Multifamily 2018 Mid-Year Outlook
Steve Guggenmos, VP Research & Modeling
Strong Fundamentals Continue
During the first half of this year, the multifamily market performance remained strong. National vacancy rates slowly inched up despite high levels of new supply entering the market. Of course, these dynamics vary across metros but any weakness is expected to be temporary as new units enter the market faster than demand can absorb them.
Jobs
Unemployment fell to under 4 percent during the first half of 2018. This strong market continues to fuel household formations. About 1 million new households were formed during the first quarter. According to RealPage, apartment absorptions are healthy at the national level, averaging 300,000 units in the past four quarters.
Completions
Completions in 5-plus unit dwellings increased 11 percent in the first half of 2018. We expect that pace of growth to slow, but the U.S. Census Bureau reported strong multifamily permitting and starts activity during the same period. RealPage saw a 5 percent increase so far this year over last year. Overall, the multifamily development pipeline is expected to plateau over the next few quarters, with more completions to come.
Treasury and Cap Rates
The 10-year Treasury rate continues to move upward, ending the second quarter around 2.9 percent – around 70 bps over the past year. However, cap rates have remained flat over the past 8 quarters – between 5.5 and 5.7 percent. This year the cap rate spread has dropped below 3 percent for the first time since the third quarter of 2008. While the Treasury rate and cap rates are correlated, cap rates do not always react to Treasury rate movements. However, consistently higher Treasury rates will put upward pressure on cap rates.
Property Prices
Multifamily property prices increased 11.3 percent over the past year; slightly higher than the 10 percent annualized growth seen in 2017. Despite moderating fundamentals, apartment investments continue to provide stable and safe returns for investors, which continues to boost property prices.
Looking Ahead
The multifamily market over the next few quarters is expected to remain healthy. Current market trajectory indicates there is little on the horizon that would cause a major disruption.
RealPage forecasts annual completions to average 300,000-335,000 units between now and the end of next year. Although some may view this relatively high level of supply as a concern, market fundamentals are holding up well.
Absorptions are anticipated to remain strong over the next few quarters but fall short of new supply. As a result, vacancy rates are expected to increase over the next several quarters and then level out in 2019 as new supply levels off and converges to the level of demand. Despite vacancy rates increasing, rent growth is expected to remain healthy, above the historical average through this year and next, reaching 4.2 percent and 3.9 percent in 2018 and 2019, respectively.
At the metro level, rent growth is expected to remain above historical averages in the majority of markets, but most will see growth rates moderate this year compared to last year. We expect some shuffling around of the top 10 metros by gross income for the remainder of 2018. Houston and New Orleans debut on the list; they were both affected by oil price drops and hurricanes.
Overall, multifamily origination volume growth is expected to slow this year to 3.3 percent growth over the year to $305 billion. A slight slowdown in 2018 comes from moderating fundamentals and increasing interest rates.
For metro-specific information and more details, read our full outlook report.
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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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