• Commercial Northwest

A Midyear 2017 Look at the State of the Apartment Industry

At the outset of 2017, most industry concerns surrounded a multifamily slowdown. Indices were falling, construction financing was becoming harder to obtain and many feared occupancy rates would drop nationwide as supply finally began to catch up with demand.

Those concerns continue to exist six months later, but the first half of the year wasn’t exactly doom and gloom.

Our State of Apartment Demand blog published earlier this year referenced the unsettling findings of the National Multifamily Housing Council’s Quarterly Survey conducted in Oct. 2016. The survey showed slowing across all four indices (market tightness, sales volume, equity financing and debt financing).

The trend for those indices hasn’t reversed, but it isn’t dropping any further. In fact, NMHC’s April Quarterly Survey showed modest growth among all four indices, although all remained below the breakeven point of 50. In short, the moderate improvements symbolize more of a plateau than a decline.

NMHC’s chief economist Mark Obrinsky said supply has remained in line with demand in Class A urban core markets, which has led owner/operators to increase concessions to spur lease activity. Even so, occupancy rates have remained at historic levels.

Another hint of a plateau was provided in April, when average nationwide rents grew only $3 to $1,314. In addition, the year-over-year rent growth from April 2016 was 2 percent, which accounted for the smallest growth since April 2011 (1.5 percent).

Other compelling industry trends at the midway point of 2017 include:

Multifamily construction loans are harder to find: Construction loans are not impossible to find, but banks have begun to be more deliberate about when and to whom they’ll offer a loan. And when banks do lend, it’s not always for the full amount of the development. While projects involving popular large developers continue to have few problems finding funding, midlevel and smaller developers are being met with more stringent loan restrictions.

Federal Reserve believes economy is strong, raises rates: For the second time in 2017, the Federal Reserve raised rates on June 15. The rise (25 basis points, to the range of 1 to 1.25 percent) reaffirms the Fed’s belief that the economy is strong enough for money to be more expansive – including real estate financing. Fed Chair Janet Yellen said the stabilization of the labor force participation rate signals a stronger job market, which helped lead to the unanimous vote to raise rates.

Amenity races ramp up: Possibly in response to the plateauing market, apartment communities have been raising the bar with regard to amenities. In a concerted effort to opt for usability and functionality, convenience-rooted amenities such as package lockers and bike storage facilities are among those being added to existing communities and also incorporated into the blueprint of new developments. Student housing developments in small spaces are especially aware of this trend.

In summary, while the apartment market might be weaker than it has been over the last few years, rents and occupancy rates remain healthy. Modest growth has been seen among major indices, and supply has remained in line with demand in certain markets. Overall, apartment operators who continue to market intelligently may not experience a drop-off of any sort based on the current trends. We will continue to watch the state of the industry and will provide another update in the next few months.

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