What’s new in multifamily?
As the darling of commercial real estate investment for the past few years, this product type has some interesting trends in store.
Below are the key factors Passco’s Ogal Claspell, Senior Vice President, Realty Investments, believes will likely grow and change the multifamily market throughout the rest of the year.
High Rate of Development Will Continue
A continued high rate of multifamily development throughout the nation will arguably be the most impactful trend of 2016. The impact of this activity will play out differently in each market. As a result, multifamily investors will need to be even more dutiful when it comes to due diligence and local research in target investment markets.
Ogal’s Prediction: Investors will spend more time talking to local municipalities and local brokers over the coming months to ensure they understand the planned new developments in metro areas, submarkets, and competing markets.
Downward Pressure on Cap Rates Will Slow
Investor activity will continue to thrive as the year progresses, and competition for quality multifamily product will remain high. Even in this competitive environment, the year will likely bring a slowdown in pricing increases. This, in turn, will reduce the rate at which cap rates are compressing in the market.
Ogal’s Prediction: Expect pricing to stabilize and the rate of cap rate compression to slow by the second half of 2016.
Secondary and Tertiary Markets Will Pick Up Steam
An increasing number of multifamily investors will look to secondary and tertiary markets for investments. The pricing gap has narrowed between these markets and primary/gateway cities, which opens the door for many investors who might not have considered these markets five to six years ago.
Ogal’s Prediction: Even institutional investors will increasingly widen their investment criteria to include secondary and tertiary markets as the year continues.
Non-GSE Lending Will Increase
Five years ago, the market share for GSE (government-sponsored enterprises) lenders in multifamily lending was in the high 60 percent range. That market share is currently in the high 40 percent range. CMBS lenders and regional/local banks alike have entered the multifamily lending market, and the lending market is likely to continue to diversify as this year progresses.
Ogal’s Prediction: Non-GSE lenders will continue to recognize the ongoing investor appetite for multifamily product, prompting them to look for new ways to increase their market share in this business.
Dialogue Surrounding Workforce/Affordable Housing Will Increase
A large segment of the renting population is getting squeezed out of new multifamily product that is coming online as lease rates climb throughout the nation.
As a result, workforce and affordable housing will emerge as the newest “hot topic” for multifamily investment.
Ogal’s Prediction: Expect to see increasing news and conferences centered around this product type, both this year and beyond.
Unit Sizes Will Continue to Decrease
The average unit size continues to shrink, especially in urban markets, as multifamily development ramps up throughout the U.S. This is a trend that will continue for the rest of 2016, and likely into the foreseeable future.
As unit sizes get smaller, however, common areas get larger. The multifamily market will likely deliver larger clubhouses, fitness centers, and outdoor areas over the next few years to accommodate social gatherings and community engagement.
Ogal’s Prediction: Though smaller units are currently en vogue, developers who are catering to an older demographic will continue to deliver projects with larger unit sizes. The fact is, micro-units are for Millennials.
Real Estate Data Will Get Bigger
Big data has been around for a long time. Unfortunately, the real estate industry has been slower to adopt big data than many other industries. We’ll see that start to change as 2016 progresses.
Ogal’s Prediction: The next few years will bring new interest in understanding the nuances of today’s renters. We will likely see commercial real estate professionals increasingly integrating big data into their research.
As each of these trends unfold, multifamily investors with a strong strategy in place and a finger on the pulse of targeted investment markets will continue to find success.
This article was originally published in Western Real Estate Business’s March 2016 issue.