Our Perspective 1/ 28/ 2020

Takeaways from 2020 NMHC Apartment Strategies Outlook Conference

There was more to the 2020 NMHC Conference than meetings, parties, dinners, and unseasonably cold temperatures. Here’s a recap of a few of the prevailing themes from the conference.

Economic Outlook:
The consensus outlook for the national economy is that 2020 will be a year of slower growth than we saw in 2019, but that there will be gains in the year ahead. In 2019, employers added about 2.1 million net new jobs, providing the fuel for continued renter demand for apartments. Looking ahead, growth is not expected to be quite that strong in 2020, but employers will likely expand payrolls by an additional 1.5 million jobs.

One driver of the slower pace of employment gains will be the already low unemployment rate. The rate, which ended 2019 at 3.5 percent—40 basis points lower than at the end of 2018—has tightened to the point that there are more job openings than there are workers to fill the open positions. With fewer unemployed people looking for work, many of the jobs will be filled by workers transitioning from one employer to another.

The economy entered 2020 having achieved the longest consecutive period of growth on record. One thought is that the U.S. economy has entered into a period of slower growth, but that the growth will be steadier and for longer periods than during previous cycles.

Investment Outlook:
Investor appetite for multifamily properties is expected to remain elevated in 2020, fueled by robust property performance. While total dollar volume in 2020 may be similar to totals from recent years, the number of transactions is likely to slow.

The compressed cap rate environment was certainly a talking point at NMHC, but more than one panelist reminded the audience that while cap rates are similar to 2006-2007 levels, the spread over the 10-year Treasury bond is much wider than during the pre-recession period, relieving some of the concerns about a too-frothy market.

With rates low, property performance strong, and investor demand elevated, per-unit prices are forecast to remain on their upward trajectory in 2020.

Financing Outlook:
The NMHC panelists were bullish about the multifamily financing climate at the outset of 2020. The market has expanded dramatically in recent years; multifamily originations in 2015 totaled approximately $200 billion, the market was on track for $350-$375 billion in 2019, and the forecast for 2020 calls for approximately $400 billion.

The agencies are expected to handle approximately half of this volume in 2020; in September 2019, the FHFA announced revised cap structure for both Fannie and Freddie. The new loan purchase caps will be $100 billion for both Fannie and Freddie ($200 billion total) for the five-quarter period from 4Q 2019 to 4Q 2020.

Outside of the agencies, there is a significant appetite for multifamily debt from the traditional sources. In addition, debt funds appear poised to account for a greater share of activity in the year to come.

Markets Outlook:
At the beginning of each year, one of the more popular questions is always “which are the markets to watch in the year ahead?” While this exercise can yield varied responses depending on who you ask, there were several markets that seemed to make most people’s lists.

Markets in the Southeast generally have a strong outlook. Atlanta, Charlotte, and Raleigh were popular choices to be top performers in 2020. Nashville is a market where demand drivers are expected to remain strong, but there are some concerns about new supply growth.

In the Southwest, the general perception is that Phoenix and Las Vegas would be hard-pressed to repeat their nation-leading rent gains from 2019, but that demand drivers in each market remain among the strongest of any markets in the country, and 2020 should be a year where each market records steady rent gains in the 4 percent to 6 percent range.

More fireworks are expected in Dallas-Fort Worth in 2020. The market could well lead the way for total job growth again in 2020, fueling renter demand. While demand will be strong, developers will continue to deliver new units at an aggressive pace. Similar high-demand, high-supply growth conditions are forecast for Seattle.

Affordability and Rent Control:
Housing affordability—for all housing types, not just rentals—has been a significant talking point in recent years. Passage of rent control legislation in Oregon and California in 2019 put the issue front and center for the NMHC attendees.

The general feeling at NMHC was that the Oregon and California measures gave owners room to maneuver (with increases allowed to outpace CPI by 7 percent and 5 percent, respectively), but that there is always the potential that legislators can limit the increases in the future.

Potential Risks:
While market sentiment was mostly positive throughout the meeting, there were some discussions about potential items that could throw the market off its current track. The issues to monitor going forward included: uncertainty surrounding the 2020 election, ongoing saber rattling on international trade, and a potential shock to the financial system.

With 2019 being an eventful year, it was less than 18 months ago that the Fed’s four consecutive rate increases shocked capital markets, causing investors to pull back on activity and fueling a double-digit percentage drop in the stock market.