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Economic Outlook Remains Healthy for Multifamily Industry

Posted on Oct 16 2019 - 3:43pm by Lance Edwards

Demand is strong, with increased capital continuing to move into the sector.

 

By Christine Serlin  (MultiFamilyExecutive.com Article

While economic growth is starting to slow, fundamentals for the multifamily industry remain strong, according to John Sebree, first vice president and national director at Marcus & Millichap, and Ryan Severino, chief economist at JLL.

The two industry leaders were part of the annual Economic Outlook session at the Multifamily Executive Conference in early October in Las Vegas.

“If you look at what is happening in the economy, you are seeing signs of slowing. We are starting to see job growth back off over time. I think we are downshifting to where we were last year. Next year will be a high chance that growth will be below where we are now,” says Severino. “I don’t know if you can ever guarantee that there is going to be a recession, but the risk is increasing.”

However, Sebree notes that every time the country has an economic downturn, it doesn’t always affect every industry.

“I don’t think the multifamily housing industry is going to get hurt too bad during the next cycle.
Demand continues to increase. And even if the unemployment rate goes up a little, we are so far from having any excess,” says Sebree. “I think the next recession we go through, whenever that is, I don’t think it’s going to have a huge negative effect on the multifamily industry.”

This year, 1.36 million new households have been created, yet the nation has seen only 1.2 million new dwellings, not coming close to meeting the demand.

“When I look at where we’re going, I don’t think this is going to change a whole lot,” Sebree says.

He adds that the new construction that is being delivered is primarily Class A since that’s all developers can afford to build because of an increase in fees and costs of new construction and requirements of the type of building you’re going to do. Over the past five to six years, Class A vacancy has remained at about 5%.

“The new construction is satisfying the demand for the number of new households that can afford Class A,” Sebree says. “The problem is a high percentage of new households is workforce … a mom and dad both working and raising two kids or a single mom working two jobs, that’s workforce housing. We’re not creating any of that, we can’t afford to create any of that because it doesn’t pencil out.”

Yet household growth in that segment continues to increase, with the vacancy for Class C around 3.8%. “It’s probably just going to continue to increase,” says Sebree. “As an owner, that’s positive. What that is saying is demand will probably continue to increase in the foreseeable future.”

Sebree says another positive for multifamily owners is that the number of multifamily transactions has remained consistent. Although it’s too early to tell if the numbers will drop a little for 2019, for the most part investors feel good about putting their money in multifamily.

“The fundamentals being as strong they are, there continues to be more and more money flowing into multifamily,” he says.

Sebree adds that 20 years ago, pension funds and large institutions would allocate 5% to 6% of their money to building real estate, primarily retail and office, and wouldn’t consider going in to multifamily. And that’s changed a lot over the years, with the allocation now closer to 9% to 10%, with multifamily being a prime target.

“The amount of money flowing into real estate, and multifamily, has continued to be substantial. That is good for all of us,” he says. “That continues to feed this engine to continue to move things forward.”