Source: Rental Housing Journal 1/23/18

The multifamily market will see continued strength in 2018, largely mirroring last year’s performance, according to new findings in the Freddie Mac Multifamily 2018 Mid-Year Outlook.

The outlook also shows Sacramento, Portland, Seattle, Tacoma and Colorado Springs among the top 10 metros for income growth in 2018.

In the outlook, Freddie Mac Multifamily Research and Modeling Vice President Steve Guggenmos and Manager Sara Hoffmann find:

  • The moderated growth the market saw in 2017 will continue through 2018
  • Originations will set another record this year
  • Rents will keep growing at current levels due to a healthy labor market and continued lifestyle preferences toward renting
  • Completions will peak and supply will increase only slightly faster than demand
  • Vacancy rates are expected to continue their upward trajectory at the national level and in most metropolitan areas
  • Vacancies in most locations will remain below their historical averages through 2018

“In 2017 the multifamily market moderated, but remained strong despite high levels of new supply,” Steve Guggenmos of Freddie Mac Multifamily said in a release.

“As we look to 2018, we expect last year’s positive market performance to continue, with robust economic growth and solid fundamentals creating sustained demand among real estate investors,” he said adding, “2018 will be another excellent year for the multifamily market.

“While results across markets will vary, we expect this year to set another record in multifamily origination volume. Moreover, demographics and lifestyle preferences will continue to favor multifamily, by ensuring demand remains strong for the foreseeable future,” he said.

Multifamily market to continue growth in 2018

Most measures suggest the multifamily market will continue to grow in line with the historical average through 2018 because:

  • The labor market again will drive market growth
  • Employment growth in 2018 is expected to remain near 2017 levels
  • Growth rate cannot be sustained much longer due to low unemployment rate and shrinking pool of available workers
  • Full employment means higher wage growth, which is expected to pick up during the year
  • Wage growth and full employment encourage more household formations

There are still pent-up households that may be formed with continued economic expansion
“Demand for multifamily units is expected to stay strong because of these economic factors as well as lifestyle preferences and demographic trends such as millennials, Baby Boomers, and increasing diversity – that are fueling an increase in renters,” the report states.

Labor market is key to driving housing demand

The key economic factor driving housing demand is the labor market.

The unemployment rate was 4.1 percent at the end of December, down 60 basis points (bps) since the end of 2016. The economy added on average 170,000 jobs per month throughout 2017, for a total of just over two million jobs during the year. While fewer than the prior two years, this pace of growth represents a healthy labor market, the report says.

The economy has regained all job losses from the recession and then some, which will naturally slow employment gains.

“With the economy near full employment, we don’t expect employment to grow faster than population growth for an extended period of time. Getting to full employment was a long, slow process, but wage growth has been even more sluggish. It is, however, moving in the right direction,” the report says.

Summary – Portland And Seattle Leaders In Income Growth For 2018

Despite higher vacancy rates, asking rents are expected to grow by 3.8 percent nationally – in line with 2016 and 2017 growth. This is above the long-run average going back to 1990 of 3.4 percent. Based on this rent growth, combined with the higher vacancy rate, gross income growth is expected to be in line with 2017 growth, just slightly below the long-run average.

Expected rent growth will continue to be mixed across the metros.

Rents will moderate most in areas that previously experienced the most growth – such as Seattle, Salt Lake City, Nashville, and Tacoma – but remain above historical averages in those cities. Increased supply will heat up competition and slow the unsustainably rapid rent growth experienced in recent years. Meanwhile, San Francisco, West Palm Beach, and Boston are expected to experience the largest rebounds in rent growth in 2018, compared to 2017.

View original article on Rental Housing Journal online.