Multifamily assets remain the preferred investment vehicle of commercial real estate investors. With the upside to multifamily investments soundly outpacing that of other asset types, that doesn’t appear to be changing any time soon.
That said, it’s wise to consider every scenario. So, what situations have the potential to pump the brakes on the industry’s momentum? We narrowed it down to three factors for the industry to be mindful of moving into 2020:
1. Rent Control Starts Spreading
Rent control was one of the hot button issues facing apartment owners and investors in 2019. Oregon, New York City, and California all passed new rent restrictions in the face of affordability concerns.
Most rent control laws present more new challenges than they address by discouraging new development and exacerbating the undersupply problem further. According to Real Capital Analytics, year-over-year volume has fallen by 29% and 32% in Manhattan and the NYC Boroughs, respectively.
Additional states and municipalities are considering their own rent control measures, emboldened by reforms in Oregon, New York, and California. Washington D.C., Illinois, Philadelphia, and Massachusetts are all considering some form of rent control to ease affordability concerns, a strategy that will likely compound the problem.
2. GSE Reform
The Trump administration has signaled that they are ready to end the government conservatorship of mortgage giants Fannie and Freddie. This will almost certainly become a hot political issue heading into an election year. However, it’s not immediately clear what the administration has planned in terms of what a reformation of these government-sponsored enterprises (GSE’s) would look like.
But according to a Treasury Department plan released in September 2019, the Department recommends “amending GSE guidelines to limit support of each GSE’s multifamily business to its underlying affordability mission.” What that means can be left up for interpretation, but it’s clear that this could impact the availability of lending on projects outside the scope of the Treasury’s definition of multifamily housing, such as “green” or environmentally friendly projects.
It’s anyone’s guess what will happen, but industry professionals should be mindful that there could be a reduced agency presence in the years ahead.
3. Recession? Maybe!
Currently, there are no immediate alarm bells ringing that signal a recession is right around the corner. Consider, however, that current cycle will be entering its 11th year of expansion in June. That’s a long time without a recession.
As the multifamily industry is driven primarily by job growth, investors should monitor the health of employment closely before making any significant investments. Assuming the industry maintains this prudent posture, we’re likely to see a slight dip in overall volume in 2020.
The Next Era of Multifamily
Fundamental changes in housing preferences towards renting, more stringent underwriting standards on homes purchases, and a generation saddled with student debt will continue to drive apartment demand across the country. As a result, multifamily will be an attractive investment vehicle in the long term due to inherent social and economic factors that have emerged since the last recession.
- For a deeper dive into the biggest factors influencing the ever-dynamic multifamily industry, check out helpful 10-year retrospective.
– Jonathan Rappa, Director of Research