2015 Multifamily Outlook

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Jason Salmon
Senior Vice President

Commercial Markets: The nation is in the 24th quarter of the current economic recovery with a compound annual rate of growth of approximately 2.3%, according to Integra Realty Resources. It is the fourth longest economic recovery since WWII. The firm suggests that “this economic recovery has had a tangible effect on fundamental property metrics, with declining vacancies, positive net absorption, and rent growth.” Indices that track commercial real estate prices and values have been recording double-digit annual appreciation for institutional- grade properties for the past two years.

Fundamentals: Due to certain underlying demographic factors, the multifamily sector has seen a surge in value in recent years—and has the near-term potential for considerable upside when compared to other asset classes with more conservative prospects. In Freddie Mac’s Multifamily Research Perspectives, the institution suggests that “strong fundamentals and investor appetite for multifamily investments will propel further property appreciation in 2015.” Multifamily property values increased about 15 percent in 2014, according to Real Capital Analytics.

Drivers: Many commentators have pointed to the Millennial generation as a motivating factor for the strength of the multifamily sector. Insofar as the Millennials comprise a huge demographic with a propensity to rent, so too does an equally significant generation. Brace yourself—it’s the baby- boomers. These empty-nesters are downsizing and choosing to rent. Yardi’s National Outlook states that “demand for apartments will be underpinned by another year of 2 million-plus new jobs, the above-trend household formations of Millennials and the ongoing move of Baby Boomers into urban apartments.”

Historical Data: In the most recent research from CBRE, a 12-month tally of $127 billion was recorded for investments in United States multifamily product. This accounts for 36% year-over-year growth and the highest historical four-quarter total. Yardi cites that “acquisition yields remain at all-time lows, between 3.75% and 5% for class A properties in top markets and 5% to 6% for most class B properties.”

The Future: Occupancy is expected to stay high, rents should continue to rise and the capital markets environment is favorable. With strong expansionary conditions in place, we expect to see near- and mid-term strength in the multifamily sector, particularly in emerging markets that have been experiencing employment and population growth.

By The Numbers

  • 80 Million – Number of Millennials
  • 35.9% – Homeownership Rate for Millennials
  • 43% – Percentage of Baby Boomers that Rent Their Home
  • 1993 – The Last Time That The U.S. Homeownership Rate Was As Low As The Current Rate
  • 1960s – Last Time Homeownership Rates Were This Low Among 35-44 Year-Olds
  • 777,000 – Average Annual Renter Household Growth Since 2004
  • 10,000 – Number of Baby Boomers Retiring Every Day for the Next 20 Years

 

IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. This material is not intended as tax or legal advice.

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