National Multifamily Index (NMI)
- Several markets with favorable supply-and-demand balances and momentum in hiring made large moves to ascend to the top spots in the 2017 National Multifamily Index (NMI).
- Los Angeles advanced 11 places in the Index from one year ago to take the highest position in 2017 behind a forecast for further tightening in vacancy and minimal supply growth. Robust job growth propelled the seven-rung rise of Seattle-Tacoma (#2) and Boston (#3) also executed an advance of seven places on its strong job market.
- Minneapolis-St. Paul (#4) is the highest-ranked Midwest metro this year. San Francisco (#7) and San Jose (#8) were downgraded from the top of last year's NMI as their growth cycles mature, and New York City also declined to the last spot in the top 10.
- Economic performance in 2017 could benefit from the carryover of last year's momentum. The uncertainty regarding fiscal, trade and other policy goals not yet formulated by the incoming administration could generate a drag on economic growth in the first months of the Trump term.
- The ability of the new administration and Congress to work together was a matter of speculation at the end of last year. Promises of infrastructure spending could find some bipartisan agreement in the coming year, but implementation of a plan could necessitate additional government borrowing.
- The economy added approximately 2.2 million jobs in 2016 but the reduction in labor market slack will support 2.0 million new hires this year. An increase in consumer spending, combined with the possible implementation of fiscal policies, should generate GDP growth in the 2.5 percent range during 2017.
National Apartment Overview
- Projected job creation and rental household formation will support demand, while demographic trends also support low vacancy and a steady pace of rent increases. Notably, the ongoing flow of millennials into the workforce, a segment of the population with a high propensity to rent, represents a robust driver of growth in the multifamily sector.
- Developers will bring 371,000 units to the market in 2017. In addition to disciplined construction lending, proposals of increased government infrastructure spending could elevate competition for construction materials and labor needed for multifamily construction.
- National apartment vacancy will end 2017 at 4.0 percent as rapidly increasing household formation generates robust net absorption that supports a 3.8 percent rise in the average effective rent. Class A vacancy rates will climb in many markets where substantial supply influxes are on tap.
- Lending capacity for multifamily acquisitions and refinancing remains healthy, but the rise in the yield on the 10-year U.S. Treasury following the election creates some uncertainty concerning where long-term rates will settle.
- Higher interest rates and tighter lender underwriting could cultivate additional investor caution. However, a potential easing of DoddFrank regulations on financial institutions could create additional lending capacity for other capital sources.
- The rise in the average sales price during 2016 maintained the average cap rate in the low-5 percent range and prompted many investors to search for higher yields in secondary and tertiary markets.
- Investors remain cautiously optimistic. However, speculation on how a new presidential administration will govern is certain to influence investors’ outlooks temporarily, at least through the early months of a Trump presidency.