Why Multifamily Will Continue to Perform Well in 2019
The data is out and 2019 is looking to be another great year for multifamily investing. One of the biggest questions investors are asking right now is whether real estate, and multifamily in particular, is at a peak. This has been an ongoing conversation for a few years now and many have remained on the sidelines fearing another recession is looming. The data is suggesting that whether the economy enters a recession or not, there are several positive signs that suggest multifamily assets will be well positioned to handle the turbulence. Here are a few data points recently released by Marcus and Millichap.
The Affordability Gap Will Continue To Create High Demand for Apartment Living
Household formations continue to outpace construction. This is true of both multifamily and single family sectors. The low supply of housing and the continued inability of cities to provide lower cost housing are pushing up demand and prices. Multifamily living will continue to present a better economic value relative to purchasing a single family home in many submarkets.
Low unemployment has increased the household formation rate especially in young adults from the age of 20-34. Most of them have preferred apartment living due to the relatively high cost of buying and owning a home. Interest rates increases have played a role in pushing up home ownership cost. The chart below demonstrates the gap between owning and renting has widened.
Lending Will Remain Conservative
Fears about returning to the stated loans of 2006-2008 are overblown as multifamily lenders remain highly reluctant to lend on future proforma rent increases by apartment operators. It’s important to remember also that even during the Great Recession, multifamily as an industry was down only 6.5%. Moreover, the default rate for multifamily loans was less than 1%.
Today, most multifamily deals are seeing a Loan-To-Value range from 55-75% and this is expected to continue into 2019. Construction lending is slowing as record product has been introduced into many markets. As multifamily construction has not kept pace with household formation, existing value-add projects will be in higher demand.
Cap Rates To Remain Steady Relative to the 10-year Treasury
Even though the Fed has hiked interest rates, lending for multifamily properties has not been affected in a significant way. Multifamily lending rates correlate with the 10-year treasury which is averaging 3.18%. Cap rates for multifamily properties are leveling out at an average of 5.3%. The spread of 236 basis points between average cap rates and the 10-year Treasury is seen as in line with historical averages.
The Macro-trend of Apartment Living Will Continue
Pew Research confirms that more U.S. households are renting than at any other time since 1965. This trend plays out among all social classes and whether the head of household has a college education or not. Americans are migrating into apartment communities in large numbers. The affordability of buying a home is a factor, but many prefer the smaller spaces and community amenities of apartment living.
In short, multifamily assets should continue to perform well in most markets provided that operators adhere to conservative underwriting and fixed rate debt. In order to read more in detail about the 2019 multifamily markets, we suggest you get ahold of the Marcus and Millichap report. You can request a copy here.