Three Myths About Softening Multifamily Markets
It’s true: rents are beginning to stabilize and soften in many markets. However, this does not mean that the multifamily industry as a whole is softening and in decline. The number of renters nationwide have reached an all-time high and the industry continues to outperform other real estate sectors. These are the three main myths, and the reality behind them, that the industry should focus on in 2019.
Myth 1: Supply and Demand
First, let’s debunk the most basic myth, and one that controls commerce across the board: Demand is not meeting supply. The fact is, demand has actually matched supply unit for unit for years. What’s more, demand exceedingly outweighs supply for Class B and C properties in primary markets nationwide. Absorption in the current expansion cycle exceeds supply, and the pace of completions falls short of projected growth. Growth is projected to increase at an even faster rate than previous years and developers will need to provide an additional 328,000 units annually between now and 2030 (4.6 million total units) to keep up with demand.
Myth 2: Overdevelopment
The second myth reviews the pace of new supply for each class: All three unit classes are being overdeveloped. There’s a catch to this myth: while there is great need for Class B and Class C units, the majority of new supply has focused on Class A units since the economy rebounded after the Great Recession. This is starting to cause increasing surplus and competition. Remember, multifamily housing demand is driven by the middle class. Developers are encouraged to find new opportunities to invest in Class B and Class C development, to adequately meet the demand for affordable housing.
Myth 3: It’s a Buyer’s Market
The third myth looks into the future of the rental industry and the impact of millennials: Young adults and professionals are choosing to buy instead of rent. Older millennials are reaching their mid-30s and starting to purchase their first homes. Younger households however continue to delay lifestyle choices that typically launch homeownership – including marriage and having children. Most millennials are burdened with significant student loan debt, which makes saving for a home more difficult.
Baby boomers also own a growing share of multifamily occupancy. That will increase as more reach retirement age and begin downsizing. Finally, don’t forget that rising interest rates will act as another barrier to home ownership, for all age groups and income levels. Interest rates are likely to increase 100-200 bps by 2020.
Looking Ahead: Oversupply is Not Universal
There is some truth to the perception that the multifamily industry is softening after years of rapid growth. Each of these three myths leads back to the fact that there is a need for Class B and Class C units that is not being met. It’s important to remember that construction is visible and that demand is invisible. This is especially true for those who need something that the industry is not adequately providing.
To be profitable, developers continue to build Class A properties, which leads to overdevelopment and surplus. There is no quick solution to developing more affordable housing, but it is essential to stay up-to-date on how changes to local regulation and construction costs will affect multifamily developers in the coming year.
G5 recently published its State of the Industry – Multifamily report for Q2 2018. It discusses the industry and unit classes in detail, policies, top markets, and emerging trends. Click here to download.