Marcus & Millichap

Multifamily Investment Forecast

National Report, 2016

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National Multifamily Index (NMI)

  • Metros with low vacancy, strong rent growth and solid projected employment gains placed highest in this year’s National Multifamily Index. Robust employment growth and household formation plus intense housing demand put San Francisco and San Jose atop the ranking, while strong operations also enabled Oakland to claim a spot on the upper rungs. Other metros with sizable concentrations of tech employment, including Portland, Seattle-Tacoma and Boston, were also ranked near the top of this year’s NMI.
  • Improving local economies and property performance vaulted Riverside-San Bernardino and Atlanta into the top 20 in this year’s Index. Markets in Texas occupied positions in the upper half of the NMI, led by Austin and Dallas/Fort Worth. Houston slipped, however, as new supply will come online while economic conditions soften.
  • Midwest metros claimed positions in the lower third of the index despite generally favorable demand drivers and property operations. Most notably, Detroit continues to chart a respectable resurgence with a significant rise in the NMI. Metros with demographic and job trends not as impressive as higher-placed markets filled out the bottom five spots in the Index, spanning from Jacksonville to St. Louis.

National Economy

  • Gross Domestic Product grew modestly last year behind considerable contributions from consumer spending, a mild resurgence in housing, non-residential construction and government outlays. Trade imbalances related to the strong dollar could subdue economic expansion in the coming months. In 2016, GDP will grow from 1.5 percent to 2.5 percent.
  • Following a projected gain of 2.5 million jobs last year, employers will continue to expand staffing, creating 2.6 million positions in 2016. Job openings hovered near all-time highs in the second half of 2015, signaling that employers see additional expansion opportunities that will require more workers on the horizon.
  • Amid the positive developments in the labor market and other facets of the domestic economy, many foreign economies lost momentum in 2015. The risk of softness in foreign economies spreading and weighing more greatly on U.S. economic performance will persist during 2016.GDP measured 3.5 percent growth as of third quarter 2014, following a rate of 4.6 percent in the prior quarter. Nominal retail sales stand 18 percent higher than the prior peak, or 5.8 percent adjusted for inflation. Employers added 2.7 million jobs, a 2.0 percent increase, regaining all of the jobs lost in the recession.

National Apartment Overview

  • New rentals were absorbed in substantial numbers last year, contributing to a decline in national vacancy to 4.2 percent. Elevated completions will exceed demand and underpin a nominal increase in the U.S. vacancy rate in 2016.
  • Further expansion of U.S. payrolls will generate new rental households and support a 5 percent jump in the average effective rent this year. Positive demographic trends in the millennial and baby boomer segments will also spur new demand and underpin solid asset operations.
  • Developers will complete 285,000 units in 2016, surpassing last year’s total of 250,000 rentals. Multifamily starts remained elevated nationwide, pointing to additional supply pressures over the near term. Several metros will record supply-induced vacancy increases this year.

Capital Markets

  • Following a long-anticipated hike in the short-term lending benchmark, the Federal Reserve will continue to monitor economic gauges to guide its course. The Federal Reserve’s fourth quarter rate bump signals its faith in the economy, but with inflation contained and only moderate growth anticipated in 2016, the Fed will likely hold off on additional action until at least midyear.
  • Regardless of the debt source, lenders vigilantly enforced leverage levels lower than those applied during the peak pricing era. Continued adherence to lending standards should mitigate the risk of defaults and maintain the flow of debt to borrowers in the months to come.

Investment Outlook

  • Healthy property operations and potential demographic-driven upsides drove capital into the apartment sector in 2015. Primary markets accounted for the majority of deals and dollar volume during the year, but secondary markets also stood out, posting sizable gains in transactions and dollar volume.
  • With cap rates for Class A assets in preferred and primary markets at less than 5 percent, development will continue to become an option for groups seeking to capture higher yields. Locations near mass-transit hubs in urbanized markets are prime targets.

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