The 2019 investment outlook is off to a bright start. The underlying metrics supporting the apartment market entering the new year remain healthy. Employers ended last year on a high note, lifting annual job growth to 2.6 million positions and extending the positive monthly addition streak to 99, the longest in the post-war era. Payroll growth should continue to create new households, including a sizable share of renter households due to elevated home prices.
Assuming the current expansion surpasses the previous record in the third quarter, investors will be employing diversification strategies favored in a mature economy. In primary markets spreads are tight, providing buyers little margin for a downturn in operations. In secondary and tertiary markets, buyers may pursue higher yields. Meanwhile, cap rates in tertiary metros can be 150 basis points higher than in primary markets, significantly lifting the attractiveness of the area. Investors are also realizing cap rate spreads by going into the neighborhoods that showed little growth 10-15 years ago and are now becoming desirable locations.