Multifamily Update

From Yardi Matrix

By Joel Nelson on Nov 19, 2018 in News

Jeff Adler, vice president of Yardi Matrix, assisted by Jack Kern, director of research and publications, recently delivered a webinar on the state of the multifamily industry. Excerpts follow.

Q: How is the U.S. economy overall?

A: It’s in good shape. Gross domestic product and employment are steady, wages are rising and the labor market is tight. Inflation is rising but under control.

Q: And the multifamily market?

A: It’s good too, although there are a few crosswinds. Jobs and population growth are strong but shifting to lower-cost cities, and homeownership is gradually rising. Multifamily capital is abundant, and new supply deliveries are weighing down on several markets, with the level of new supply flattening but not declining.

Q: Has multifamily supply leveled out, and why?

A: Construction delays and financing are a factor. Construction is just catching up to household formation, and builders are focusing on higher-price single family homes.

Q: What are some policy changes addressing affordability?

A: There are some proposed and implemented government mandates. Other market-oriented changes include a community in Kissimmee, Fla., that encourages residents to cover some of their rent by sharing their apartment on Airbnb; “rent by bedroom” communities that combine private bedrooms with shared kitchen and living areas. The coworking trend offers a model for coliving. Societal infrastructure, especially education, is the power of local economy, which drives multifamily investment.

Q: What job growth trends are affecting multifamily?

A: Companies are relocating and expanding in lower-cost markets—places like Phoenix, Orlando, Fla., Houston, Las Vegas and Raleigh, N.C. Tech hubs are emerging both in formerly non-tech metros and traditionally overlooked cities, such as Indianapolis, Pittsburgh and Philadelphia.

Q: What are some of the other factors in play?

A: The 2017 tax reform that caps the deduction for state and local taxes will likely accelerate migration from gateways such as San Francisco, Los Angeles and Chicago, to lower-tax states such as Florida, Nevada, Texas and Washington.

Q: Which metros figure to have the most multifamily rent growth over the next couple of years?

A: Tech hub and tertiary markets such as Reno, Sacramento, Calif., Tacoma and Spokane in Washington state, and eastern Los Angeles County.

Q: And which areas will have the least growth in that time?

A: Tertiary markets such as Texas cities Corpus Christi, Amarillo, El Paso and McAllen, along with gateway markets like Manhattan, N.Y. and Northern Virginia.

Q: Do you foresee some secondary tech cities providing too much multifamily supply in the next couple of years?

A: Yes. Metros such as Seattle, Charlotte, N.C., Dallas and St. Louis are at risk of oversupply. But this is really a good story—only a handful of metros are at risk of oversupply. This is a market with good overall balance. Over the long term (five years), these markets figure to be in balance, as strong demand drivers will likely continue.

Q: What is technology’s impact on the future of real estate?

A: The home is emerging as a software platform. Artificial intelligence isn’t new in multifamily—revenue management software programs have used a form of it for almost 20 years. AI—which takes the big data collected from internet of things (IoT) devices, then learns to predict future outcomes or make decisions—has the ability to streamline production, cut costs and pave the way for new products and services. It can improve property performance to let staff spend more time with applicants and residents.

The IoT—a network of physical objects that contain embedded technology to sense, communicate and interact with the external environment—for multifamily properties focuses on such things as building access, smart sensors for thermostats and water leak detectors, along with conveniences such as voice assistance, Bluetooth speakers and automated blinds. One of the most exciting parts of IoT is that it helps drive maintenance costs down and supports preventative maintenance.

A broader example of IoT is Barcelona, Spain, one of the IoT-integrated smart cities in the world. Smart parking sensors that direct drivers to available parking, and smart lights and watering systems combine for about $145 million in combined revenue plus water and energy cost savings. AI can also help the investment side of the business to identify asset with value creation potential and reduce underwriting time.

Q: What’s the bottom line for multifamily?

A: It’s a sharpshooter’s game for the next few years, but in five to 10 years the outlook is best for intellectual capital hubs that have the most attractive fundamentals. For now the market has enough gas in the tank to keep things going.

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