The State of Multifamily in 2016: Notes from NMHC’s Research Forum

Matt Maison, director, research and analysis at Arbor Commercial Mortgage, presents his takeaways from the NMHC Research forum held in Chicago April 6 – 7.

Last week I had the privilege of attending the 2016 National Multifamily Housing Council’s (NMHC) Research Forum. This was my second year attending, and I learned a lot from my counterparts in other areas of the multifamily research community.

There were some great presentations given by some of the top thought leaders in the multifamily research industry, so I thought I would post some notes and highlights of the event.

April 6

Headship, Homeowners and Renters: Demographic Projections

• Rolf Pendall, Metropolitan Housing and Communities Policy Center, Urban Institute

Rolf Pendall started his presentation by going into detail about the demographics of future household formation, stating that the U.S. has a young, diverse population that will spur household growth into the middle of this century. He stated that 100 million households are expected to be added through 2060.

The audience voted by show of hands to see what the anticipated homeownership rate long term will be. More than half of the people in the room thought the rate would remain around 60%. Pendall cited polls that report three out of four economists believe the homeownership rate will be below 60%.

Pendall concluded his talk stating that policy will have a big impact on household formation, such as loosening mortgage standards and affordable housing programs. Homeownership remains the best way for the lower income population to accumulate wealth, because it’s basically a forced savings account that you also live in.

Apartments: Is the Long Upswing Still on Track?

• Daniel Mahoney, LaSalle Investment Management Inc.
• Jim Clayton, Ph.D., Cornerstone Real Estate Advisors
• Philip Martin, Waterton

Philip Martin started this segment of the forum with some talking points around the current state of the multifamily market. He noted that there are favorable supply and demand fundamentals moving forward, although the market will have a greater reliance on job and income growth, household formation, and housing values. Martin expects housing demand to outpace supply — both the single-family and multifamily markets — and also projects that job growth with outpace completions.

Next up, Jim Clayton started his presentation on current risks in the market by saying he was asked to do the same thing three years ago, and the risks remain largely the same. One year ago, we were in a strong environment where investors could trade on market trends, or ‘beta’ as he called it, although now investors must look more closely at property-level indicators for value-add opportunities, or ‘alpha’. Clayton also stated that “investors don’t by metros, they buy assets.” He expressed concern that a slowdown in volume is possible if global economic risks lead to investors holding onto assets, since other investment opportunities may be even riskier.

Both speakers worry of a market slowdown in 2017, or even a recession. Apartments have underperformed over the last few years, although they are further along in the cycle than other property types.

Measuring Apartment Performance

• Sara Rutledge, National Council of Real Estate Investment Fiduciaries

In the next segment, Sara Rutledge presented the latest data from the National Council of Real Estate Investment Fiduciaries (NCREIF), which showed that apartment fundamentals remain strong. While apartments have underperformed recently according to indices, this is mostly because other property types are catching up to the strong performance demonstrated by the multifamily sector since the end of the recession. Rutledge also noted that capital expenditure for tenant improvements, such as unit upgrades, were up to 2% of net operating income, an increase from 1% in 2010.

Apartment Markets Roundup

• Aimee L. Baumiller, PNC Real Estate
• John Chang, Marcus & Millichap
• Jay Lybik, Equity Residential

During this panel, the presenters decided to run through the major multifamily markets in the U.S. ‘March Madness’ tournament style, with a tournament of a handful of the top markets. As they went through each round, they went over the strengths and weaknesses of each market that they saw for 2016, and then picked a winner in each matchup. A certain New Yorker in the audience was particularly vocal when New York was eliminated in early rounds of the presentation.

Their final four ended up being Boston, Sacramento, Atlanta, and Portland. The panel chose Boston as the overall winner, based on the market’s low vacancy rate and high absorption totals in a supply constrained market. Overall, the development pipeline seemed to be a concern for most markets, so the markets that were predicted to have strong absorption demand to take up the new supply were the ones that made it farthest in the tournament.

April 7

Headwinds and Tailwinds: The Economic Outlook

• Michael S. Miller, Ph.D., DePaul University

Michael Miller had a few key points about the economy that stood out during his talk. He noted that older savers are hurt by the low interest rate environment, while borrowers benefit. He cited global economic risks as the reason for pent up investment capital, not low interest rates. Finally, Miller noted that this expansion is the only expansion in recorded history with two negative GDP quarters within it.

The Single-Family Outlook and Its Impact on Multifamily

• Svenja Gudell, Ph.D., Zillow Research

Svenja Gudell’s presentation covered a wide range the single-family market. She noted that the median home value remains 6.8% below the peak (based on Zillow’s index) and reminded us that the bottom of the market was reached in early 2012. There is an inventory shortage in most markets, but there is adequate inventory available in the top tier markets. There is also a shortage of entry level homes, but there are availabilities at the top end of the market. Affordability remains an issue, as incomes at the lower levels remain stagnant, although higher end incomes are showing some growth

According to Gudell’s best guess, about one percent of single-family rentals are owned by institutional investors. She also shared some of Zillow’s survey reports, which show that most people say they’re renters because of: affordability (53%), lifestyle (26%), or uncertainty (15%). Zillow forecasts single-family home values to increase at 2.5% during 2016, and rent growth to be slower at 2.0%

Market-Rate Apartment Demographics & Affordability

• Richard Hughes, RealPage Inc.
• Jay Parsons, MPF Research

Richard Hughes and Jay Parsons presented a study done by MPF Research, which looked at the demographics behind affordability in a new way. Their data shows that the affordability problems are at the bottom of the market, in class B and C properties, and not at the top of the market in class A properties. They also shared methodologies around new renter categories that they’ve developed, which factored in more data points than just looking at data broken down by age and income, which is traditionally done in the industry.