While the future never perfectly mimics the past, 2020 could look a lot like 2019 for multifamily property owners and developers. High occupancy rates, rising rents — except in a few rent-capped states — foreign capital and record new-unit deliveries are all on the horizon.
Here are five trends on tap for the multifamily market in 2020:
1. High Occupancy Levels
U.S. apartment occupancy rates reached a near-record 96.3 percent in the third quarter of 2019, according to real estate analytics firm RealPage. An additional 118,000 apartments were occupied during the quarter, setting a fast clip for absorption compared with the previous five years' third quarters.
Multifamily captured a sizable share of demand from newly formed households, while renters' home purchases remained limited compared with historical levels, RealPage Chief Economist Greg Willett said.
Occupancy rates aren't equal across property classes. Despite rising rents for affordable units, class-C properties achieved nationwide occupancy of 96.5 percent, a 20-year high, in mid-2019. Class B occupancy hit 95.9 percent. Class A was softer, due in part to new supply, but still tight at 95.3 percent.
2. Rising Rents
New-lease rents rose 1.2 percent nationally during the third quarter, pushing the annualized pace of rent growth to 3 percent and the average monthly rent to $1,416, RealPage reported. Phoenix and Las Vegas again led rent growth among major metropolitan areas in the quarter with annualized increases of about 7-8 percent.
Tight occupancy could mean continued rent increases in 2020, if owners and operators decide to push for them.
“While a 3 percent bump in rents is significant for individual renter households, it's perhaps surprising that tightened occupancy hasn't led to even bigger price growth," Willett said.
“Apartment owners and operators are expressing concerns about the possibility of slowdowns in economic growth and apartment demand during the near term. If demand cools, it can be better to sacrifice a little on rent achievement in order to go into that more competitive leasing environment with maximum occupancy."
3. Investor Interest in Smaller Markets
Those strong fundamentals mean competition for attractive deals can be fierce. To make the numbers work, some investors have identified second- and third-tier markets and affordable housing as opportunities to maintain yields.
“We've seen the biggest increase in capital going into secondary and tertiary markets seeking value and opportunity," Brian McAuliffe, president of capital markets at CBRE told National Real Estate Investor (NREI).
Foreign capital remains an important trend as well, in part because multifamily may be seen as more stable than other property types, NREI reported.
Foreign buyers prefer larger deals and class A properties. Canadians have been the most active buyers, along with investors in Bahrain, Israel, Singapore, Qatar and the Netherlands.
4. All-Time Record for New Supply
Despite rising construction costs, 2020 could set an all-time record in deliveries of new apartments, according to RealPage data reported by the National Apartment Association (NAA).
Apartment completions are on track to hit "historic peaks," the NAA said. "More than 526,000 units are under construction across the U.S., and more than 359,000 of those units will deliver within the next 12 months."
Houston, Oakland and Los Angeles were among the markets expected to post big year-over-year increases in new supply.
5. Rent Cap Pressures on Values in Certain States
New laws that restrict rent increases may have eroded property values in three states where lawmakers enacted them, according to Bloomberg.
New York's new rules make it more difficult for owners to significantly raise rents for approximately 1 million rent-controlled properties. Oregon's regulations limit increases to inflation, plus 7 percent annually. In California, the cap is inflation, plus 5 percent annually.
Cap rates, which measure investment yield, rose in those three states in 2019's second quarter, according to a Real Capital Analytics (RCA) analysis.
Jim Costello, a senior vice president at RCA, told Bloomberg he didn't think the effect was a coincidence.
Rather, Costello said, investors felt that they needed "something extra" to compensate them for the perceived diminished growth opportunity of multifamily properties in these states.
All told, however, the outlook for the multifamily market in 2020 appears bright.