theRRD believes the outlook for multifamily investments remains strong for most markets, and guarded for others, even though they are seeming to gain steam within the investment community. Much of the strength of the multifamily market remains on the basic principles of economics, supply and demand. New inventory coming onto the market should slow a bit due to the lack of quality investments to develop as many have been previously acquired or the zoning is making it difficult to maximize the land use. With less inventory, and continued demand, pricing should remain stable if not rise in the coming year.
Tied to this is that banks, private equity and other lenders are tightening their parameters when examining deals, which means fewer multifamily deals are getting done even though demand for rental units has not slowed in most areas. These institutions are looking for higher quality deals to place their money. Rental rates as well as occupancy rates should inch up even though demand is slowed a bit, since the available rental units coming to the market has not. theRRD is estimating rent growth to be 2.5–3.0% due to a healthy labor market and lifestyle preferences, creating demand for multifamily units.
A market that has been gaining more interest among investors as they try to find inventory are the tertiary markets. Tertiary markets seem to be something we have been hearing about investors moving too for the last couple of years, but this may also be a cause for concern. Tertiary markets do present some compelling opportunities for many investors but there are concerns about the liquidity in these smaller metros. One of the largest challenges with investing in tertiary markets is that relatively minor changes in supply can create meaningful near-term disruption in occupancy and investment returns
Since there are less Class A buildings being built to match demand, the darling of the investment community seems to be infill Class B and sometimes Class C buildings. Classes B and C will become the go to investments, especially in the suburbs. In mid-2017, it was forecasted that Class B and C apartments were set to have the best potential for high returns in well into 2018. We should see this trend a continued as renters become priced out of Class A product and acceptance of the newly renovated suburban B product continues to grow. However, with fewer supply issues and wide-appeal rent levels from a pricing and rent-to-income standpoint, we’ll see investors focusing on suburban submarkets where Class B and C apartments are typically not affected by the new-supply issues facing the higher-end, Class A assets.
Overall, theRRD believes the multifamily market for 2018 will remain strong, with good potential investments to be had, it just may take a little more searching to find them.