The Freddie Mac Multifamily Midyear Outlook for 2014 contains some points that desperately want to be positive, paired with some estimates and forecasts that paint what could be a very different picture for the multifamily housing market. The take-away seems to be that we should expect volatile market conditions to continue into the next year or so, prime time for investors to do minimal capital improvements in preparation for eventual increased market demand.
The report reveals that, by all estimates, more than 3.9 million new households should have been formed during the Great Recession, weren't. Whether that's a result of the shifting cultural landscape or symptomatic of a “failure to launch” generation, prognosticators tend to assume that the trend won't continue and that Millennials will start setting up house on their own as they find jobs. Younger households are more prone to renting, especially now that housing starts are low and home loans are harder to get.
Freddie Mac's Steve Guggenmoss says multifamily investors should expect to feel a pinch in the next few months as occupancy rates drop. In the face of such guarded optimism about those Millennials finally “launching” and getting their own jobs and places to live, that warning looks more like the agency is taking a “wait and see” approach to what's coming down the pike for multifamily housing. Basically, there are two possibilities for the market:
Scenario 1: Steady Economic Recovery
- Millennials currently living with their parents get jobs, keeping a 13-year-low occupancy rate near 4.1 percent or better
- Demand will increase to 440,000 new units per year, with only 340,000 units slated to come on the market in the next two years
- The rental housing market will tighten, rents will increase, and investors will realize improving returns.
Scenario 2: Lagging Job Creation and Recovery
- Unemployment and underemployment will continue to plague millennials, who will stay at home even if they are working
- Some cities will suffer from overbuilt multifamily housing, and occupancy rates will hit 4.8 percent nationwide by the New Year
- At best, rents will remain steady and the market will stay in a holding pattern.
All in all, it looks like market volatility and uncertainty may be the “new normal” Freddie Mac is predicting. And, while investors are steadily coming into the REIT market and bolstering overall real estate numbers, the right approach for multifamily property owners may be to hold, maintain, and improve when the market makes gains in your favor.