Multifamily Boom Can’t Last Forever

At a forum on economic trends in commercial real estate at the 2015 REALTORS® Legislative Meetings Expo, two prominent housing economists explained why investors should be wary about unbridled optimism about the apartment market.

Sam Chandan—author, professor, and founder of Chandan Economics—said that, just in the way that investors were fooled into thinking that the housing market couldn’t fail in the run-up to the most recent recession, so too should today’s investors avoid the temptation to believe wholesale the glowing reports about rising rents and low vacancy levels in multifamily buildings.

“Investors will tell you we’re fundamentally a nation of renters now… that narrative ignores that there’s a cyclical component,” Chandan said. “As house prices begin to improve… there will be a significant subset of renters in the U.S. who will say now is the right time to be a homeowner.”

Chandan said part of the problem is thanks to the media, which is more apt to write about billion-dollar apartment acquisitions, making it easier for readers to see the multifamily market as ever expanding in terms of record-setting deals. He also noted that the belief is enticing due to the dominant—but misleading—narrative about the largest generational segment of the population. 

“Millennials will always be millennials. They will not always be in their 20s,” Chandan said. “You can ask any 22-year-old throughout modern history, ‘Do you want to own a minivan?’ And they will say no. But one day they will.”

At the same forum, National Association of REALTORS® Chief Economist Lawrence Yun addressed the issue by looking at the data. He said that under normal circumstances population growth tracks very closely with household formation, but currently the latter is lagging behind the former. He said that situation should be good news for all housing segments.

“There is a pent-up demand for household formation which can support home sales as well as an increase in the rental rate,” Yun said, noting that the supply in multifamily new construction is still insufficient to meet market needs. “If you are an apartment owner and you are concerned that people will start buying homes, you don’t need to worry too much.”

Yun noted that a growing employment rate might do the same thing for the office market, which is still well behind multifamily in terms of recovery: “They have squeezed the workers so much into these spaces… which means vacancy rates will likely decrease.”

Ultimately, Yun advised investors not to pull back, but to proceed with caution. “We do anticipate some growth activity,” he said. “You may need to be more selective, discriminating.”

Chandan agreed: “It’s not just the ability to find good deals. It’s about having the discipline to be able to walk away from deals when they don’t make sense.”

—Meg White, REALTOR® Magazine