What You Can Learn From the Robust Multifamily Markets Around the US
Multifamily real estate has been a smart choice for investors since the Great Recession. Though the past isn't always a prelude to the future, these lessons can help real estate investment firms make strategic decisions about current opportunities. Today, some of the most important lessons are coming from robust U.S. multifamily markets like Boston, San Francisco and Seattle.
Nationally, the multifamily housing sector has benefited from a strong rebound in construction, decades-low vacancy rates and rent increases that outpaced inflation, according to the State of the Nation's Housing report released by Harvard University's Joint Center for Housing Studies (JCHS). The multifamily housing sector is also benefitting from a growing mismatch between the increasing supply of high-end apartment units and unmet demand from low- and moderate-income renter households.
"Although rent growth did slow [in 2016] in a few large metros — notably San Francisco and New York — there is little evidence that additions to rental supply are outstripping demand," JCHS said in a statement.
Here's a look at the multifamily real estate growth trends in Boston, San Francisco and Seattle and the lessons they can teach investors.
Boston: Demand Drives Rental Market
Boston continues to be "one of the most stable multifamily markets in the U.S." due to "above-trend population gains and increasing job growth," according to Commercial Property Executive (CPE).
Rent gains had softened through June, with rents contracting in some of Boston's pricier submarkets, yet demand remained healthy. This trend has been driven by a highly skilled workforce that's attracted to Boston's diversified economy — ranging education, health care and professional and business services — and the city's reputation as a hot spot for innovation.
Boston proves that the right market characteristics can create such strong demand that rent gains can be achieved even as more supply comes online.
San Francisco: Rents Hit Affordability Ceiling
In San Francisco, multifamily housing has been all about high demand from well-paid tech workers, lagging supply and rising rents — trends that have sustained not only the city but also its suburbs.
Indeed, nearby Oakland ranked fourth nationally among emerging multifamily real estate markets, according to a PwC interactive map. (The other markets in the top five were northern New Jersey, Miami, Chicago and Ottawa in Ontario, Canada.)
In a post on Yardi's Balance Sheet blog, associate director of research Paul Fiorilla pointed to San Francisco, along with Denver and Austin, as markets where the mismatch between supply and demand was already evident. "Each of those metros has a strong economy and an attractive lifestyle that continues to drive in-migration."
While these trends would typically be cause for investor celebration, there's an important caveat: Rising rents can become a constraint even for highly paid workers, forcing them into more affordable markets and longer commutes. Fiorilla noted that all three cities "saw a severe deceleration in rents as a result of rents growing to levels that are ahead of what many renters can afford."
Seattle: New Supply Slows Rent Rises
Farther north, Seattle offers a different lesson: Supply affects markets as much as demand does. In this city, Fiorilla wrote, "Increasing amounts of new supply are another factor that will weigh on rent increases."
Other cities on his list with a similar dynamic included Austin, Charlotte, Dallas, Denver, Houston, Orlando, San Antonio and Washington, D.C. These cities have strong job growth and are attractive to younger workers, Fiorilla suggested, yet the need to absorb newly constructed units could slow the rate of their rent growth.
Not all rental housing is multifamily housing. When investors sell detached homes occupied by renters, some of that supply is converted to owner-occupancy, raising the homeownership rate and reducing the supply of rental housing.
The national homeownership rate has rebounded since the Great Recession and "is beginning to claim closer to its normal share of new households," according to National Real Estate Investor (NREI).
Still, homeownership isn't about to overcome rental housing. NREI suggested that three factors explain why: It's challenging for builders to locate an adequate supply of buildable lots for single-family houses, would-be buyers face affordability constraints due to rising home prices and only the most creditworthy borrowers can qualify for home-purchase financing.
These snapshots show that there's a lot that investors can learn from analyzing robust multifamily markets. A strong financial partner and the right team of experts can help investors apply these lessons and make the right decisions when working in this sector.
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