Full Speed Ahead
Multifamily sector will advance along its long runway.
Despite rumors to the contrary about multifamily's growth, 2018 will be a seller's market.
As long as off-market portfolio transactions and recapitalizations continue - keeping the amount of available deals and cap rates down - so will aggressive bidding. Even with transaction volumes at historic highs, several factors should fuel this demand cycle.
Absorption: Multifamily is expected to have strong absorption through 2019 as fewer apartments come to market.
Secondary markets: As secondary cities increasingly attract capital, expect more cap rate compression in those markets compared to large metros.
Tech hubs: After outpacing the national average by double digits since 2012, technology-driven employment hubs will maintain the strongest rental growth.
Cap rates: Each of these factors may further suppress broadly marketed activity and likely trickle into secondary and tertiary markets that have attracted capital as investors seek yield.
Ironically, it's the prospect of these reliable dynamics that will shake up other aspects of multifamily next year.
Every capital food group wants exposure in a strong sector. Last year, about 66 percent of multifamily investors were private buyers, and the remaining 34 percent were institutional. Expect greater diversification during 2018 and new equity in the space, including more international capital.
International sources invested $11.3 billion in U.S. multifamily during the last year, according to ARA Newmark research. Expect heightened activity as high net-worth families and sovereign wealth funds shift their attention from trophy offices and hotels.
However, direct funding may be less common. International capital has become increasingly fond of identifying U.S. sponsors for multifamily investments.
Which markets will be hot in 2018? Look for secondary markets to continue to outpace primary markets, especially in the Southeast and Southwest. Three primary factors will affirm the frontrunners.
Extending 2017 success: Atlanta and Dallas are considered global gateways and have economic tailwinds helping - tax-friendly policies and robust job growth. Inventory in these cities is growing at twice the pace of the national average.
Chasing yield: Orlando, Fla., and Houston will maintain attractive yields, from the 5.1 to 5.5 percent range. Orlando finished 2017 with record sales volume. Houston continues to present a compelling story, as oil markets stabilize and the impact of Hurricane Harvey pulled significant single and multifamily offline, substantially driving up marketwide occupancy and providing new support for rent growth.
Surging cities: Seattle, Denver, and Raleigh-Durham, N.C., forecast rapid growth. However, institutional capital could give the edge to Salt Lake City's strong tech base or to San Diego's transition with new mid-rise and high-rise development.
Though conventional multifamily outshines sector interest, 2018 will put the spotlight on three niches.
Student housing: Since proving itself recession-resilient, this sector is becoming a favorite among institutional buyers and international investors, delivering new equity to multifamily. More than 33 percent of 2017 deals tapped international capital, up from 20 percent in 2016.
Seniors: Active adult activity will thrive. Cap rates should remain stable as more investors - global, private equity, and public and private REITs - drive development and acquisition in markets with high barriers to entry.
Affordable housing: Affordable has become a buzzword among niche players and institutions since Starwood's grand entrance with the purchase of a $500 million portfolio. Expect a steady flow of deals as properties reach the 15-year investment horizons. While yields may compress, they'll stay stronger than conventional growth without relying on substantial hikes in rent.
Debt Market Movement
Debt capital for well-positioned assets will remain plentiful despite a pullback in the CMBS market. Meanwhile, government-sponsored entities, banks, and life insurance companies are expanding their outstanding debt.
Lending across major metros will continue to benefit from regional banks expanding their real estate balance sheets, while larger national banks remain more risk-averse.
Overall, employment growth remains positive nationwide, strengthening demand for multifamily and bringing welcome change across the industry. These advances encompass greater diversification of investors, an influx of new equity, shifts among lending sources, and sector evolutions. Even disruptions from short-term rentals should start to ease up and work in concert with apartment owners. Through 2018 and beyond, expect multifamily to make the most of these fluctuations.