Top 3 Reasons We Could Be Nearing the Top of a Multifamily Market Cycle
It seems strange for national news sources to refer to the housing market as still in "recovery" when national home prices have been increasing steadily for 4 straight years and when in some markets, the median home sales price has far exceeded what it was at the peak of the market in 2006-2007 (think: San Francisco).
But it is true that many markets have not bounced back up to the "peak prices." However, I would argue that most markets have returned to where prices "should have been" absent the bubble pricing which developed and popped around 2007-2008. And one could say that those markets have "recovered" from the housing crisis. (There, I said it. I'll go into more detail about that in another post.)
You may be asking "what does all this have to do with multifamily market cycles?" I say, it has everything to do with it.
Reason 1: Rent Growth is Slowing in 19 Out of 100 Major Markets
Yes, in many major markets, there has been incredible rent growth for the past 3 -4 years. Even the National average rent growth has recently been hovering around 1% per month; and the year-over-year growth is 2.4% Nationally. (www.apartmentlist.com) However, there are some markets, even significant markets, that had been growing, but now are seeing stagnated rents or even declining rents. Des Moines, Kansas City, Cleveland and Cincinnati are experiencing rent declines right now. Other declining rent markets which may surprise you are San Francisco, San Jose, and Miami.
Reason 2: Apartment Prices Are at All Time Highs
Average pricing has been rising for 7 consecutive years and average CAP Rates have dropped for 7 consecutive years. In the Minneapolis metro, the average price per unit has increased about 30% from approximately $80,000 per unit to over $110,000 per unit just in the four years from 2012 to 2016. (Class A properties; Source Marcus & Millichap).
Reason #3: Vacancy Rates Are Still Declining
The Minneapolis/St. Paul metro is projected to have the lowest vacancy rate among all major metro markets in the U.S. in 2017. This is good news for apartment owners. The Twin Cities supply/demand balance still leans toward the demand side with an estimated 3,800 new units coming to market in 2017. With vacancy rates at all-time lows, the demand should absorb the supply.
Nationally, multifamily new construction starts have slowed abruptly, suggesting, 2017 could be the peak year of new construction. (Marcus & Millichap MF investing Forecast 2017)
Does all this mean we are nearing the top of a cycle? No one knows. But, some experts and industry leaders at the recent Minneapolis Affordable Housing Summit (attended by over 200 local and regional industry leaders in the field of affordable multifamily housing) seemed to think it could be true.
What do YOU make of all this? How can you use this data to your advantage? How do these trends affect your own short-term or long-term investment goals? Only you can answer those questions, but hopefully, this information is helpful as you decide what is your best strategy.
Doug Grimm is a licensed real estate Broker in the state of MN, and is the founder of Investment Property Advisers, and has been helping clients buy and sell investment properties for nearly 15 years. Please call to introduce yourself if you would like Doug to help you with any of your real estate needs.
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