Some multifamily markets face changing supply, growth realities in 2017
Multifamily housing has had a solid six-year run, according to Fannie Mae’s Multifamily Economics and Marketing Research Group (MRG). But the economists expect the growth to slow some in 2017. It basically boils down to what is happening in about a dozen metro areas and their submarkets.
“Key fundamentals have propelled the multifamily sector over the past few years,” says Kim Betancourt, the MRG’s director of economics. Those include favorable demographics, continued job growth, and faster household formations. The Millennial population – 83 million strong – is at the center of the action and stands to drive demand for the next five years.
“But along with all of these positive drivers,” she says, “there has also been a lot of new supply. And much of that new supply is starting to hit the market, job growth is moderating. And there’s a little bit too much supply in some submarkets and not enough in others.”
A Stable Picture for Multifamily
Betancourt adds that there is no oversupply at the national level. And looking at the numbers for the country overall, things look pretty good.
Nationwide, the multifamily housing industry should remain “fairly stable” in 2017. About 400,000 apartment and condo units should come on line this year, the Dodge Data & Analytics Construction Pipeline shows. That’s compared to about 343,000 apartment units in 2016.
That supply is not a bad balance with expected demand for apartments when you look at the job numbers nationally. Moody’s Analytics expects 1.4 percent job growth this year. That works out to the addition of roughly 2 million new jobs in 2017.
The problem, Betancourt suggests, is that just 12 markets primarily will account for the bulk of the new multifamily supply. But job creation in 2017 will occur much more widely across the country.
MRG is expecting to see signs of slowing momentum in the national vacancy rate and the rents that building owners charge, as a result.
The vacancy rate was running at about 5.25 percent in the fourth quarter of 2016. MRG expects it to rise to 5.5 percent in the early part of this year. It could be 6 percent by the end of the year. Actually, that’s a more normal level for the national vacancy rate.
Rent growth is a similar story. Rent growth in 2016 was an estimated 2.5 percent. It beat inflation, which was running at a 1.7 percent pace year-over-year at the end of November. MRG expects to see some moderation in rent growth this year – with an overall pace of about 2 percent. That likely would put it in positive territory compared to inflation.
A Tale of Three Cities
Betancourt zeroes in on three cities – Houston, New York, and Boston – to explain how a mismatch between jobs and apartment supply is affecting the multifamily sector.
Jobs will continue to grow in all three metros – but not enough for the market to absorb the large amount of new supply just on the horizon.
Houston is anticipating the delivery of more than 9,500 units this year. That’s compared to a rise in demand of about 4,000 additional units. Boston is awaiting 9,200 units, with projected added demand of fewer than 1,500 units. And the nation’s largest multifamily rental market – New York – expects more than 43,000 new apartments but only an increase in demand of 26,000 units.
Compounding the problem, most of the new apartment supply underway consists of Class-A units. These command the highest rent levels.
This will put downward pressure on rent growth in all three areas. It could even create some negative rent growth in the coming year.
And a Starkly Different Tale of Two More
But there are other parts of the country that are experiencing just the opposite, Betancourt observes. Job growth is vigorous in Orlando and Phoenix and there just aren’t enough apartments to go around.
Professional services, healthcare, and tourism are the magic words for job growth in these two metros. According to Moody’s, 2017 will bring 39,000 new jobs to Orlando and 63,000 to Phoenix.
Orlando could use another 7,800 multifamily units to meet its growing demand in 2017, but it expects to see the delivery of only about 5,300. Phoenix should be able to comfortably add about 12,000 units, but it will probably get only about 6,200.
Despite traveling at a somewhat reduced speed, multifamily will continue to forge ahead in 2017. And the outlook for the year is still positive.
Also, says Betancourt, “It’s important to note that this slowdown is expected to be short-lived – maybe 12 to 24 months or so.
“After that time, we expect the multifamily sector’s underlying fundamentals will improve as new deliveries slow down and assuming that job growth and demographic trends remain stable.”
Timothy Ahern is a writer and editor in Fannie Mae’s Corporate Communications Department.
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.