The national multifamily market is forecast to continue to post strong performance in 2020. There are several factors supporting the favorable outlook, a few of which are outlined below. To be sure, there are also a handful of economic, financial and political conditions present that combine to add uncertainty to the market. Despite a few challenges, on balance, the pluses are expected to outweigh the minuses in the economy, the capital markets, and the multifamily sector in 2020.
Healthy Labor Markets Driving Demand for Apartments
Sustained employment growth is forecast to continue to fuel household creation, and the multifamily market will capture its share of new households. As of this writing, employers were on pace to create approximately 2 million net new jobs in 2019, marking the ninth straight year where payroll growth came in at or above 2 million positions. With the country essentially at full employment, it will be tough for the economy repeat this performance in 2020; gains will likely be more modest in the year ahead.
Homeownership Rates Holding Steady
With the economy remaining in an extended growth cycle, employers expanding payrolls, consumer confidence high, and mortgage rates low, conditions would seem ripe for a rise in the national homeownership rate. To this point in the current expansion cycle, however, homeownership rates have held steady around 64.0-64.5 percent, remaining essentially unchanged from five years ago, and down 500 basis points from the pre-recession peak. An unexpected flight to homeownership could create a supply/demand imbalance for rental housing, but there is little indication of any significant shift in homeownership trends occurring in 2020.
Strong Absorption Bolstering the Class A Segment
Multifamily developers have been active in the Class A space, bringing an average of approximately 215,000 Class A apartment units to the market annually since 2015. Despite the wave of new development, vacancy rates in the top tier of the market have been quite steady, ranging between 5.5 percent and 6.0 percent in recent years, as renters have moved into a net of nearly 1 million Class A units since 2015. While there are several markets where construction remains quite active, led by Dallas-Fort Worth, Seattle, and Atlanta to name a few, demand at the high-end of the quality spectrum has proven strong enough to keep vacancy rates fairly flat.
Affordability to Remain a Challenge; Rent Control Measures Likely to Have a Minimal Short-Term Impact
Apartment rents have been rising faster than the rate of inflation for the past several years, and affordability has been one of the prevailing themes in the multifamily market. Late in 2019, California passed rent control legislation, but with the law allowing for annual rent increases of 5 percent, plus the rate of inflation, renters are unlikely to find significant relief. The more pressing realities driving rents higher—in California and in other high-demand states—include: elevated demand for apartments, rising land and construction costs, and a wave of higher-end, luxury projects coming online. With these conditions in place, renters are going to find themselves facing higher rents in 2020.