How Do I Envision the Multifamily Market in 2018?
Steve Guggenmos, VP Research & Modeling
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:
Employment & Wage Growth
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
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.
Construction
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.
Supply and Demand
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.
Gross Income Growth
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.
Property Prices and Origination Volume
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.
What Does the Future Hold?
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.
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About This Author
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.
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