How do I envision the multifamily market in 2018? More of the same! By most measures, the multifamily market will continue to grow, fueled by strong employment growth, demographic trends, and lifestyle preferences favoring multifamily rental housing. Let’s take a more detailed look:
The key economic factor driving housing demand is the labor market. We expect employment growth in 2018 to match growth seen in 2017 – stronger than population growth and with an already low unemployment rate of 4.1 percent, wage growth is expected to pick up more.
Rents will continue to grow moderately due to a healthy labor market and lifestyle preferences creating demand for multifamily units. Rents are expected to grow by 3.8 percent nationally – in line with 2016 and 2017 growth. This is above the long-run average going back to 1990 of 3.4 percent.
New completions are expected to peak through late 2017 and early 2018, then even out near current start levels. However, construction delays over the last few years have slowed unit completions, generally giving demand time to absorb most of the new supply.
New supply in many markets is elevated and most will see vacancy rates rise in 2018 – but the majority will remain below their historical averages. It will take longer to absorb new units in some areas than in prior years. The new supply is expected to outpace demand nationally in the short-term, causing vacancy rates to continue to increase.
Based on expected rent growth, combined with a higher vacancy rate, gross income growth is expected to be around 3.2 percent – slightly below the historical average of 3.4 percent but in line with 2017 growth.
In the past seven years, gross income growth has outpaced the long-run average, driving up investment returns and demand for multifamily investments. Property prices, in turn, have increased faster than the historical average. The increasing property prices encourages market activity such as property sales, refinancing, and renovations, all contributing to higher volume originations. Higher property prices – albeit moderating in growth – in 2017 and 2018 will lead to higher origination volume in both years.
Overall, it looks like the multifamily market will have another good year, even as it continues to moderate. Employment growth will stay above population growth, fueling demand for housing units, while demographic and lifestyle preferences continue to favor rental housing. New completions will push vacancy rates up but strong demand will keep rent growth above expected inflation. Strong fundamentals and investor demand will boost property prices and market activity, leading to higher origination volume, which we predict will hit another record in 2018.
Learn more about what’s driving the multifamily rental market and where it’s headed. Watch our brief video for a summary of our research findings and read our Multifamily Outlook 2018 for the details, including metro-specific projections.
Have a comment or question? Email us to let us know what's on your mind.
Insights and perspectives from Freddie Mac staff on current topics and events related to housing and the Multifamily industry.
Steve Guggenmos
VP Research & Modeling
Meg McElgunn
Senior Director, Freddie Mac SBL Production
Steve Guggenmos
VP Research & Modeling
Steve leads multifamily related research at Freddie Mac. In this role he performs research related to national and market-specific multifamily conditions. His team supports the multifamily business by developing models and quantitative approaches that determine risk-based capital allocations. The models capture loan level risks and also the benefits of the diversification and structural credit support for pools of multifamily mortgages, supporting the core business strategies of Freddie Mac Multifamily.
The Federal Housing Finance Agency recently announced new 2021 loan purchase caps for Freddie Mac and Fannie Mae. The new rule consists of many changes, with the most broadly impactful being to the area median income thresholds under which conventional units are considered mission-driven.
Despite the disruptions of 2020, we expect the multifamily market to see improving conditions in 2021.
Strong overall performance during the past decade is a key factor in the possible outcomes we may see the rest of this year as the effects of the pandemic unfold.
Performance in the multifamily market was strong during 2019 and is expected to remain healthy into 2020, but with the potential for moderated growth in comparison to recent years.
In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market. 2018 ended much stronger than anticipated with near record absorptions and stronger rent growth compared with the prior few years.
Recent research shows that an increasing number of multifamily units are not affordable for low- and very low-income households.
Rental affordability is a significant challenge for metropolitan statistical areas across the United States. Our research shows that supply just hasn't kept pace with demand in many metros, and that's pushing affordable rents out of reach for millions of American families.
In our research, we find that performance in the multifamily market remained healthy during 2018, despite high levels of new supply entering the market. We expect this trend to continue into 2019, but with more modest growth in comparison to recent years.
Performance in the multifamily market remained healthy in the first half of 2018, and is expected to continue throughout the second half of 2018 and into 2019, but with continued moderation from the prior few years.
Market rate multifamily rents have been dramatically increasing in recent years as housing demand significantly exceeds available supply. In contrast, during the same period rent growth has been moderate for units with restricted rents, such as those funded by the Low-Income Housing Tax Credit (LIHTC) program.