We’re already well into the first quarter of 2019 and with that comes the many industry events, including NMHC’s Apartment Strategies Conference and MBA’s CREF 2019. Before the year — and conference season — gets fully underway, we want to share our perspective on the top financing and investing trends that may impact your multifamily investment opportunities in the coming months.
1. New Construction Generates Sales, Financing Opportunities
Multifamily development has been robust in recent years, reaching a peak in 2018. About 280,000 apartment units were delivered in 2018, and more than 1.1 million units have been delivered during the past five years. Only about 25 percent of these units have sold at this point. Developers are expected to either place permanent financing on projects or implement exit strategies by increasingly bringing stabilized projects to market.
2. Value-Add Remains Popular, Proﬁtable
Investors looking to steer clear of some of the aggressive pricing for new properties will continue to target value-add opportunities. Value-add strategies that can be executed in short time frames of about 18 months will appeal to investors and lenders as vacancies tighten and rents rise in nearly every major market in the country.
3. Interest Rates May Plateau
The Federal Reserve raised the fed funds rate nine times from late 2015 to the end of 2018, but the year ahead could bring an end to the upward path in rates. The Fed indicated at its December 2018 meeting that it would increase rates twice more in 2019. After a few years of increases, a leveling of rates will alter investment and financing outlooks. Spreads have compressed to competitive levels after a volatile end to 2018. Competitive spreads, combined with lower Treasury rates, have resulted in the actual interest rates for many buyers being well below the initial underwritten estimate. Accordingly, we have seen little change in the going-in cap rates.
4. Many Anticipate Slower Economic Growth
One reason the Fed will likely curtail the pace of rate increases is the expectation the economy will expand at a more modest pace in 2019 than it did in 2018. A recession is unlikely, and economists are forecasting job growth to be positive, but conditions are expected to soften. This trend follows on the heels of a historically long expansion. It could take a few quarters for buyers’ and sellers’ expectations to realign in 2019.
5. The Impact of Opportunity Zones Remains a Wild Card
The favorable tax treatment of investments made in opportunity zones will attract a lot of attention and some investment capital, but the program is not likely to be a good fit for everyone. Multifamily developers with a long-term hold business plan have shown significant interest in the program. The zones are generally in under-served areas, meaning there may be challenges securing tenants to occupy properties and lenders willing to finance these projects.