The overall vacancy rate for multifamily is expected to rise by 20 bps to 4.5%, which is still below the long-term average of 5.1%. Rent growth is expected to be down to about 2.4%, slightly under the long-term average of 2.6%.
In 2019, new construction apartment demand was around 300,000 units however, a slower economic growth for 2020 anticipates apartment demand to be around 240,000 units in 2020, roughly 20% less than 2019. Multifamily demand is expected to remain sufficient enough to absorb a healthy new supply of units within the market.
It is expected that development will continue in both urban and suburban locations in 2020. Although, geographical the focus is shifting to the suburbs—both mid-rise “urbanesque” product in the densifying suburbs and garden product in more traditional greenfield locations. Buying or building in the suburbs will remain the best bet based on market performance and investment returns. Suburban multifamily is expected will outperform urban, maintaining lower vacancy and achieving higher rent growth.
Investors and developers should also consider smaller metros (e.g., less than 2 million population). While liquidity and overbuilding risks are generally higher in smaller markets, there are several metros with exceptional multifamily performance today resulting from favorable supply/demand fundamentals (steady growth over recent years and only moderate development activity). Many smaller metros are undergoing a significant upgrading of their urban cores, thereby improving quality of life and helping them retain talent. Seven smaller metros had 4% or higher rent growth as of Q3 2019: Albuquerque, Birmingham, Colorado Springs, Greensboro, Memphis, Dayton and Tucson. They are likely candidates for outperformance in 2020.
