2019 was a strong year for multifamily investing and the year ahead looks to be more of the same. There is a significant amount of capital in U.S. markets searching for yield with very few alternatives. Multifamily apartments will remain one of the more attractive asset classes for yield. Although, we expect some compression on yield rates due to the higher price environment and supply increases in many markets.
With the upcoming election, we expect that there will be confusing signals circulating about the health of the U.S. economy, which may slow down the movement of capital. But, on a fundamental basis, the economy will add more jobs and the absorption rate of new apartment units remains healthy across the country.
We expect inflation will be moderate and interest rates will continue to experience downward pressure. This should keep cost structures manageable for most projects, but it is still an environment requiring caution in how debt is used. Multifamily apartments will continue to benefit from the dual effect of seniors who are downsizing and moving into apartments, and millennials entering the workforce and wanting to stay mobile. These factors should lend to modest rent growth in most of the cities benefitting from job and population growth.
The sunbelt states will continue to present opportunities, but investors who have gotten used to higher yields in larger metros will need to curtail expectations as prices have increased and the costs of taxes and insurance weigh more heavily relative to cash flow. This is especially true in Texas where taxes and insurance are tethered to market value more so than other states. But Texas will continue to benefit from job and company migration out of California.
“Some 660 companies moved 765 facilities out of California in the past two years, and Dallas-Fort Worth has been the beneficiary of many of the relocations, according to a new report. The departures from the Golden State between January 2018 and now involve corporate headquarters, manufacturing facilities, data centers, research hubs, software and engineering centers and a few warehouses.” (Dallas Business Journal)
Phoenix will continue to forge ahead in rent growth. 2019 saw rent growth of more than 7%. Value-add projects have more room to run in the submarkets where retirees and tech companies are relocating.
Finally, as apartment rent rates climb, more pressure is being felt by renters who are paying a higher percentage of their income for rent. This is causing local governments in California, New York, Oregon, Illinois and Washington to consider more rent control policies. Expect more conversation and debate on this topic moving into 2020.