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Will overbuilding impact multifamily in 2018?

2017 ushered in new supply in the U.S. multifamily sector. The result was softening market fundamentals and concerns around overbuilding. What does it mean for 2018?

January 30, 2018
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It was a hotly debated topic at the Apartment Strategies conference held at this month’s National Multifamily Housing Council (NMHC) annual meeting. The general consensus: 2018 will be a good year for the both owners and investors in the sector, but it won’t be without challenges.

“The consensus is that we’re in the later stages of the economic cycle, but despite that, real estate fundamentals are still strong and have a lot of runway ahead,” said Jeff Adler, Vice President at research platform, Yardi Matrix.

Adler pointed to the recent tax bill as a positive indicator, which he claims has leveled the playing field of owning versus renting. The “Millennial Tailwind” has also had a positive impact, he notes, referencing the growing trend of millennials getting married and having children later in life, extending their time in the renting cycle.

“2018 has the potential to be interesting, but certainly not easy,” agreed Doug Bibby, President of NMHC. “Fundamentals are still strong, but the headwinds we’ve been talking about for a while have arrived.”

Panelists conceded that supply will continue to have an impact on investment strategies in 2018 as new construction hits the market. Though a slowdown in construction-starts is expected nationally, there is likely to be continued new supply in metro areas with consistently hefty demand, such as Houston, Seattle and Denver.

In fact, newly built supply is impacting rent growth in markets across the country. In 2015, the top 10 markets ranged from 13 percent rent growth (Oakland) to 7.1 percent growth (Phoenix). In 2017, the top market achieved 6.5 percent rent growth (Sacramento).

“As premiums for the right market selection become smaller, individual property stories may be more important than what market they’re in,” said Greg Willett, Chief Economist at RealPage, Inc, a rental housing management solution business.

But there are a number of submarkets that aren’t experiencing softening rent growth, Willett noted. He suggests that workforce and blue-collar neighborhoods deserve a closer look this year as they’re achieving higher annual rent growth than their urban core and upscale counterparts.

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