Steady Hiring Favors Multifamily

CALABASAS, CA—More than other property types, multifamily has seen an increase in demand thanks to steady hiring since the end of the recession, Marcus & Millichap says in its Midyear 2015 Apartment Outlook Report. “As job formation, rising consumer confidence and modest wage growth take hold, apartment demand drivers will maintain momentum,” according to the report.

MMI notes that the employment-to-population ratio for the prime rental cohort, ages 25 to 34, has reached a 15-year high, a particularly encouraging threshold. “Household formation has grown rapidly as economic advancement has supported de-bundling, and young adults have increasingly begun to move out on their own,” the report states.

“This broadening growth, together with a tighter unemployment market, will ultimately intensify wage pressure and thereby underpin additional rent gains," according to MMI. "The trend has already emerged in the strongest employment markets, but it is migrating to secondary and tertiary metros as the economic momentum spreads.”

Multifamily has demographics on its side, as well. The report notes “the rising tide of Millennials,” which will continue to raise apartment demand in the coming year. “There are more people in their early 20s in the US right now than at any time in history, and 68% of these younger adults rent,” the report states. Although most have gone for urban locations, the suburbs have also benefited from a broadening of demand. (Demographics as well as development will be on the agenda at this year's RealShare Apartments, scheduled for Oct. 21-22 at the Westin Bonaventure in Los Angeles; click here for more information.)

And with all of the concern about overbuilding in the sector, MMI notes thatthis year's scheduled new deliveries of 250,000 units represent a modest increase over the 232,000 units delivered in 2014. About half of the completions will be concentrated in 10 major markets, though, which does raise the question of oversupply in those markets.

New deliveries notwithstanding, MMI says that with strong demographics and steady employment gains supporting household formation, vacancy will decline 20 basis points year over year to 4.3% at year's end. That same growth in household formation will also boost rents, pushing up average effective rents 5.6% Y-O-Y to $1,244 per month, according to MMI.

The latest results from Yardi's Matrix Monthly survey of apartment owners generally bear out MMI's forecast. Nationwide, rents rose by $7 in August to a record high of $1,162, matching the 6.5% year-over-year increase in July, according to Yardi.

Yardi's report does caution that the recent volatility in the financial markets could take some of the edge off future growth. At present, however, there are no immediate red flags. “The demographic and demand trends that have produced historically low apartment vacancy rates will not be easily turned around,” according to the report.

That's the case even as Kingsley Associates' latest analysis shows renter renewal intent and perception of value for amount paid continuing to decline, as the se metrics have done since the fourth quarter of 2013. Only 52.3% of residents responded that they "probably would" or "definitely would" renew their lease, down 0.9% from a year ago., while the 53.9% of renters who feel their apartments are worth the rent they're paying is off 0.6% from the year-ago period.

“When we look at time trend analysis, it is quite evident that renters are feeling the effects of sharp rent increases,” says John Falco, a principal in Kingsley Associates' Atlanta office. “Three years ago, only one out of every three renters cited rental rate as a top decision factor. Today, that figure has increased to 56% of renters and has now overtaken location as the top decision factor in the lease renewal process.”