The multifamily industry is set to face a number of legislative and regulatory challenges in the year ahead, but the great unknown is whether economic challenges will also be in the mix.
At the 2019 NMHC Fall Meeting, three industry economists— Kim Betancourt, director of economics and multifamily market research at Fannie Mae; Steve Guggenmos, vice president of multifamily research & modeling at Freddie Mac; Mark Obrinsky, chief economist and senior vice president of research at NMHC—weighed in on the odds of a recession in the next 12 months. (View the presentation.)
Their consensus was there's about a 50-50 chance that there's a recession in the industry's near future. On the negative side of the equation are inverted yield curves, weaker manufacturing stats and growing economic uncertainty—all of which are driving negative economic headlines.
However, while business confidence is dropping, consumer confidence remains firm. Moreover, the jobs picture looks good, with jobless claims hitting extreme lows. In fact, Guggenmos said that, even if jobless claims jumped by an unexpected 500,000 claims, total claims would still remain very low by historical standards.
Such mixed signals have a psychological effect on the market. "This constant drumbeat of recession kind of gets in people's heads and it starts to become a self-fulfilling prophesy," explained Betancourt. "These businesses aren't run by robots—at least not yet. They're run by people and so when they hear stuff about a recession, they do things like say, 'Maybe we shouldn't hire that extra person or buy that car.'"
Taking a longer look at the market, the economists expected demand for multifamily to remain strong for quite some time, as the demographics will be in the industry's favor over the next few years. Millennials and Gen Z are driving this demand, but the question is whether their housing needs and preferences are what the apartment industry has grown used to delivering.
"If you can be pretty much anywhere and work from anywhere, where are they going to live?" asked Betancourt. "This group—millennials and Gen Z—is a big part of our population. We, as owners and developers, need to think more creatively about the products we develop."
To illustrate this point, Betancourt pointed out that the fastest growing households are those with multiple non-related people in them—or roommates, to put it another way. Today's younger generations are living with roommates not only because of affordability concerns but also because they like the lifestyle. "Even the younger ones who get paid pretty well, they are still living with roommates," she said.
Both Betancourt and Guggenmos said they saw multifamily deliveries peaking this year and were concerned that the bulk of the new supply is concentrated in 10 or 12 metros, while job growth has been spread out. Regardless of the elevated levels of supply coming into the market, "absorptions have looked really good," said Guggenmos.
"Considering how many units we have, it's like pulling a rabbit out of a hat," added Betancourt on absorptions. "There's clearly a lot of pent-up demand."
With strong underlying demand, investors remain bullish on the multifamily market. The market is responding with low cap rates, a wider spread over Treasury rates and higher valuations. And with lots of capital available and for relatively cheap, Betancourt said the "free ham in the market" was fueling multifamily investment activity.
To that point, Guggenmos noted the forecast for the multifamily origination market shows originations are likely to increase by 8 percent next year and about the same into 2020. He said he believed the market could easily match last year's transaction volume, when considering sales plus refis and all the new construction that will need to find permanent financing.
However, he noted that new caps on lending from Fannie and Freddie could change the makeup of the capital markets. "If the market continues to grow this way and there are new constraints in the market, you have to be looking at CMBS," he said.
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