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  • Jason Tuvia

Same Rent, Different Day: Multifamily Mighty at Midway Point in 2018

Same Rent, Different Day... The multifamily housing market is going to continue its strong performance with continued gradual correction, according to Freddie Mac, which just released its midyear multifamily outlook.

Though new supply has been increasing vacancy rates, the increases have been incremental and moderate. Rent growth remains healthy at the national level as continued demand keeps multifamily afloat. Completions are expected to peak sometime before fall. In the first half of 2018, deliveries increased 11%. Despite approaching the peak in deliveries, the U.S. Census Bureau reported a 2% increase in multifamily permits and a 10% increase in starts in the first of this year.

This is a reversal of the trend of slowing construction levels over the last couple of years. Despite fears of overbuilding and the slow, upward creep of vacancy, it appears that supply will remain elevated over the next few years. This will likely preserve fears of slowing rent growth and shrinking occupancy, but so far, decreases in both categories have been moderate.

Vacancy is still lower than 5% nationally, right where a healthy multifamily market ought to be.

Rent growth remains healthy estimated at 4.5% annually, as of Q2 this year. This is down from cycle high of 6.1% rent growth in 2015, but still remarkably healthy. Again, like many have been saying for the past year, Freddie Mac predicts that, barring a major macroeconomic event disrupting the whole economy, the multifamily industry will remain solid. Supply is going to be the main concern going forward. Freddie says vacancy will crawl up to 5.1% over the rest of 2018 and level out at 5.3% in 2019 as supply tapers off. This translates to a predicted 3.6% gross income growth in 2018 and 3.5% gross income growth in 2019.

Now, for all the fretting the industry does over supply pulling on rent growth, the reality is the nation is still facing a housing shortage in both multifamily and single-family housing.

According to Freddie Mac, when you account for growth in population and household creating, the U.S. ran a 240,000-unit supply deficit in 2017. Over the last ten years, that deficit has averaged 600,000 units per year. "We are closer to the supply we need to support demand than we have been in a long time," their analysts observed.

The remaining gap and overall housing shortage in the U.S. are the main drivers behind the worsening affordability conditions in the nation.

Most of the top 40 metros in the U.S. by population are still running deficits and could afford to build more units without glutting the market.

These top three deficits in the nation belong to Miami, Detroit and Minneapolis. Miami ran a 20,500-unit deficit, Detroit had a 21,700-unit deficit and Minneapolis ran a deficit of 10,900 units.

So, though construction levels have been closing the gap and yes, decreasing rent growth, the market is still in need of more homes to reach equilibrium.

Though there are more underbuilt metros than not, there are still some significantly overbuilt markets. The top three are New York City, Chicago and Los Angeles, running surpluses of 22,600 units, 19,300 units and 14,500 units respectively all buzzy cities with many a headline devoted to their statuses.

This probably contributes to many of the fears surrounding the market’s direction, but when the smaller metros are put in the equation with the stellar job growth the nation is seeing, the outlook becomes far less tenuous.

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