Sponsored by Marcus & Millichap
By John Chang
Steady economic growth and favorable demographic trends continue to keep the national apartment market on solid footing. Demand remains driven by the healthy labor market, boasting an unemployment rate under 4 percent. While large primary metros have experienced steady job creation for the majority of the current business cycle, more economic growth is percolating inland from these areas to secondary and tertiary markets. Many smaller markets are witnessing increased employment growth as businesses establish new operations in these areas and shift their recruiting methods to attracting local talent rather than trying to relocate talent to existing facilities.
Workforce housing is benefiting from tight labor conditions as people who have traditionally had difficulty finding work are able to secure jobs and have the opportunity to live on their own, boosting household formation in the process. The unemployment rate for those with a high school education or lower has fallen significantly over the past several years, applying added pressure to housing demand for inexpensive units. Availability of class-C apartments has trended downward faster than other asset classes, moving vacancy to the low-4 percent range at the end of the first quarter. These more affordable units will continue to face strong demand as the labor market remains robust, with job openings outnumbering job seekers by roughly 30 percent.
Healthy demographic trends are providing an additional boost to apartment markets nationwide, with lifestyle changes and evolving housing preferences guiding demand. As many millennials delay starting families relative to previous generations, the need for rentals will remain elevated, particularly in urban areas where young professionals are attracted by the popularized live-work-play dynamic. With millennials being the nation’s largest generation, they will be crucial to apartment demand moving forward. Baby boomers will also play a key role for the sector as empty nesters downsize and transition to urban lifestyle apartments. These factors will put further pressure on apartment vacancy rates as new supply struggles to meet demand.
Deliveries are set to eclipse 300,000 in 2019, for the fourth consecutive year, as builders aim to keep stride with rising demand. Heavily developed submarkets across several major metros will generate a modest uptick to the national vacancy rate this year; however, absorption will be generally strong nationwide. Leasing activity of traditional workforce housing will remain solid as household formation stays elevated due to the tight labor market. At the same time, class-A and -B apartments will experience relatively steady absorption, keeping their respective vacancy measures in the lower-5 and upper-4 percent bands. National apartment vacancy will see a gradual incline over the next few years as the current expansion continues to mature, although demand should stay fairly healthy even if economic momentum slows.
Positive demand drivers point to a promising outlook for the apartment market into 2020, though risk of a slowing economy could begin to erode momentum. The longer-term outlook is clouded by geopolitical issues, but the sector’s foundation remains solid. The prolonged expansion and positive demographics will sustain rental housing demand, offering apartment investors a wide range of investment opportunities.John Chang serves as the senior vice president and national director of research services for Marcus & Millichap Inc.
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