Multifamily Midwest

The sector with the strongest outlook? It's not industrial

The sector with the strongest outlook? It's not industrial,ph01

Which commercial sector is the strongest? Across the Midwest and the United States, it’s long been a battle between industrial and multifamily. A new report, though, suggests that rising demand and slowing construction will provide an additional boost to the multifamily sector starting in 2020. And that small boost could mean a future that’s slightly brighter for multifamily than it is for industrial.

Irvine, California-based Ten-X Commercial, an online transaction platform for CRE professionals, in mid-August released its latest multifamily market report. The report says that demand for multifamily units is showing no signs of slowing. At the same time, construction activity in this sector is expected to cool starting in 2020.

This combination will result in low vacancies and strong rent growth. It’s also a combination that gives the multifamily sector the strongest outlook among all the major CRE property groups, according to Ten-X.

Matthew Schreck, senior quantitative strategist at Ten-X, said that the multifamily trends Ten-X reported on aren’t new. What’s interesting, though, is how strong this sector has been for so long now. Demand for apartment units has remained high since the housing market crash in 2007 and 2008.

“We’ve seen strong, consistent demand in this sector for a long time now,” Schreck said. “The demand has been driven by a softer housing market. A lot of young adults are still stuck at home. They are burdened by student loan debt. They are having kids later in life. They are getting married later in life. A lot of factors have driven this strong, ongoing current of demand.”

The Ten-X report does point to Millennials as a major factor in the continued demand for apartment units acreoss the country. According to the company’s report, 32 percent of adults from the ages of 18 to 34 are living with their parents, thanks largely to the financial burden of student loan debt. This has put a hurt on the single-family market. The trend, though, has helped the multifamily sector.

Ten-X says that when Millennials aren’t living at home, many of them are moving into apartments instead of buying homes. This has resulted in a country-wide multifamily vacancy rate that Ten-X predicts will plummet to 5 percent by 2022.

Combine this with construction activity that is expected to slow starting in 2020, and it’s clear why Ten-X is so high on the future prospects of the multifamily market.

“During the last three years, the multifamily supply pipeline was very heavy,” Schreck said. “Demand was high, too, but there was so much new construction it kept a lid on rent growth. But now we expect the new supply in multifamily to start tapering off in 2020, 2021 and beyond. At the same time, we expect the industrial sector’s supply picture to continue ramping up. Demand remains high for industrial, but supply is rising quickly, too. That is one of the key reasons why our outlook for the apartment sector is the strongest for the next three to four years.”

Schreck said that multifamily demand is strong across all apartment asset types. Developers, though, have been building a far greater number of high-end apartments. They haven’t been building as many lower-cost units. Because there aren’t as many affordable units, the demand for those that do exist is extremely high.

The researchers at Ten-X don’t expect demand to lessen for multifamily in large part because student loan debt is only increasing. Schreck points to falling mortgage interest rates. These falling rates make buying a home and taking out a mortgage loan more affordable today. Still, younger adults are waiting to buy.

Why? It’s the student loan debt they face. Potential homebuyers are kept out of the market because their monthly bills are too high thanks to the burden of paying back their student loans.

At the same time, the number of single-family homes for sale today is lower than usual. This lack of inventory makes it more difficult for buyers to find homes, and is keeping more of them in multifamily properties, Schreck said.