Based on most key indicators, the second quarter of 2016 was a strong for the multifamily sector. But after 2015’s record-breaking rent growth and investment results, even a very good quarter can appear to be a slowdown.
Rent growth has eased off of 2015’s record gains to a steady (but not explosive) 3.6%. Vacancies held steady at 4.1% even as an ongoing wave of supply put some pressure on the high end of the market. That’s what limited rent growth in construction-heavy areas like Houston and Washington, DC.
On the other hand, west coast markets including Portland, Sacramento and Seattle saw strong rent growth.
Deal volume during second quarter 2016 totaled $34 billion – which is virtually identical to the same quarter in 2015. And while capital rates drifted to an average 4.9%, markets including San Francisco, Austin, and Sacramento posted some of the strongest gains.
All things considered, investment in multifamily still makes sense. A spate of high-end construction notwithstanding, the U.S. faces a broad housing shortage. On average, the number of new households formed since 2010 outpace the number of new housing units built at nearly two-to-one. Investors concerned about 4 & 5 Star overbuilding may want to look to 3 Star assets outside of prime locations, rather than abandon the asset class altogether.
The multifamily sector’s record of steady rent growth and high occupancy – along with low volatility – makes it an ideal defensive asset as the economic cycle extends into a seventh year.