LOS ANGELES–The US multifamily market should remain healthy for some time, thanks to an ongoing economic recovery, the availability of capital and a good rate of return compared to other investments.
However, investors need to be wary that new multifamily construction doesn’t outstrip demand, that the Federal Reserve may raise rates, and that pent-up desire for home ownership doesn’t cause a shift in vacancy rates.
That was the consensus derived from Marcus & Millichap’s Apartment Market Overview and Outlook, a webcast presentation that took place today.
Presenters from Marcus & Millichap included John S. Sebree, VP/national director national multi housing group; Hessam Nadji, managing director research and advisory services; and William E. Hughes, managing director Marcus & Millichap Capital Corporation.
Nadji noted at the start of the webcast that there’s “a lot of drag on the economy. That will not derail the recovery. But it will rob from the rate of growth,” he said. The good news, he said, is that the economy continues to show resiliency. “That’s not exciting, but it will allow the recovery to continue and apartments in particular” to grow.
With every major sector of the economy adding jobs, the trend is positive, he said. But job growth is “below where it would be in a healthy recovery.” As a consequence, “there are not a lot of renters becoming homeowners,” he said, which indicates that the apartment market improvement should be expected to continue.
About 140,000 units of new construction are underway, Nadji said, the highest number since the financial crisis began. Those numbers are in balance with demand, he added, but “the cycle is getting mature.”
Sebree said there is a “tremendous amount of pent-up demand” among younger people. That and the so-called “Echo Boomers,’ the trailing bit of the baby boom, will help the apartment market. The opportunity will be in class-B and class-C, he said, with growth there more robust than A growth, which led the recovery.
He said later in the webcast that the average annual sales volume, which was pegged at $86 billion in 2012, will rise above $95 billion this year, even though the volume of institutional sales has leveled off. “Values are back to where they were in 2006,” he said.
Hughes said that the low cost of debt and equity continue to drive the capital markets. “There’s capital available for every transaction,” Hughes said, although new construction would be “highly scrutinized” by lenders.
He added that the Federal Reserve would likely move toward some reduction in the economic stimulus before its announced 2014 end, although he said he did not anticipate an overnight move.
The presenters indicated that they do not believe the recent multifamily investment boom indicates that a bubble is in the offing for apartment prices, although they cautioned that the next five years would not see the increases that have happened in the last two years.
Another trend is that apartment developers may look to the suburbs for new construction, given the high costs associated with urban infill.
Marcus & Millichap recently hosted a Northern California Investor Symposium, as reported earlier by GlobeSt.com.