Multifamily investment is in for a strong year, similar to or even above the levels of 2018. Millennials and Baby Boomers’ preference for renting instead of buying is one of the main pillars of growth for the sector. Availability of capital is another. Debt providers are taking advantage of the healthy fundamentals and holding on to their terms. Mortgage origination levels are anticipated to surpass the total volume in 2018. Kim Betancourt, head of multifamily research at Fannie Mae, highlights the main figures behind this prediction and explains how the expanding inventory of luxury units and the slowdown in job growth will impact lending.
What are your expectations regarding total multifamily lending volume in 2019?
Betancourt: Based on anticipated investor demand, available liquidity and construction projects whose loans should convert to permanent financing throughout this year, multifamily mortgage origination volume levels are expected to remain very similar to, if not higher than 2018’s activity level. (According to MBA, mortgage banker originations for just multifamily will rise 1 percent in 2019 to 264 billion, with total multifamily lending at $315 billion. It expects similar activity in 2020.)
The Fed indicated that interest rates will go up not more than once in 2019. What does this mean for the market? What are your views?
Betancourt: Despite the increase in interest rates over the past year, investors are convinced of both the current and future upside value in owning multifamily properties, keeping cap rates low. Multifamily cap rates have remained in the mid- to low-5.0 percent range over the past two years due to the ongoing influx of capital flows and investor demand for properties. And, it seems that these factors are expected to continue into 2019.
As a result of this anticipated investor interest, and despite elevated levels of new supply delivering over the next 12 to 18 months, investment in existing multifamily properties is expected to remain similar to 2018 levels. With multifamily cap rates remaining at low levels—currently at 5.4 percent, down from 5.6 percent at the end of 2017, according to Real Capital Analytics—it seems unlikely that cap rates will compress any further. But that doesn’t mean that they will skyrocket either. The expectation is that national multifamily cap rates are likely to increase only slightly in 2019, but likely staying below 6.0 percent.
Supply of new apartments is expected to peak in 2019. What other challenges do you anticipate and how will these challenges impact multifamily lending?
Betancourt: The amount of new multifamily new construction elevated, with deliveries expected to reach their peak in 2019. According to the Dodge Data & Analytics Supply Track data, which distinguish between multifamily properties consisting of either apartment or condominium units, about 394,000 units were completed in 2017, another 381,000 units or so are estimated to have been completed in 2018, with another 453,000 expected in 2019. In comparison, only about 59,000 condo units came online in 2017, with another 67,000 condo units estimated to have been completed in 2018, and only 46,000 condo units or so expected in 2019.
The biggest concern for the multifamily sector is that most of the new apartment rental supply that is underway is estimated to consist of Class A units, which command the highest rent levels in their location. But in many metros, it is these very Class A units that have either begun, or could begin, to experience declining rents in addition to rising concession levels this year.
In addition, at a national level, that amount of new multifamily units being added to the existing stock is expected to peak in 2019 just as job growth is expected to slow down, which in turn, is likely to dampen demand. Job growth is expected to be at 1.0 percent in 2019, according to Fannie Mae’s forecast, which would produce just 1.5 million new jobs. Based on that amount of job growth, theoretically multifamily rental demand could be in the range of between 250,000 units to as high as 370,000 units, just as more than 450,000 units are expected to be completed and come on line this year.
What will be the main trends in multifamily lending in the year ahead?
Betancourt: There should continue to be demand for multifamily lending in 2019, thanks to positive demographics, anticipated job growth and new household formation.
If 2019 will be similar to 2018 when it comes to multifamily investment and lending levels, should we expect a slowdown going forward? What are your long-term expectations in connection to this real estate cycle?
Betancourt: Millennials have been a driving force for the multifamily sector over the past several years. As a group, this cohort totals about 80 million and doesn’t peak until 2024-2025, allowing for continued demand for multifamily housing. But, only about 70 million people will be between the ages of 20 and 34 by 2024—that’s in just a few years. And if they are anything like previous generations, a sizeable percentage of them will become renters of multifamily housing. Despite all the new multifamily construction going on today, there might actually not be enough of the right rental housing, or enough supply in the right locations, to meet the demands of this uniquely tech-savvy and multitasking-skilled generation.
Image courtesy of Fannie Mae