As Expected, Multifamily Market Returning to Normal in 2017

multifamily market


A year ago, the consensus among multifamily leaders was that 2017 would be a tale of a storybook market cooling its heels. By last fall, analysts observed that a slowdown was already underway and would continue into the next year.

Issues with affordability and funding loomed, as did price flattening due to a shake-up in the mix of demand and product supply. Developers would be forced into a more selective approach as lending tightened, they said.

The crystal ball seemed pretty transparent at the time. And as 2017 heads to the finish line, the vision is holding clear. Multifamily will go down just as many figured—a return to a more normalized market.

“The general story is the cooldown or return to normalcy,” RealPage Chief Economist Greg Willett said in early December. “The anticipated outlook in 2017 materialized.”

And just as prognosticators said, the market showed some blips in an otherwise hearty year.

But make no mistake, say industry analysts, despite the less favorable data, multifamily is still a good investment with plenty of bright spots heading into the New Year. Even though the industry is “clearly late in the cycle now,” Willett expects 2018’s kickoff to mirror 2017. The apartment industry remains on solid footing, but you still can’t ignore some sobering signs.

“The consensus view of most economists is that we’re still a couple of years away from a recession,” he said. “We’ve got good fundamentals on demand, but a big flow of product clearly goes on through 2018. Occupancy is healthy, but another issue has been just trying to absorb product. Rent growth is okay but not spectacular. (Property) sales have slowed down meaningfully.”

Here’s a closer look at how these and other industry metrics have performed:


Occupancy, still healthy in the big picture, is off from its peak. Blame supply. A large number of completions in 2016 followed by more in 2017, mostly in the upper tier, slowed rent growth and reintroduced something rare in apartment leasing strategy lately – concessions.

Occupancy across the country’s top 100 metros dipped to 95.5 percent in the third quarter, down 20 basis points on a quarterly basis and 50 basis points annually, according to RealPage data.

“That shift is more of a supply story than a demand story,” Willett said. “The delivery pace has accelerated a lot, and new product is coming on stream a little faster than it can be absorbed.”

RealPage Vice President Jay Denton said occupancy normally peaks in the third quarter, then recedes. The falloff could be a little more pronounced because of more new supply.

“We have some concern about how much occupancy could deteriorate during the next few months, given big blocks of new supply are set for delivery during the seasonal leasing lull,” Denton

There’s good news that although Class A has cooled, it also has stabilized, and Class B and C apartments remain attractive even though occupancy and rents aren’t what they were a couple of years ago.

The Minneapolis/St. Paul market has shined, sporting 97.9 percent occupancy in the third quarter.

Even despite the overall drop in occupancy, Willett said the industry is well within a “tight market.”

Rent growth

Rent growth pace is in line with the long-term norm, although much of what carried the urban core is gone. By the third quarter, effective rents for new leases hovered between 2.5 and 3 percent for the year and showed 0.9 percent growth during the third quarter. Typical monthly rent across the country’s top 100 largest metros sat at $1,316.

By the third quarter, a shift among the country’s rent growth leaders from the West Coast was well under way. Based on quarterly RealPage data, on two of the top performers from an all-West Coast ensemble from 2016 remained in the top five, although Sacramento maintained its No. 1 ranking.

Las Vegas, fueled by growth in top-end and middle-market products, climbed from No. 5 to No. 2 but Riverside-San Bernardino, Seattle and Phoenix fell. Improved rent growth edged eastward to Orlando (No. 3), Minneapolis/St. Paul (No. 4) and Jacksonville (tied at No. 5 with San Diego).

Through three quarters, Sacramento has maintained brisk rent growth, more than doubling the 2016 national average in Q1 and Q2 at 9.8 percent. Third-quarter performance was still impressive at 6.9 percent.

Rent growth in the Twin Cities, boosted by an improved local economy, began improving in the first half of 2017. In the third quarter rents improved 4.6 percent, the first significant improvement since the recession burn-off of 2011.

“Consumers should feel more comfortable with rental housing price jumps similar to typical wage growth, after several years when rents rose faster than incomes,” Willett said.

Property acquisitions

In one of the biggest surprises, property sales and acquisitions have fallen off the record performance of 2016 at a higher rate than expected. Even though transaction activity picked up in the third quarter, investors are scarcely finding deals that make sense.

Plagued by high land and construction costs, the West Coast, once an attractive market, has about dried up as far as sensible deals go. That’s not surprising, as the area holds some of the country’s lowest capitalization rates in the urban core and suburban markets.

“There’s a disconnect between buyer and seller pricing expectations,” Willett said. “Plus, would-be sellers motivated by debt maturation can refinance at very low fixed rates of interest.”

The shift has been enough that investors have to be more selective in their acquisition strategy, a consensus of many going into 2017.

“We’re clearly late in the cycle now,” Willett said. “You’re starting to see thing happen that typically happen late in the cycle. The capital is there, the investment opportunities are there, you just have to find an individual deal that makes sense.”

Absorbing new product

Absorbing new product will continue to be an issue. RealPage projects that the peak for apartment deliveries will be in the first half of 2018 because many properties have shifted completion schedules. By the second half of the year deliveries should taper off.

Dallas, New York and Los Angeles should rank as 2018’s new supply leaders, while lots of product also is on the way in Seattle, the District of Columbia, Denver and Atlanta.

While there are still more units to come on line, building is cooling in many of the top 10 major metropolitan markets. October’s release of U.S. census data indicates that building permits are plateauing, noting a 12.2 percent decline year over year.

Four of the top 10 metros issued fewer multifamily permits in the 12 months ending in October 2017 than for the same period in 2016. Atlanta was the only city to experience a double-digit percentage decline.

However, the top 10 metros issued 1.4 percent more permits than for the preceding 12 months.

“New construction starts have begun to slow in what had been the building hot spots, but there’s not an abrupt halt in activity,” Willett said.

Even with adjusting, re-calibrating multifamily is still a good bet

At November’s National Multifamily Housing Council OpTech Conference & Exposition, President Doug Bibby said the industry is going through transition but expressed optimism for the future although a large affordability task lies ahead.

The industry will need to provide 4.6 million more apartments at various price levels to meet demand in 2030. A projected influx of immigrants who typically rent less expensive housing will force the industry to redistribute new construction to accommodate a broader base of renters, Bibby says.

While that may sound inviting to builders, the trick is going to be creating lower-priced housing in a costly building environment.

“I think people need to understand that the price point has gone up because the economics have changed so dramatically,” he said. “This is a challenge of really changing the conversation, and you’ll hear more from us on that.”

Affordability aside, Bibby says the apartment industry still has a lot going for it. And change isn’t necessarily a bad thing.

“The market is slowing and that is good because we need to adjust and calibrate,” he said. “This wasn’t going to run forever.”


Contributing Editor, Property Management Insider
President, Ballpark Impressions, LLC

author photo two

Tim Blackwell is a long-time publishing and printing executive in the Dallas/Fort Worth area who writes about the multifamily housing and transportation industries. He has contributed numerous articles to Property Management Insider, and worked as a newspaper reporter in the D/FW area. Blackwell is president of Ballpark Impressions, and publishes the Cowcatcher Magazine. He is a member of the Fort Worth Chapter/Society of Professional Journalists.

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