However, Moderation in Rent Growth Starting To Set In and a Handful of Markets May Be Past Their Peak
The multifamily sector looks to continue to remain quite healthy in 2014 based on analysis of current data from Freddie Mac and Fannie Mae. But the pair of big GSEs expect multifamily growth to moderate beyond this year as conditions return to long-run historical levels.
The Freddie Mac Multifamily Investment Index shows that multifamily should remain an attractive investment for the next few years. The Index, which measures the relative attractiveness of investing in multifamily properties over time, was at 146.3 for the third quarter of 2013, well above the historical average of 124.6.
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"As the broader economy continues to grow, we expect the overall multifamily sector to remain strong in 2014. Revenue growth in the industry will continue to perform near or above historical averages, but at lower rates than the previous two years,” said David Brickman, executive vice president of Freddie Mac Multifamily. “The growth in some markets, however, has already slowed down and vacancy rates in a select few are inching up.”
Vacancy rates in many major markets are below historical norm rates, lessening concerns about overbuilding in these markets. However, current vacancy rates in Washington, DC, and Norfolk, VA., are higher than historical averages, which puts these markets at a higher risk of a market slowdown with further increases in supply, Brickman said.
Fannie Mae expects continued demand for multifamily housing in 2014 - from both tenants and property owners - based on a number of key factors: improving job growth, an increasing number of renter household formations, new apartment supply, and rising for-sale home prices, according to Kim Betancourt, director of economics, multifamily economics and market research at Fannie Mae.
The ongoing demand for multifamily housing also was evident during the last quarter of 2013, which normally slows down due to cyclical seasonality. Instead, rent growth appears to have been positive, with vacancy levels remaining steady, despite new additions to existing supply coming online late in the year, Betancourt noted.
Fannie Mae’s Economic & Strategic Research Group is forecasting nonfarm payroll growth to increase by 1.9 percent in 2014 and again by 2.0 percent in 2015. These positive job trends should help boost household formations, which in turn also should increase demand for rental units.
Not all metros are expected experience the same level of employment growth, Betancourt said. Some are not expected to come close the national level. Although all of the nation’s major metros are expected to see positive job growth this year, metro areas such as Cleveland, St. Louis, Detroit, Philadelphia, and even Boston and Washington, DC, will likely fall below the national average.
While this should not be a significant problem for the multifamily sector in some of these metros, others, such as Boston and especially Washington, DC, have quite a bit of new supply expected to come online this year. That is expected to dampen rent growth in certain submarkets in these metros over the next 12 to 24 months, she said.
Fannie Mae expects other metros to fare better. The major Texas metros of Austin, Houston and Dallas should continue to be the jobs juggernauts they’ve been over the past few years. However, other less-likely metros, such as Orlando, Louisville, Palm Beach, and Portland, should all enjoy above-average job growth this year, helping to keep rent growth and vacancy levels healthy.
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