Nearly Half of Multifamily Investors Surveyed Plan to Hold Onto Their Properties During The Next 12 Months
Despite fears of a recession from some corners of the market, research conducted by the National Real Estate Investor (NREI) suggests that most multifamily investors remain strikingly optimistic. Over the last six years that NREI has collected opinion data from investors, this year represents the period with the highest proportion of survey respondents saying they want to hold their multifamily assets for the upcoming year (47.1%, a more than 3% increase from 2018).
While Fewer Investors Want to Buy, Multifamily Remains An Attractive Sector
While investors may be feeling great about holding their assets, slightly fewer investors said they wanted to buy multifamily property compared to 12 months ago (37.4% vs. 41.0%). Over the last six years, this number reached a peak in 2014 at 55%. Despite this, multifamily remains an attractive sector, especially when compared to other types of commercial real estate. In a ranking of major property types, multifamily increased from 7.7 to 7.9 between mid-2018 and mid-2019, while office properties were ranked at 5.8, industrial at 7.5, and hotels at 5.9.
The proportion of investors who want to sell increased slightly, by 1.5% (from 14.0% to 15.5%), the highest percentage of investors looking to sell over the previous six years that NREI has conducted the survey. This increase isn’t too much of a surprise, considering that 53.9% of respondents think cap rates will increase over the next 12 months, a lot less than the nearly 70% who thought that in last year’s survey. In contrast, around 30% think cap rates will not change, while 17.1% believe cap rates will fall over the next year.
Interest Rate Expectations Remain Positive
In addition to positive feelings about the multifamily sector as a whole, investors are also feeling relatively good about interest rates. Over the last several years, most investors have anticipated that interest rates would only rise. However, today, only 44.7% of NREI survey respondents believe that rates will increase in the coming months. That’s a significant decrease from 12 months ago when approximately 90% of investors surveyed thought that rate hikes were coming soon.
In contrast, 9% believe that rates will decrease, while the majority (46%) think that rates will not change soon. In addition to most believing that rates will not significantly increase over the next 12 months, most survey respondents (53%) generally think that credit spreads will remain stable (in contrast, about 40% think they will increase).
Today’s Investors Are Less Concerned About Overdevelopment
Compared to 12 months ago, today’s multifamily investors are somewhat less worried about overdevelopment. 35.2% of 2019 survey respondents believed overdevelopment was an issue, while 43% believed it was an issue in 2018’s survey. In comparison, 38.3% of this year’s respondents thought the development level was “just right,” an uptick from the 35% who held that opinion in mid-2018.
Investor Opinions on Leasing and Rents
While most investors may not be particularly concerned about overdevelopment, some investors do believe that too much development will lead to rent decreases in the coming years. These concerns are exacerbated by the fact that more investors are flooding the multifamily market since rents have increased in the last few years. Affordability is also a concern for a lot of investors, some of whom believe that vacancy rates may increase due to skyrocketing rents. Despite this, most investors (a whopping 73.3%, up from 66% in 2018) think apartment rents will go up over the next year, while about 12% think rents will fall.
Investors’ opinions on occupancy rates are also somewhat rosy. More than 50% of survey respondents think occupancies will increase during the next year (up nearly 10% from last year’s survey). In comparison, only 22.2% believe occupancy rates will decrease-- down about 4% from 2018.
Investors Also Remain Positive About Capital and Debt Availability
Investor views on the availability of debt are similar but slightly more positive than they were a year ago. 22.3% of respondents indicated that it was easier to acquire debt than it was one year ago (up from 21%). In contrast, 56.6% said that debt was equally available than it was 12 months ago. In the last year, Fannie Mae and Freddie Mac have become increasingly popular sources of multifamily debt, scoring 7.1/10 on a 1-10 scale, while banks came in at 6.6/10, and institutional lenders scored 6.3/10.
In addition, 72% of investors believe that LTV allowances will stay the same in the coming year, while 69% think DSCRs will stay the same-- a substantial increase from last year’s survey. In contrast, 11.8% think LTVs will increase, while 16% think they will decrease (that’s 20.5% and 11% for DSCRs, respectively).
Investors See The South and West As Promising Multifamily Markets
As a final part of the survey, investors were asked to rate each multifamily market region on a scale of 1-10. Multifamily investors rated the South 7.8/10, the West 7.7/10, the East 7.3/10, and the Midwest 6.4/10. While the South saw a slight increase, all other regions saw small decreases. Atlanta, Nashville, and Charlotte ranked among the hottest multifamily markets in the country, with recent 12-month rent increases of 5.4%, 4.1%, and 3.2%, respectively.
While the market outlook remains bright overall, the oversupply of class-A luxury housing remains a concern for some multifamily investors. Specifically, some investors think that, as more millennials grow older and start families, they may begin to purchase single-family homes in the suburbs, while newer generations of renters may no longer be able to afford the high rents at many recently-built urban developments. However, if overall investor opinion is any measure of future market performance (a big if) the multifamily sector will still be a great place to invest for the coming year.