Ten –X Commercial, the nation’s leading online real estate digital marketplace, released the latest U.S. Multifamily Market Outlook including the top five “Buy and Sell” markets for multifamily real estate assets. The report shows that while fundamentals have begun to soften, demand across the apartment market remains strong due to positive demographic trends that continue pushing millennials and other Americans to forgo homeownership in favor of renting.
The report pinpointed Sacramento, California, Phoenix, Las Vegas, Raleigh-Durham, N.C. and Jacksonville, FL as the five markets where investors should consider buying multifamily properties. Favorable demographic trends are on full display in these regions, where employment stands at record or near-record levels and a combination of high demand and light supply pipelines are bolstering rent levels.
The Ten-X analysis also identifies New York City, San Francisco, San Jose, CA, Washington, D.C. and Oakland, CA as markets where investors may consider selling multifamily assets.
These mostly major markets seeing an onslaught of new supply pushing up vacancies and rents may already have reached their peaks, leaving them vulnerable to diminished returns for investors.
While apartment vacancy has plateaued in most markets, the supply pipeline is unevenly distributed throughout the country, making certain markets more vulnerable to rising vacancies. On a nation level, the massive influx of new supply is expected to increase the vacancy rate to 5% by 2018 before declining demand pushes it to 6.2% by 2020 during a modeled economic downturn.
The Multifamily Sector’s Top Five “BUY” Markets
- Sacramento – Rents in California’s capital are growing at a breakneck pace, as a modest supply pipeline has kept vacancies at near-record lows. The market is further boosted by consistent gains in overall employment, which, driven by robust increases in the government sector, posted growth in the mid-one percent range over 2016. The city’s population also jumped 1.3 percent, outpacing the national average. Sacramento’s overall market strength is expected to help it weather the Ten-X recession downturn scenario in 2019-2020, with solid gains in NOI projected to continue during that span.
- Phoenix – Effective rents in Phoenix have increased 4.6 percent over the last year and Ten-X Research forecasts rents to jump by more than 5% through 2018. Much of the growth can be attributed to tightening availability as vacancies remain in the mid-4 percent range despite a healthy supply pipeline. Employment in the city is at an all-time peak despite slowing growth in several key sectors, while population increases remain at healthy levels. Even with a cooldown in rents under the Ten-X recession downturn scenario, investors should continue to see healthy returns through 2019-2020.
- Las Vegas – Las Vegas’ multifamily market is being bolstered by steady population growth and employment that has reached an all-time peak despite recent softening the leisure/hospitality segment. The city enjoys a favorable supply-demand dynamic, as vacancies are expected to decrease from the mid-3 percent range to roughly 2.6 percent by the end of 2018. With rents at record highs, Ten-X Research projects stellar 5.1 percent average annual NOI growth over the next two years. Tight vacancies and solid rent growth should keep NOI gains in the mid-2 percent range during the expected downturn in 2019 and 2020.
- Raleigh-Durham – Thanks to a strong and outsized professional/business services sector, total employment in Raleigh-Durham is now 14 percent above its pre-recession peak. Regional population is also growing at more than twice the national rate, helping to drive torrid annual rent growth of between four and five percent for multifamily properties. Although a recent influx of supply had kept vacancies in the five percent range, Ten-X Research expects local demand to stay resilient during the 2019-2020 recession downturn scenario, giving the area one of the brightest apartment outlooks in the nation.
- Jacksonville – Jacksonville’s apartment sector is being boosted by strong demographics, with the market’s population expanding at three times the national rate. Employment has seen a similar increase with thriving education/healthcare and professional/business services sectors anchoring the region’s strong economy. According to REIS, effective rents are enjoying solid growth in the mid-3 percent range. A manageable supply pipeline allowed vacancies to fall to a cycle-low 4.3 percent at the end of 2017 while NOI growth hovered around 5 percent before falling to the mid-three percent range through 2020.
The Multifamily Sector’s Top Five “SELL” Markets
- New York City – NYC is suffering from an unprecedented supply boom of market-rate apartments following the completion of nearly 10,000 units since early 2016. Another 40,000 market-rate units are due to deliver by the end of 2018, which should drive vacancies above 11 percent. Though metro employment is at an all-time high, the pace of job growth has cooled and the city’s population is growing at its slowest rate since 2007. Effective rents have already begun to contract and will decline by 2.7 percent annually through 2020. NOI will march in lockstep with rents, declining by an annual average of 4.5 percent in the same timeframe.
- San Francisco – Multifamily completions have outpaced absorption in San Francisco every year since 2014, leading to a steadily rising vacancy rate. Rents weakened in 2016 in response to increasing availability. While the city’s unemployment ranks well below the national average, the pace of employment growth has slowed from the upper-four percent range in early 2016 to the mid-two percent range in 2017, due in a large part to a slowdown in the city’s critical information sector. According to Ten-X projections, the region is likely to face annual NOI declines of roughly 4.7% through 2020.
- San Jose – Slackening demand and a surge of new supply have dampened multifamily prospects in the Silicon Valley hub of San Jose, pushing vacancies up to the low-four percent range. While the area’s information sector remains strong, overall job growth has cooled significantly. Unemployment is tight at roughly 3.4 percent, though a slowdown in population growth is limiting the potential for future expansion. Effective rents, which saw meteoric growth earlier this cycle, have seen dramatically slowed expansion and rents are expected to begin contracting in 2018 as vacancies climb above 7 percent. The region is expected see annual NOI declines averaging 3 percent from 2017 to 2020.
- Washington, D.C. – In a market where government accounts for three of every 10 jobs, uncertainties about federal hiring have all but put employment growth on hold. While unemployment exceeds the national average, D.C. demographics are booming, with the city experiencing population growth of 1.6 percent in 2016. Trouble for the market is looming in the form of a supply surge that will introduce some 12,000 new apartments by the end of 2018. Ten-X forecasts that demand will be unable to keep up with incoming supply, pushing vacancies above 9 percent by the close of 2020 and stagnating NOIs for multifamily investors.
- Oakland – Employment levels are at an all-time peak in Oakland, propelled mainly by the professional/business services and education/healthcare sectors. While population growth in Oakland exceeds the national average, the market is subject to negative spillover effects from declines in San Francisco’s information industry. Apartment vacancies remain low at 3.4%, but that figure represents a 40-basis-point increase in the last year. Under the Ten-X 2019-2020 downturn scenario, completions are forecasted to heavily outweigh demand and trigger rent contractions. Modest NOI gains in 2018 are projected to give way to average declines of 4.4 percent per annum in 2019 and 2020.
Ten-X is the nation’s leading online real estate transaction marketplace and the parent to Ten-X Homes, Ten-X commercial and Auction.com. Ten-X allows people to safely and easily complete real estate transactions online and is headquartered in Irvine and Silicon Valley, CA. For more information, visit Ten-X.com. Reprinted with permission of On-Site.