Taking the multi-housing market's pulse
As we enter 2019, investor demand continues to be robust, and this follows what appears will be a record-breaking year for multi-housing transaction volume in 2018. Simultaneously, all eyes are on interest rates after significant volatility during 2018 as the Federal Reserve raised its benchmark interest rate to the highest level since April 2008. Even with an increased Federal Funds Rate, global investor interest in the U.S. is sustained by multiple years of steady job growth and a strengthening U.S. economy.
The U.S. homeownership rate increased slightly from the 2017 level of 63.9 to 64.4 percent as of the third quarter. The shortage of single-family homes, particularly starter homes for first-time buyers, is likely to prevent large increases in the homeownership rate over the next few years and continues to drive strong demand in the rental market. As most millennials have entered homebuying years, they continue to trail all other homeownership age groups by a significant margin. Millennial homeownership increased nominally in 2018 to 36.8 percent, trailing the next closest age group by 22.7 percent. A report released from the Urban Land Institute in July 2018 highlighted the millennial homeownership rate in 2015 was eight percent lower than the homeownership rate of Gen Xers and baby boomers at the same age.
After a decline in 2017, preliminary multi-housing transaction volume increased 9% in 2018 when compared to 2017. Notably, preliminary transaction volume is up four percent over the same period in 2016, which was a record year for volume. The six major metros (Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C.), which represent the most expensive markets in the country, recorded a 22 percent increase in multi-housing transaction volume, mostly driven by increases in San Francisco (110 percent) and Washington, D.C. (175 percent). Furthermore, multi-housing transaction volume for non-major metros increased four percent in 2018 compared to 2017.
The multi-housing sector continued to experience an increased quantity of portfolio and entity sales in 2018, reporting a 13 percent increase in transaction volume reaching $40 billion as compared to 2017. During 2018 there was an increase in transaction volume for mid/high-rise buildings by 31 percent and a decrease in garden buildings by 1.5 percent, compared to 2017, indicating the favorability of mid/high-rise assets. Preliminary sales volume in 2018 decreased year-over-year most significantly in Baltimore (-34 percent), North New Jersey (-31 percent), and Orange County (-27 percent). Markets with the greatest increase in year-over-year sales volume in 2018 were Washington, D.C. (+175 percent), San Francisco (+110 oercent), and the NYC Boroughs (+84 percent). The top five markets in terms of sales volume in 2018 were Los Angeles, Dallas, Manhattan, Atlanta and Houston.
Cap rates have increased slightly to 4.8 percent in the six major metros, which is up eight basis points (bps) from 2017. Conversely, cap rates in non-major metros have decreased to 5.9 percent in December, compressing nine basis points from 2017, offering higher yielding opportunities.
Multi-housing continues to remain a desirable investment for institutional investors, large investment funds, public and private REITs, and private operators. The market has continued its strong pace, achieving three percent effective rent growth nationally through 2018. T
he larger number of new units completed in 2018 is expected to soften rent growth, however the market remains tight with occupancy at nearly 96 percent. Over the long-term, Axiometrics’ apartment fundamentals remain bullish as the data suggests the long-term demand will outpace the new supply being delivered.
Over the last 12 to 18 months, we have witnessed a migration of capital towards workforce housing and expect that trend to continue as more luxury rental product is delivered at rental rates that price out a large majority of the renter pool. As a result of that, the parameters of what defines workforce housing has changed. Workforce housing has moved from renters that earn 60 percent of area median income to residents that now earn 80 to 100 percent of area median income. The underserved population is now the band that does not qualify for purpose-built affordable housing (60 percent) but have been squeezed out of the 80/90s vintage housing that have undergone valueadd redevelopments.
Opportunity Zones will be a topic of discussion in 2019, with pricing discovery at the forefront of the conversation. There is significant capital being raised for Qualified Opportunity Zone Funds and there will be a race to deploy the capital. According to the Washington, D.C. based Public Policy Organization Economic Innovation Group, U.S. investors currently hold approximately $2.3 trillion in unrealized capital gains. The Treasury Department and the IRS are expected to provide further guidance in early 2019.
Looking forward into 2019, Axiometrics projects effective rent growth to average three percent with a stable vacancy rate of 5.1 percent. The unemployment rate remained unchanged at 3.7 percent and wage growth is up 3.1 percent over the past year. The multi-housing market continues to see ample liquidity and significant dry powder. Since multi-housing investments generate consistent annual cash-on-cash returns, demand for these investments should continue to remain strong due to their attractive cash yields relative to other asset types. Meanwhile, healthy job growth provides a strong indication for continued health in the housing sector.
