What’s Next for Multifamily?

What do the next few years hold for multifamily investment, development and operations?

Las Vegas—What do the next few years hold for multifamily investment, development and operations? A half-dozen CEOs tackled the question this week during Multifamily Executive’s 2015 conference in Las Vegas.

For the most part, the leaders of a half-dozen public and private owner/investor/operators struck a tone of solid optimism about the state of the market. “We’ve waited for 25 years for this part of the cycle to arrive,” said Tom Toomey, CEO of UDR Inc. If the current market cycle is compared to the side of a mountain, Toomey said, “We’re still in the foothills.”

MAA’s Eric Bolton concurred. He cited the confluence of demand from Millennials and Baby Boomers, economic trends and capital markets. “We’ve got forces at play that we’ve not experienced in our careers,” he said. Demand is emerging from two huge age groups: Empty-nesters of the Baby Boom generation, who are trading single-family homes for rental apartments, as well as from the growing numbers of Millennials who are forming households but are delaying home ownership. As a result, Bolton said, “We’ve got a new paradigm here. Every time we think we’ve reached a plateau, it’s a false plateau.”

Some notes of concern emerged from the generally optimistic picture. “We tend to be really careful in the secondary markets,” explained James Butz, CEO of Jefferson Apartment Group, naming metro areas like Nashville; Memphis; and Raleigh, N.C., as examples. The impact of falling oil prices on Houston is prompting executives to exercise restraint. “Houston is showing some signs of softness, especially west Houston,” reported Mark Alfieri, CEO of Monogram Residential Trust Inc. Originally a non-traded REIT sponsored by Behringer Harvard, Monogram Residential and completed its transition to a fully integrated, self-managed REIT in July 2014.

The CEOs also named several markets that they consider undersupplied. CityView’s president, Sean Burton, named San Francisco, San Jose and Oakland, a burgeoning East Bay market that is in a position to benefit from San Francisco’s notoriously tight market. Michael Schall, the CEO of Essex Property Trust, concurred. “I’d double down on the Silicon Valley,” he said, adding: “There’s no market we’re in right now  . . . where we expect supply to get ahead of demand.”

Cap rates also commanded attention. Noting that Class A and Class B cap rates differ by as little as 25 basis points in some markets, Toomey said, “I’m surprised at compression of the Bs. It’s too tight to the As.” Executives agreed that an influx of foreign capital searching for stable investment choices will likely keep squeezing cap rates. Citing the West Coast as an example, Schall pointed to a dearth of B product in the region’s more attractive markets as a contributor to tight cap rates.

He also expressed skepticism about the impact of interest rate hikes on cap rates. “”We’re talking about a quarter-point hike” in 2015 “and three moves in 2016,” he said. “Is that enough to move cap rates?”