The Year Ahead in Multifamily

LOS ANGELES-The multifamily sector has continued to perform in 2013, albeit with increased competition in the marketplace—especially for quality acquisitions. With a strong few years of rent growth and price appreciation, the sector has outperformed most other property types in the recovery. Thus, more and more players have sought to capitalize on the multi-family opportunities. Many acquisitions have thus been poached. Even so, the year is closing strong with choice assets still available to savvy investors with strong business plans and the capital to back them and act quickly.

Investors in 2013 participated in a heated apartments marketplace. Acquisitions activity topped out at its highest volume since the bust of 2008, with properties trading hands at ever higher prices. Activity continued to follow rental demand, and the rent rate increases resulting from it. Development of new product continued to flow into the market and 2014 will continue to see additional product coming to market.

With 2013 closing out strong, the horizon for the multifamily sector in 2014 shows promise. According to REIS, landlords will likely drive asking rents upward approximately 3.1% with prices outpacing inflation, which industry forecasts predict to remain muted at 2%-2.5% nationally. Effective rents will also climb at a similar pace, at a forecasted 3.2%. The bid-ask for investment product will continue to narrow as the supply of strong acquisition candidates thins. 

Nationally, expect a continued low vacancy rate approximating 4.2%. Expect cap rates and interest rates to move slightly north by 20-30 bps.

On the development front, more product is expected to come to market next year. The climb in rental rates has spurred developers to jump into the game and to build new apartment communities. This will occur at a heightened rate in supply-constrained markets, where projects started in 2011, 2012 and 2013 are completed and added to the available inventory. Overall expectations are that 164,000 new rental units will be brought to market in the US in 2014.

Of course, additional product coming online during a time when financing for the purchase of new for sale homes is more readily available, may lead to slowed rental rate growth. However, the projects built in areas where rental demand is particularly strong, will fare well. These projects will be found in metropolitan markets where employment is climbing, and also in high barrier-to-entry regions where for-sale home pricing affordability is an issue but schools, amenities and quality of life are strong.

Because of the increase in both development and investment activity in multifamily, 2014 should prove eventful. With interest rates remaining low, and rental growth continuing to outpace inflation, investor appetite likely won't recede. Competition for quality properties will continue, new developments will come to market, and those with acquisition opportunities readied with strong economic fundamentals, conservative underwriting and committed capital able to react quickly, will come out on top.

Matthew Heslin is principal & CEO of Oak Coast Properties, an owner, developer and manager of multifamily communities. Visit Oak Coast Properties at www.oakcoastproperties.com and contact Matthew at matt@oakcoastproperties.com. The views expressed in this column are the author's own.