Multifamily Remains a Favored Asset Class — Q4 2016 Market Update

Despite uncertainty surrounding the election and slowing rent growth in some higher-priced markets, U.S. multifamily properties remained a favored asset class during Q4 2016.

Overall, rent growth continued and vacancy held steady, while development was active and demand was elevated. Job growth remained strong, although economic growth remained slow, and uncertainty hung around the new administration and rising interest rates.

Rental Market

According to Reis, the average asking rent for multifamily properties in the U.S. reached $1,308/unit at the end of the year, a 3.7% increase over $1,261/unit one year ago. This marked the 28th consecutive quarter of growth. Over the last 15 years, multifamily rent growth has averaged 2.7% annually. Reis projects that rent will grow 3.5% during 2017, then will slow to 2.2% by 2021.

The asking rent for class A properties finished the quarter at $1,511/unit, up 3.4% from the $1,461/unit year-end 2015 mark, while the average for class B/C properties was $1,063/unit, up 3.5% from $1,027/unit.

Seattle claimed the top spot for rent growth among multifamily markets during 2016, where the average asking rent increased 10.5%, climbing to $1,601/unit, up from $1,449/unit. Rents have been driven by a strong local economy and increased foreign investment. Seattle also had the most active construction cranes in the country at the end of 2016, as well as the fastest home-price growth in the nation.

Nashville posted the second fastest growth among primary markets, increasing 8.2% to $1,020/unit, up from $943/unit. Rent growth has been boosted by strong employment gains, led by the health-care industry, and active new development. Nearly 8,000 units were completed over the last two years, and 17,800 units are expected to be completed through 2021.

Tacoma, a relief valve for Seattle’s soaring rents, posted 8.1% rent growth and finished at $960/unit, as compared with $888/unit one year ago. In addition, vacancy dipped to the lowest level since Reis has been tracking it.

While rent growth slowed throughout most of the Bay Area, Sacramento grew 7.9% during the year, rising to $1,178/unit from $1,092/unit, and representing the fourth fastest growth in the nation.

Portland posted the fifth largest rent growth during the year, at 7.4%, boosted by high-tech job growth, including renewable energy business and tech start-ups.

Growth in high-priced markets slowed at the end of the year, finishing flat compared to 2015 levels. Year-over-year rents in Boston was 0.3%, while New York City finished up 0.2%. San Francisco posted a decline of 0.3%.

Reis reported that the national vacancy rate finished the quarter at 4.2%, essentially unchanged from one year ago, although well below the most recent high of 8.0% in Q1 2010. Class A vacancy finished at 5.8%, essentially unchanged from the end of 2015, while class B/C vacancy improved to 2.8%, down from 3.1%. Overall, vacancy is expected to reach 4.7% in 2017, then increase to 5.1% by 2021.

More than 195,700 new multifamily units were completed in the U.S. during 2016, falling short of the 210,300 units completed during 2015, which was the highest total on records going back 15 years. Demand outpaced new supply during the year, with 197,600 units absorbed, which was higher than the 2015 total of 201,600 units.

Investment Sales

According to data from Real Capital Analytics, sales volume for multifamily properties in the U.S. reached a record-high total of $158.4 billion during 2016, slightly more than the previous high of $153.4 billion recorded during 2015. The average sale price was $145,700/unit, up from $135,900/unit for 2015.

Blackstone and Starwood Capital Group were the most active buyers during the year, with $14.5 billion and $10.6 billion in purchases, respectively.

The average cap rate was 5.7%, compared with 5.9% for 2015. In comparison, sales for all property types averaged a 6.1% cap rate in 2016 and 6.3% in 2015. The most recent high for multifamily cap rates was 7.0% during the third quarter of 2009.

Private investors accounted for 58.9% of multifamily transactions, the largest share of all investor types, and was higher than the 53.2% share reported during 2015. Cross-border capital investment represented 5.7% of total volume, down from 12.8% in 2015.

The Moody’s/RCA CPPI™ apartment price index increased 12.7% during the 12 months ending in November 2016, lower than the 14.8% increase measured one year ago. The all property index increased 9.3% over the last 12 months, compared with 11.5% one year ago.

Economic Overview

The U.S. Bureau of Labor Statistics reported that employment increased 1.5% during 2016. The largest increases were in the professional and business services (up 2.7%) and education and health services (up 2.4%) sectors, while mining and logging posted the biggest loss (down 10.3%). Job growth totaled 2.2 million in 2016, slightly lower than the increase of 2.7 million during 2015.

The Consumer Price Index increased 2.1% for the 12 months ending December, breaching Federal Reserve’s inflation target of 2.0%, and was the largest 12-month increase since the period ending June 2014. The index for all items less food and energy rose 2.2% and the energy index increased 5.4%.

Gross Domestic Product for the U.S. increased 1.9% during Q4 2016, down from 3.5% in Q3 2016. Growth was driven lower in part by a downturn in federal spending and weaker exports, which were offset by increased housing investment. Full-year growth for 2016 was 1.6%, matching the slowest annual pace since the recovery began.