Marcus & Millichap

2020 North America Multifamily Investment Forecast

Outlook 2020

Special Research Report

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National Multifamily Index (NMI)

  • Robust economic and demographic gains propel Orlando five steps to claim the top spot in this year’s Index. Additionally, Tampa-St. Petersburg (#5) and Phoenix (#6) make strong leaps into the top 10 as strong household gains tighten vacancy.
  • Seattle-Tacoma (#2) climbs three rungs on solid employment gains and high home prices that keep apartment demand elevated. San Diego (#3) dips one step as rent growth eases, while neighboring Riverside-San Bernardino (#4) skips up three notches as vacancy declines.

National Economy

  • The labor market will remain a key factor in the pace of domestic growth in 2020. With the national unemployment rate hovering near a 50-year low in the mid-3 percent range, job creation will remain strong but taper from last year.
  • The tight hiring market will continue to place upward pressure on wage growth, supporting 3 percent gains and pushing disposable income to a record high. Plentiful jobs and climbing incomes will deliver elevated household formation once again this year.
  • The durability of the current expansion cycle, which will likely extend into its 11th year in 2020, continues to unlock housing demand. Household growth this year will be 12 percent above the current cycle’s yearly average as 1.3 million new households are formed. This will generate additional demand for rental housing as home sales have remained stable for four years at about 450,000 houses per year.

National Apartment Overview

  • Workforce housing will anchor the national apartment market this year as availability within the segment remains at 20-year lows. During the past three years, Class B vacancy has dropped 70 basis points to the low-4 percent range, while the Class C rate has retreated 130 basis points to the mid-3 percent band.
  • Class A apartments will also benefit from strong demand as sustained white-collar job creation keeps vacancy rates for this segment near 5 percent despite the delivery of 300,000 new apartments.
  • Despite the significant inventory gains, developers have been effective in aligning new supply with job creation and population growth, keeping most markets in the U.S. in balance.

Capital Markets

  • The Federal Reserve will balance a whirlwind of economic and geopolitical forces this year as it sets policies to sustain domestic growth. In 2019, it cut the overnight rate by 25 basis points three times in an effort to offset recessionary risk.
  • Invigorated by increased Fannie Mae and Freddie Mac lending, apartment debt financing will remain highly liquid this year. In addition to the Government Sponsored Enterprises (GSE), a variety of local, regional and national banks; pension funds; insurance companies; and CMBS sources will be active lenders in 2020.
  • While debt financing is still accessible for all types of projects, investors conducting a major property upgrade may need to blend mezzanine debt with other capital sources until they prove out their concepts and substantially fill units.

Investment Outlook

  • Tight labor markets and the extended growth cycle have boosted apartment demand nationwide, but the invigoration of secondary and tertiary metros has drawn increasing interest from investors.
  • A major policy shift impacting multifamily investment is rent control. Three states — California, New York and Oregon — have already enacted rent control, and several other states and municipalities have rent restrictions on their agenda.
  • Secondary markets still offer an 80-basis-point premium compared with primary metros and tertiary markets offer a 120-basis-point lift compared with primary metros.

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