The latest U.S. Multifamily Market Outlook report, released this week by the nation’s top online real-estate transaction platform, takes note of the country’s rising rental vacancy rates and determined its top five “buy” and “sell” markets for multifamily investment and housing.
The “buy” markets, named as such by Ten-X Commercial, have strong local economies and continue to have more demand than supply. The markets are Houston, Salt Lake City, Fort Worth, Texas, and two in North Carolina: Raleigh-Durham and Charlotte.
The company’s “sell” markets – those where supply is causing rising vacancies and stagnant rents – include three cities in California. The markets are Miami, San Jose, Calif., New York City, San Francisco and Oakland, Calif.
Overall, the nation’s multifamily market supply is growing, which has led to rising vacancy rates – as much as 0.4 percent (40 bps) in the last 12 months. That’s a trend expected to grow over the next three years; the company projects vacancies across the United States will increase by 1.10 percent (110 bps) by 2021.
“Completions have outstripped absorption for six straight quarters, while absorption has slipped to its lowest level in more than five years,” Ten-X Chief Economist Peter Muoio said in a release.
Muoio notes that today’s national vacancy rate is fairly low from a historical perspective, but is the highest since 2012 due to the rising supply of new properties. Completions of new multifamily housing units is expected to reach a peak in 2018, with more than 300,000 new units hitting the market. The company says vacancies may exceed 5 percent by the end of 2018, which would be the highest rate since 2011.
Multifamily investment getting ahead of demand?
“While millennials and other demographic groups continue to forgo homeownership in favor of renting in walkable neighborhoods, developers appear to have gotten ahead of themselves in creating rental supply,” Muoio said. “The pipeline can reasonably be described as a flood, and though demand for these units is likely to come in the years ahead, we can expect to see some significant digestion issues in the near term.”
Apartment rents nationwide rose 3.9 percent year-to-year in the first quarter of 2018, to an average of $1,321 per unit. That’s a smaller increase than in late 2015, when rent growth peaked at almost 6 percent. Ten-X considers a realistic model to be one of slowing growth rates through 2019-20, a time in which the company has factored in a scenario that would estimate the possible conditions of a recession. In that case, vacancies could rise above 6 percent by 2020, but then go back below 6 percent with the beginning of a recovery in 2021.
Here are snapshots of the 10 markets, according to the report:
Top 5 “buy” cities for multifamily investment and housing
- Houston: (2018 rent: $987/unit; 2018 vacancy rate: 6.2 percent) after two years of no job growth in Houston, the energy industry is improving and the local economy reflects this. The city saw a 6.1 percent increase in rents year-to-year, and the multifamily vacancy rate was 6.2 percent in the first quarter of 2018, which is down 0.5 percent (50 bps) from last year and down 6.6 percent (660 bps) from its peak. In the scenario of a downturn, Ten-X believes Houston will weather it better than other markets and that net operating incomes (NOI) could see annual gains of 6.0 percent through 2021.
- Raleigh-Durham, N.C. – (2018 rent: $1,105/unit; 2018 vacancy rate: 4.8 percent) Annual job growth in Raleigh-Durham is in the 2 percent range, and salaries are the highest on record. The city’s unemployment rate fell 0.5 of a percent year-over-year, and is below the national average. Rents rose 5.3 percent in the same time period, which is close to its peak. In the recession scenario, Ten-X believes the city would see NOIs rise an average of 3.6 percent annually, and that apartment rents in 2021 would be 13.4 percent higher than today.
- Salt Lake City – (2018 rent: $943/unit; 2018 vacancy rate: 5.0 percent) There is no oversupply of multifamily housing in Salt Lake City; the apartment market is tight and Ten-X believes it is likely to stay that way during a recession scenario; rents would most likely rise by 12.6 percent by 2021 (with a corresponding annual rise in NOIs of 3.4 percent). The city, which has a rapidly growing population and an unemployment rate below the national average, has a steady economic base in transportation and utilities.
- Fort Worth, Texas – (2018 rent: $907/unit; 2018 vacancy rate: 3.7 percent) There are a lot of elements giving Fort Worth its growth and resilience: job growth, low unemployment (total employment is up 3.1 percent year-to-year), and an economic base that includes trade, transportation, leisure and hospitality, all of which are up from a year ago. Apartment vacancies are steady at 3.7 percent in 2018, but NOIs would be expected to grow by 3.1 percent annually and rents would be expected to rise about 12.3 percent by 2021 in the Ten-X downturn scenario.
- Charlotte, N.C. – (2018 rent: $1,001/unit; 2018 vacancy rate: 6.0 percent) Population growth in Charlotte was 2 percent in 2017, nearly three times the national average. Annual job growth in Charlotte is above 2 percent, and payrolls are at a record high, due partly to the metro’s professional and business services industry; the education and health care sectors are right behind. Rents are 6.4 percent higher year-over-year, and would be expected to rise another 10.2 percent by 2021 in the recession scenario. NOI would be expected to grow 2.8 percent annually during that time period.
And the top 5 “sell” cities for multifamily investment and housing
- Miami: (2018 rent: $1,415/unit; 2018 vacancy rate: 5.2 percent) Multifamily vacancies are expected to rise 10 percent this year, due to high rates of apartment construction and a slowing local economy. Those factors also would affect Miami’s ability to manage the downturn scenario. Apartment rents would rise just 0.5 percent by 2021, and NOIs would drop enough in 2019-2020 to erase expected gains in 2018 and 2021.
- San Jose, Calif.: (2018 rent: $2,461/unit; 2018 vacancy rate: 4.6 percent) San Jose also is seeing a large number of new multifamily units come online; that, plus the fact that population growth has fallen for four straight years, may mean its multifamily investment potential is not as golden as it once was. Rents rose 2.1 percent in the last year, but that’s low compared to past increases. In a recession scenario, vacancies between now and 2021 would be 6.7 percent, 2.1 percent higher than today, and NOIs would fall 1.0 percent annually.
- New York City: (2018 rent: $3,457/unit; 2018 vacancy rate: 5.5 percent) New York is always complicated, due to its sheer size and diversity, but quite a few industries prominent in the city’s economy are slowing, and population has fallen for six consecutive years. An unrelenting supply pipeline is sending vacancies soaring. In a downturn, apartment rents would be expected to fall 1.2 percent and vacancies would be expected to rise to 5.9 percent, which is 0.4 higher (40 bps) than 2018. (Ten-X notes that its analysis of the New York market consists of market-rate rental complexes with 40+ units in Manhattan, Brooklyn, Queens and the Bronx. The company does not include affordable housing, condos or co-ops.)
- San Francisco: (2018 rent: $2,926/unit; 2018 vacancy rate: 4.6 percent) San Francisco’s job growth is still expanding, but not as fast as it did in the past. Heavy rates of construction of multifamily units creating a heavy supply pipeline is affecting the industry; apartment rents would be expected to drop 4 percent by 2021 in a recession scenario, and vacancies would be expected to rise to 6 percent, a 1.5 percent (150 bps) increase. Correspondingly, while NOI gains would be expected in 2018 and 2021, severe decreases would be expected in 2019 and 2020.
- Oakland: (2018 rent: $2,092/unit; 2018 vacancy rate: 3.6 percent) Oakland grew quickly in 2015-2016, but that has slowed now due to the technology-related industry. The city has very low unemployment, but population growth is falling slightly, down to 0.7 percent in 2017. High supply of multifamily units is meeting low demand, which means a downturn would mean a 2.8 decrease in rents by 2021 and an increase in vacancies to 5.4 percent. NOIs would be expected to fall 1.0 percent annually between 2018-2021.