How are you handling the many changes hitting the real estate industry? Some of the trends we saw in 2019 are shaping the year ahead. Let’s take a deep dive into the state of the market—from where it has been to where it’s going—so you can leverage the data to fine-tune your business strategy for 2020 and beyond.
Market Trends: A Year in Review
Currently, there are about 48 million residential units on the market, with 43% being multifamily, 39% being single-family, and 18% being quad- or duplex units. A whopping 1.9 million new rental units entered the market in 2019 alone, which is a significant increase from 2018. The majority—32%—were in the multifamily residential space.
The ongoing inventory crunch is largely pushing the increase in the multifamily sector. With the growing need for more housing, many duplex and quadplex units are being torn down and replaced with denser complexes consisting of five or more units. In addition, single-family housing is also on the rise, which has led to a boom in community association developments. The majority of new construction (61%) is community association–related, so if you’re thinking about investing in new properties, this is a great market to watch.
The overall residential market, and particularly the single-family sector, made great strides in 2019, but the office, hotel, and retail markets slowed and are expected to remain flat in 2020. Meanwhile, the industrial market saw some gains last year and will likely continue to grow. This is mainly due to the increasing demand for warehouses. Right now, many commercial properties, like vacant malls, are being renovated to accommodate e-commerce and data businesses.
Based on findings from the NREI/Marcus & Millichap Investor Sentiment Survey, investors are planning to hold onto their multifamily properties over the next 12 months, which will make purchasing in the sector more difficult. This investor strategy is largely caused by the ongoing affordability crisis, as well as concerns about a possible mild recession in conjunction with this year’s presidential election. Overall, multifamily likely will continue to have great investor sentiment despite the holding pattern, but hotels, offices, and retail stores will probably diminish in attractiveness.
The affordability crisis is nothing new, but it continues to have a big impact on the state of the real estate market. As rents rise and wages remain stagnant, it’s getting harder and harder for residents to keep up. Rent control laws are being created around the country to combat this, but they present many difficulties for real estate companies. Property management firms have to adapt to fluctuating market conditions while keeping rent rates reasonable and managing long-term tenant expectations, which is no easy feat. Adding to the issue, in some states, rent control laws even differ from city to city. So moving forward, it will be essential for real estate professionals to stay on top of rent control laws and respond accordingly.
Another key item in the inventory equation is new construction. According to Trading Economics, new construction reached a 12-year high in August of last year. With housing starts up by 6.6% and building permit applications up by 7.7% in 2019, construction is only going to continue to boom in 2020. While the housing supply is indeed growing, it’s still not increasing fast enough. In fact, in order to keep up with the current rental demand in the United States, construction would need to double.
Increasing Occupancy Rates
Even as the economy shows signs of a fluctuation, rental demand remains high. Apartment occupancy rates were at 96.2% last July—which is a number that hasn’t been seen in 19 years. Generational shifts are one of the reasons why we’re seeing this increase. As millennials delay homeownership and baby boomers downsize, more and more consumers are in need of multifamily housing.
Slowing Rent Growth
With increasing occupancy rates, you would think rent growth would also be on the rise. However, based on data from Multifamily Executive, rent growth was at a mere 3% in 2019. The ongoing affordability crisis and fear of an economic downturn have contributed to this. In the coming year, investors will likely continue to value stability over maximum profit per unit in the long run. All in all, these market trends suggest the industry will remain strong for real estate companies and investors. If you use these findings to fine-tune your business strategy, you’ll be in the best position to experience growth and profitability in 2020 and beyond.