At CommLoan, the number one asset type we quote, put under application with our lenders, and close, is multifamily. We love performing on apartment deals because we know we’re providing a valuable service to the communities those apartments serve. From value-add acquisitions to stabilized cash-out refinances, we know multifamily, and that bodes well given the state of the market in 2020.
The major takeaway is that multifamily fundamentals continue to be extremely strong. 2019 reflected annual rent growth of 4.4%, compared to the year prior and nationwide apartment vacancy averaged just 4.9% – holding steady even with significant new supply delivered. Absorption was down slightly from 2018 but remains healthy due to a strong labor market with low unemployment and increasing wages. Supply is expected to moderately outpace absorption in 2020, which means vacancy rates are likely to increase modestly again, similar to the 20 bps increase from 2018 to 2019. There are many demand drivers leading the way in growth for this segment, including a lack of for-sale housing inventory at lower price points, lifestyle preferences, and demographic trends. Given the lack of supply of affordable for-sale housing and an economy poised for continued positive growth, there is unlikely to be a downturn for multifamily in 2020.
Some of the top metros for multifamily rent growth include Phoenix (our hometown!), Las Vegas, Albuquerque, Tampa, Fort Lauderdale, Seattle, San Francisco, Chicago, and Philadelphia. Vacancy rates have remained in a tight range despite new deliveries in these markets and any small increase in vacancy will be more than offset by higher rents.
On the investment side, cap rates remained relatively flat throughout 2019 and property prices continued to increase due to higher NOI capturing that rent growth and continued strong occupancy, factors which are driving investor appetite. The 10-year UST is down more than 100 bps from this same time last year, but multifamily cap rates have not followed the same trend, making cap rate spreads relatively high. More investor demand may put downward pressure on cap rates, which together with strong property fundamentals, will push multifamily prices upward even more.
Strong demand for multifamily and healthy property fundamentals (not to mention continued low interest rates) will likely result in a higher volume of loan originations in 2020 as well. According to Freddie Mac, 2019 multifamily origination volume is expected to come in at $369B once the numbers are finalized, a 9% increase over 2018 originations. 2020 origination volume is forecast at $390B, nearly a 6% increase over 2019 numbers. This data suggests that there will continue to be strong demand for multifamily through 2020. And here at CommLoan, we’re happy that’s the case!