Annual U.S. multifamily property sales are approaching a record in the face of a flood of new apartment construction and increasing home ownership, according to CoStar.
Market doomsayers may be confounded by how the new units are being quickly absorbed by renters, but demand remains unabated across the sector, CoStar’s multifamily analysts predict in a presentation on the state of the market.
“The multifamily market continues to surprise market watchers,” said Michael Cohen, director of advisory services for CoStar Portfolio Strategy, the company’s advisory arm. “Expectations that supply would overwhelm demand, expectations that price growth would trail off, both appear to be contrary to what we’re seeing today.”
While data from the second quarter confirms that rent growth has slowed in many markets and vacancy has inched up in places, apartment vacancy for the U.S. market as a whole actually declined 50 basis points in the second quarter, to just under 6 percent.
In addition, average apartment rents rose 3 percent compared to the second quarter of 2017, an increase in the year-over-year rate compared with the first quarter but below the peak annual rent growth of more than 5 percent in 2015.
And the average apartment in the U.S. now rents for $1,298 per month, according to CoStar. That is a cycle high.
Taking stock of the second-quarter performance, CoStar’s analysts tied the apartment sector’s success to a favorable overall economic picture nationally: job growth is high and new households are forming quickly, both of which are driving demand for apartments.
But the multifamily market also benefits from some of the bad news in the economy. Increasing mortgage rates are keeping many renters from making the jump to home ownership, while a slowdown in single-family home construction has made it even more difficult for first-time home buyers, even as homeownership rates edged up slightly.
“This cycle, nearly every marginal household has been a renter household, bringing the home ownership rate down from 69 percent to 63 percent,” said John Affleck, CoStar’s director of analytics. “More recently, however, more and more new households have been buyers, and the home ownership rate has begun to rise, albeit slowly. Over the last two quarters, the home ownership rate has risen by just .1 percent, a slower pace than the last two years, and frankly, more slowly than we expected.
“So why aren’t more people buying homes? Rising interest rates and aggressive pricing certainly matter. But are there actually any homes to buy?” he added.
On the capital markets side, investors have shown strong interest in the apartment sector. Many large institutional investors, including those outside the U.S., consider U.S. apartment markets to be a good, long-term investment, and have amassed billions to invest in properties.
Affleck also predicted the year-end total for apartment sales this year will match or exceed last year’s total of just under $180 billion in trades.
CoStar subscribers may view the entire Midyear 2018 State of the Multifamily Market webinar by logging in and accessing CoStar’s online Knowledge Center.
By John Doherty