Jan. 22, 2018, 1:28 p.m. | Lucro Staff | Deal Review

Multifamily Market Trends to Expect in 2018

Besides making empty promises to ourselves about how often we’re going to get in the gym, we want to explore trends in the multifamily market. We sat down with Lee Associates multifamily investment specialist Brian Pohl to chat about what he predicts 2018 will bring for brokers and investors. Pohl’s 14 years of experience across the U.S. strongly qualify him to provide an instructive forecast on the good and bad news for multifamily investors in 2018.

Minding the millennial gap

In 2017, real estate investors struggled on pinpointing the millennial market. Millennials are not quite financially stable enough to invest in buying an entire home, and to be frank, they don’t necessarily want to.

“Younger people or millennials don’t have the means or capital to go get a mortgage, and they don’t really have an interest in buying a home anymore,” Pohl said. “They want to work in the city. They want to live in an apartment that allows them more flexibility.”

In this case, the multifamily market will continue to see class B and C apartment buildings as a smart and necessary investment in 2018. Their more expensive counterparts aren’t serving the most elusive part of the market. The cost-effective options are seeing more and more rental interest, therefore serving a larger market brokers and investors aim to sway.

As millennials serve one of the largest rental pools, it’s important to consider not only where they’re renting, but their rental habits as well.

“Costs to rent in urban cities is obviously expensive,” Pohl said. “There’s only so many jobs the millennial demographic can have to afford the $3,000 one bed one bath, or small two bed two bath.”

Millennials tend to rent small, with immediate access to public transportation or within biking distance from work. They care more about the communal aspects of their neighborhood, like being across the street from their favorite coffee shops. If they can’t afford to be near public transportation or their favorite spots, they’re moving elsewhere.

Mid-urbanized suburban markets

The multifamily real estate market will likely see a surge in mid-urbanized suburban markets. Think, transit oriented suburbs with a small but lively city center. Most of these suburban areas have train services that run from the big cities to the towns. With more and more people moving to these areas, it’s worth taking a look at investing in the smaller cities that surround the large, metropolitan market.

According to Zillow chief economist Svenja Gudell, reports show the amount of people moving to urban areas grew in 2017. Up 8% since 2016, millennial are just starting to consider the suburbs.

They are slowly approaching the shift from young 20s to upper 20s. However, people are waiting longer to have kids, get married, and shift from their beloved cities. For example, your typical millennial market might wait to make the move until they’re 35 instead of age 28.

In 2018, investing in multifamily real estate options that speak to millennial preferences (fitness centers, rooftop gardens, and close proximity to their favorite grocery stores topping the list) will prove worthy. We can expect millennials to continue the move from the big city into the mid-urban market.

Rents flatten

Pohl explained that the job market growth has finally began to flatten, with 2.1 million jobs added in 2017. Its slower growth will begin to impact rents, with rent growth decelerating – but not by any enormous dips.

This fluctuation is highly dependent on the market’s location, as rent has increased anywhere from 5-20% on coastal primary cities (L.A. and New York City). But in smaller, midwestern/central markets, rents in multifamily buildings won’t be escalating anywhere near those numbers.

In an interview with National Real Estate Investor, Julia Georgules, vice president of research with JLL, concluded that vacancy may also start to impact the 2018 market. Another prognostication from Georgules? No rent growth in 2018.

Retrofitting proves key as new construction slows

Millennials work harder to save money than any other age group – appeal to their large market by choosing to retrofit your multifamily properties. Retrofitting involves taking an old aspect of your property (such as 10-year-old HVAC equipment) and upgrading it to woo new renters. It’s an ongoing trend, but one that isn’t expected to fall off the radar in years to come.

Inefficient energy in multifamily homes won’t appeal to the market that loves new, high-tech appliances and features. Pohl agrees that investing in upgraded utilities and choosing to retrofit will be an important aspect for the new year, especially since new construction is expected to slow.

As retrofitting gains popularity as a lower-cost alternative, new construction will continue to slow in upcoming years. As aforementioned, high-cost properties just aren’t appealing to young renters. More often than not, they’re choosing older properties with new appliances and amenities.

Rural, affordable markets continue to take hits

Those living more than 100 miles away from a major city will continue to see a lack of growth in 2018. The market is moving far, far away from multifamily housing opportunities in rural areas.

“Rural markets more than 100 miles outside of a big city are suffering incredibly. The levels of poverty are incredible, and there’s a lot of concern for rural American communities and isolated cities,” Pohl said. “They don’t have access to intellectual capital and there’s not much business activity, so that’s one of the big concerns. That also speaks to affordable housing.”

Affordable housing could see a major gut in 2018 with the introduction of the recently-passed tax bill. The proposed bill eliminates the New Markets Tax Credits, a program benefiting homeless and low-income families. The program has created and retained hundreds of thousands of new jobs and has helped build 100 million square feet of new construction. The bill cancels the program, as well as rescinding funds approved for 2018-2019.

Multifamily still proves a strong investment

In the end, the multifamily market will prove its strength in 2018 quietly. It’s a market that might not be breaking news – but that doesn’t mean it can’t be an incredible place to invest.

“Multifamily provides for good deals. It’s a safe place for investors to put their money,” Pohl said.

A study by the National Apartment Association and National Multifamily Housing Council shows apartment hunters for the next decade will continue to dominate the market. The factors at play have to do with the delayed homeownership, because of the millennials appeal to spend on experiences, not homes.

“We’ve seen a real renaissance in the multifamily market. People realize it’s a very safe place with risk and return looking very good,” Pohl said. “You don’t see huge spikes, but it’s a fairly steady, predictable return. Yields are always good.”

The multifamily housing market will see some changes in 2018, but will continue to perform for investors and brokers. Its unassertiveness on the market will still generate long-term cash flow, and isn’t that at the top of everyone’s to-do list?

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