The United States in its longest economic expansion in history and the multifamily housing market is mirroring that growth. In 2019, around 279,000 multifamily units were added to the market, with occupancy rates going as high as 96.3 percent. And yet, the demand for multifamily housing is so far ahead of the current supply that real estate developers would need to build over 300,000 multifamily housing units per year through 2030 to get up to speed.
A booming economy has always been a great thing for the real estate sector. But there are several other reasons why investors can expect the healthy performance of the multifamily housing market to continue in 2020 and beyond.
Rising Cost of Homeownership
In expensive metro areas like Boston and San Diego, high prices and tight inventories have put single-home properties out of reach for many first-time homebuyers. The median sales price for a single-family house in Boston, for example, was $605,000 in January 2020. And at $635,000, the median price for a Washington DC home displayed a 10 percent increase between 2018 and 2019, according to Long & Foster housing data.
So, instead of sitting on the sidelines and waiting for their incomes to rise, young homebuyers are increasingly opting for multifamily investments that would help them cover mortgage costs. Meanwhile, a vast majority of millennials and empty-nesters are choosing not to own a home and instead take advantage of high-service, high-amenity apartment living. Short-term rental contracts are also allowing young members of the workforce to keep themselves aligned with the job market and pursue opportunities across the country.
Environment-Friendly, Smart-Home Spaces
For their 2020 Apartment Resident Preferences Report, the National Multifamily Housing Council and Kingsley Associates talked to 373,000 apartment residents and discovered that technology and innovation are rapidly redefining people’s expectations of a home. Renters today are interested in everything from smart thermostats and smart lighting to dynamic glass and virtual assistants.
Another key consideration for residents is wellness. More than 83 percent of survey respondents insisted they would not become a part of a multifamily community if it did not offer on-site fitness activity options. Residents also stress the need for communities to operate responsibly. Recycling programs, community green initiatives, and on-site renewable energy options are some of the top features desired by tenants today.
And with renters openly admitting that they are willing to pay a premium for top amenities, developers and investors are also happily plowing into the multifamily housing market.
Investment Push Through Fiscal Policy
A particularly encouraging factor for multifamily investment in 2020 is the federal government’s fiscal policy, which is offering historically low interest rates, lucrative prepayment options, and other favorable terms to investors. While traditional mortgages require a down payment of 20 percent, in the case of an owner-occupied multifamily home investment of up to four units, a down payment as low as 3.5 percent will also suffice, if the loan has been insured by the Federal Housing Administration.
The multifamily lending market is so vibrant right now that industry experts estimate government-sponsored enterprises like Fannie Mae and Freddie Mac will be able to meet only about $160 billion of the projected $400 billion demand for multifamily debt capital in 2020. In this environment, innovative lenders will quickly step up to fill the void and capture new business by offering better customer service experiences to borrowers.
Strong Multifamily Housing Markets in 2020
While forward-thinking developers can always analyze population and employment trends to identify communities with strong future demand potential, the active construction scene and dynamic job market in some high-growth metros have put them on the radar of commercial real estate services and research company CBRE. According to CBRE, Austin, Atlanta, Phoenix, and Boston are the most robust multifamily housing markets to watch in 2020.
Strong multifamily performance and investment returns can also be expected from smaller metros that are in the midst of urban revivals. CBRE believes the 2020 outlook is particularly positive for seven cities with a population of less than 2 million: Albuquerque, Birmingham, Colorado Springs, Greensboro, Memphis, Dayton, and Tucson. Due to favorable demand-supply fundamentals, these seven cities have also been witnessing a steady rent growth of 4 percent or higher.
Rent Control and Stabilization
With new statewide legislation coming into force in New York, California, and Oregon, 2019 may be remembered as the year of rent control. But even then, three California markets — Sacramento (5.1%), the Inland Empire (4.1%) and Orange County (3.9%) — posted some of the best year-over-year rent growth in 2019, according to a report from Yardi Matrix.
Overall, rents in the US multifamily market grew by 3 percent for the year. 2020 brings Illinois and Washington state on the watchlist for rent control legislation. However, “fundamentally, the market is sound, with no red flags on the immediate horizon,” the Yardi Matrix report assures. Savvy investors can leverage location intelligence to look within their target community and seek out submarkets with low vacancy rates as well as the potential for rent increases.