What Lies Ahead for the Multifamily Market?

After several years of white-hot performance, the nation’s multifamily sector is beginning to post more normalized numbers.

Michael Bull_In FocusAfter several years of white-hot performance, the nation’s multifamily sector is beginning to post more normalized numbers. Rents and occupancy continued to rise throughout 2013, but rates of growth were a bit lower compared to the previous year. Still, make no mistake about it: with demand from Millennials and Echo Boomers expected to remain strong, 2014 should be another good year for the multifamily market.

On a recent episode of the “Commercial Real Estate Show,” my guests and I discussed the current and future performance of the multifamily sector.

Rents, Occupancy on the Rise

In 2013, rent growth was 2.8 percent, down from 3.6 in 2012, said Ronald Johnsey, president of AxioMetrics. The national occupancy rate ticked up by 30 basis points last year. “It’s always great when you have a market where you can increase rents but occupancy still goes up,” Johnsey said.

The increase in new supply caused Class C properties to have the highest rent growth among apartment property types, Johnsey said. In 2013, Class C rent growth was 4 percent, while Class A and B communities experienced rent growth of 2.3 and 3.2 percent, respectively.

“Because Class A properties increase their rents the quickest in the recovery, renters move to Class B properties to control their housing cost,” Johnsey added. “Then those properties get full, rents rise and people in Class B properties move down to Class C properties.”

Rent growth is expected to continue at a rate of 3 to 5 percent in the middle-sized markets, said Alan Tapie, senior vice president at Grandbridge Real Estate Capital. “Institutional investors are following rent growth, and we are seeing them move into those markets,” he added. “They also understand that the positive movement has spread out beyond Class A properties.”

Many apartment communities use revenue management programs to assess their rents, said Brett Finkelstein, CEO of CFLane. “Revenue management programs take factors like unit mix, floor plans and competing properties in the area into consideration,” he said. “We set the program at our target occupancy, and it tells us what rents would provide a maximum return for our investors and clients.”

Revenue management programs make it easier for underwriters to look at a property. “Underwriters definitely look at effective rents, but as we are coming out of the recession, they want to see an operator who knows what they are doing and revenue management systems are a big part of that,” Tapie added.

Demand Expected to Remain Strong

“Tenant traffic is definitely strong and increasing,” Finkelstein said. “Across the board, we have seen demand strengthening, which has allowed us to push rent substantially. Recent college graduates are moving out of their parent’s homes. Older people who are selling their homes are choosing to rent apartments instead of buying condos. Everyone realizes now that a home is not a guaranteed investment.”

Amenity packages are still key to attracting and retaining renters, Finkelstein said. “Tenants want a lifestyle, not just somewhere to live,” he added. “We tailor our amenities to what residents in the community want.”

Deliveries Increase

Several markets are delivering a large amount of new products this year, which is causing some concern. “We are counting on job growth to absorb the supply,” Johnsey said. “For example, Dallas’ supply will grow from 10,000 units to 12,000 units in 2014, and Austin’s supply will increase from 6,000 units to 10,000 units.”

However, construction has already started to slow down, Johnsey said, and with costs for materials and labor increasing, it isn’t likely to spike in the near future.

Land prices are also increasing, which has further stalled construction, Finkelstein said. “We see a lot of opportunity in buying and upgrading older product,” Finkelstein said. “We’ve been successful buying in high-end areas and improving properties.”

The future looks bright for the multifamily sector. Apartments seem to be a sound investment alternative at this point in the cycle while interest rates are still low and demographics are favorable. The apartment industry is unique in that it offers opportunities for all size investments. Consider job growth, competing housing and proactive management for the best returns.

Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales, leasing and advisory firm headquartered in Atlanta.