The multifamily market has enjoyed several years of rapid growth and generally the fundamentals are showing that in 2017 we will continue that pace, although with some moderation. Let’s take a look:
The labor market continued to improve in 2016, but progress was slower compared to previous years. The economy added 2.2 million jobs—more than the historical average, but considerably fewer than the 3 million and 2.7 million jobs added in 2014 and 2015, respectively. The labor force participation rate was 62.7 percent as of December 2016, which is only marginally higher than a year prior and lower than the post-recession average of 63.6 percent.
Strong labor markets prompted more households to form in 2016. Through third quarter, 1.2 million new households were formed—above the post-recession average of 850,000 per year. The majority—630,000—rented their homes due to demographic shifts and lifestyle preferences.
To keep up with the rise in renter households, multifamily construction has reached the highest levels since the late 1980s. Demand for rental units is at historical highs, and we expect construction to remain high this year, fueling more development. Multifamily permits and starts remain elevated but decreased in 2016 while completions increased modestly by two percent compared to 2015.
Over the past several years, as new supply was delivered, vacancy rates have increased from very low levels in most metros. Despite higher vacancy rates, many remain below their historical average. This implies that there’s room for greater supply to be absorbed.
While new supply is well documented in many larger markets, it has not been as prevalent in smaller, non-gateway markets. Now, these previously overlooked markets are beginning to get investor interest for their strong performance.
The multifamily market will continue to grow in line with the historical average in 2017. Vacancy rates will increase modestly in 2017, although remain below the historical average. With employment growth higher than population growth and wages rising, demand for multifamily units will remain robust, keeping income growth in line with the historical average.
Despite the recent increase in interest rates, we are not forecasting major changes to multifamily fundamentals as a result of higher rates. However, this year it will be particularly important to continue to track the multitude of factors that can impact the housing market.
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