The State of the Multifamily Industry in 2017
2017 multifamily outlook: Optimistic despite expected cooling after record cycle
On Jan. 10, Apartment Association of Greater Dallas members packed their annual state-of-the-industry luncheon before a panel of industry professionals that included Steve Lamberti of Milestone Apartments REIT; Jay Denton of Axiometrics; Jeff Price of Jones Lang LaSalle; Jay Wagley of CBRE and Brian Tusa of Trinsic Residential Group. Among this group of multifamily movers and shakers, they reached a consensus that growth will likely slow in 2017 but that the market should still remain healthy overall. The panel acknowledged that the boisterous run of the multifamily industry over the past several years make 2015 and 2016 tough acts to follow; however, the apartment industry is still a good place to be despite the potential for a slight slowdown.
Echoes of this general sentiment reverberated across discussions of the multifamily industry throughout January. In fact, Doug Bibby, president of the National Multifamily Housing Council, gave a similar message on Jan. 5 as part of the state-of-the-industry webinar created by Humphreys & Partners Architects, L.P.
“2017 is going to be a solid year, but it’s going to be marked by increasing caution,” Bibby said. “The more I talk to people in the industry, the more I’m convinced that everyone is going to be more selective in what they do.”
The optimistic near-term forecast doesn’t excuse a lack of attentiveness
Another speaker on the Humphreys & Partners Architects, L.P. webinar, Greg Willett – Realpage, Inc.’s chief economist and head of their market intelligence division MPF Research – stressed that while the near-term outlook appears favorable, industry professionals mustn’t ignore indicators of a cooldown in a year less likely to forgive miscalculations.
“If you make a mistake in the market . . . in 2017-18, you’re going to pay a penalty for having messed something up,” he said.
At the AAGD luncheon, Jay Denton, senior vice president of analytics for Axiometrics (recently acquired by RealPage) said that the buzzword “affordability” will serve as just such an indicator. He explained that those in the multifamily industry should pay close attention to how well the industry adjusts after enjoying unprecedented rent growth – which continued up 3.8 percent for new leases last year according to MPF Research. They should also keep an eye on the single-family market and its ability to build homes that people can afford.
Recent headlines from the national media have additionally pointed toward price flattening in top-tier urban core spaces, citing stagnant or lower rents for Class A apartments in Boston, Chicago, Dallas, Manhattan and Washington, D.C. Willett said that “noise” is limited to only a few markets and that overall rent growth should continue upward, landing around 3 percent with Class B and Suburban Class A products leading the way.
“A lot of media reports have focused specifically on that (top-tier) niche, and it’s true there is softening there, but the market overall is still really strong,” said Willett.
Despite stiffer lending requirements, multifamily is still a good investment
Both Bibby and the panelists at the AAGD luncheon indicated that lenders, particularly those providing construction loans, have started to pull back and tighten. Brian Tusa, chairman and CEO of Trinsic Residential Group stressed that the days of banks loaning money with less equity commitment are fading. In fact, the percentage of loan-to-cost has dropped 10 to 15 percent in recent months, requiring developers to pony up more equity for deals.
Bibby mirrored a similar sentiment regarding lenders during his own speech. “Their rates are inching up; it’s getting a little more difficult to get construction loans,” he said. “That’s sometime how the system corrects itself.”
But he still believes that U.S. real estate and multifamily remain attractive investments, especially for conservative overseas investors.
“Capital is going to continue to seek U.S. opportunities in real estate and multifamily,” he said. “We are still a haven for capital, particularly what I call ‘flight capital,’ and that’s from countries like Russia and China and others that are just not like our capitalist system. They are going to be looking to place their capital in safe and deep markets like ours.”
‘You can cool off … and still have a good story’
Although some markets have been taxed by slowdowns in leasing and new inventory coming on line, many of the experts – Bibby and Willett included – remain optimistic about growth.
Willett estimated that of the 542,000 units currently under construction in the top 100 markets, about 65 percent of those – up 26 percent from 2016’s total – will deliver before year’s end. But with declines in starts and building permits in November of last year, Willett does expect deliveries to peak in 2017.
“Certainly, there will be a lot that does get delivered this year,” he said.
However, RealPage anticipates that high demand will still keep vacancies below 5 percent even with the additional inventory. Coupled with rent growth momentum still expected to reach 3.2 percent, 2017 is poised to be another great year for the multifamily industry.
“My overall message is market performance is still really strong,” said Willett. “It’s not quite where we were a year and a half ago, but that was the strongest performance that we should probably expect to see during our lifetime. You can cool off from that and still have a good story.”