NEW YORK CITY—In many respects, the national multifamily market is a story of bifurcation. As Institutional Property Advisors’ Midyear Investment Forecast points out, the class-A sector is hot, and the report is awash in adjectives such as exceptional, record, attractive and stable. IPA is a division of Marcus & Millichap.
But as IPA SVP and national director Jeffery J. Daniels tells GlobeSt.com, rising housing affordability issues remains problematic, an issue that extends far beyond the reach of the development community. But first, the good news:
“The high propensity to rent among many newly formed households, despite a dramatic lowering of mortgage rates over the past six months, points to a true change of preference for renting over owning,” the Report states.
“This shift in housing demand toward apartment rentals underpins absorption levels remaining higher than witnessed historically and strong potential for maintaining tight housing conditions over the short- to midterm horizon.”
No wonder Daniels is bullish. “We had record-high absorption in the second quarter of 182,000 units,” he says. “Plus, there’s a record-low national vacancy rate of around 4.1 percent. The market is tight.”
And tight with new-age occupants, sometimes challenging what he calls the prehistoric use of data by most real estate firms. “Fortune 100 companies understand that data can be used to collect specific trends about potential customers and utilize that data to get an edge on the competition,” he says. “We as an industry are pretty prehistoric about the data we collect and how we use it.”
Once that learning curve is secure, he says, investors and developers will look to who the primary renters are and adjust their strategies accordingly. For instance, “27 percent of all units are being rented by female heads of households.”
This comes in addition to millennials, of course, who start out renting in cities where affordability and walkability are emphasized, and baby boomers who are downsizing. “We need to look at data that points to where demand is and execute more strategically toward that demand,” he says.
For millennials, renting is an affordable alternative to “entry-level homes that are a lot higher priced today than they were 15 or 20 years ago,” he says. For boomers, “there’s a point when maintenance of a single-family home becomes exhausting.” For both cohorts, “living 35 or 40 minutes away from the arts and cultural opportunities that downtowns provide is another incentive to rent closer in.”
Investors tapping into these rental trends will have no problem accessing capital for that execution. Even if Fannie and Freddie are slowing a bit, availability is still running high.
“The availability of debt for apartment assets remains elevated, spurred by the recent pivot by the Federal Reserve,” according to the Report. “Sourcing will be led by Fannie Mae and Freddie Mac, in addition to a wide array of local, regional and national banks, and insurance companies. The decline in interest rates has again widened the spread between cap rates and Treasury, reducing lender concerns about the risks related to repayment and valuation at maturity.”
Affordability remains an issue, although Daniels credits the success of the Low-Income Housing Tax Credit program, “which has generated millions of units to help house those who may not be earning a living wage.”
But despite the positions taken by many local and state authorities, affordability is a problem that extends far beyond the development community. “Restraints on development and making the developer and landlord community accountable for what is really a larger issue only goes to constrain the amount of supply of affordable housing and further exacerbates the problem,” Daniels says, arguing that commercial and industrial properties, which benefit from a healthy local population, should rightly share the burden of cost-justification. “Why do legislators blame the multifamily producers for the affordable housing crisis when economic growth requires a healthy housing stock? Burdening housing producers only exacerbates the problem.”
As the industry continues to puzzle out that part of the multifamily picture, the overall market continues on its “exceptional” path. “Can the world still get screwed up?” asks Daniels. “Of course. But it will be from outside forces beyond our control. From a pricing standpoint, we are efficiently building the right amount of units for the demand that’s coming.”