Underlying demand drivers for all real estate sectors will remain strong in 2020 as the ultra-tight labor market supports steady wage growth and household formation. Decisive Federal Reserve action in 2019, together with its stated commitment to sustaining the growth cycle, has moderated recession fears and boosted sentiment that will empower business leader decisions. Real estate and the economy will also benefit from favorable demographic drivers as baby boomers and millennials lever sturdy household balance sheets into active spending and investments.
Exceptionally low unemployment has unlocked accelerated household formation, driving increased apartment demand. Vacancy rates stand at or near 20-year lows in most markets despite record construction levels, delivering steady rent gains in the 4 percent range. Workforce housing, particularly Class C properties, is poised to outperform in 2020 as much of the new housing demand will be concentrated in the most affordable segment of the market. In addition, the stock of Class C apartments has been shrinking as remodeling and upgrading these “value-add” properties has been a core focus of investors for the last few years. Vacancy rates for these assets will likely remain about 50 basis points below the national average for all property classes and deliver a rent growth premium in the 100-basis-point range.