Real Estate Investors Heading Into an Interesting and Optimistic New Year

Wondering what 2018 holds for real estate investors? According to data published in a recent article on National Real Estate Investor online (NREI),  2018 could be a good year for investing – depending of course on the outcome of a variety of factors. The past few years have been solid for multifamily investors, but this year the market has begun to shift from one of impressive growth following the recession. Looking toward the new year, BAM looks at what investors are dealing with and how 2018 might shape up...

Overall, despite a slowing down, the climate of multifamily investment is still positive. Investors have enjoyed a long-term wave of growth, spurred on by a steady economic growth cycle and the post-bust, pro-rental mentality that helped to drive higher apartment demand, among other factors. Tight vacancy combined with rent growth coincided with higher market liquidity to boost asset values, according to NREI. Yet over the past year the market has shown a shift away from this pattern.

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Rental income growth has slowed and investors have become more wary, which has “moderated appreciation in numerous markets.” According to NREI, the post-recession gains have been absorbed, and value-add opportunities have been seized – making it harder for investors to find properties with solid potential. Simultaneously, apartment construction is bridging the gap between demand and supply. In yet another converging factor, there is a larger gap between “bid/ask” price with a lot of potential sellers being perhaps overly optimistic about their properties' value. Throw in ever-popular economic uncertainty and concerns about how things will shake down with taxes and health care, and it's a recipe for putting the brakes on multifamily deals as well as appreciation.

Of course, investors have adjusted their sails to manage current conditions. Multifamily investors are looking at asset classes that they typically ignored in previous years, such as class-B and class-C properties as well as some outer-edge suburban areas and properties in secondary and tertiary markets. Per the NREI data, within the last year over half of the dollar volume invested in apartments over $1 million was in secondary and tertiary markets – marking a 42% jump from 2010. In tertiary markets cap rates have fallen to an average of 6%, while national cap rates on class-B and class-C properties sits around 5%. For investors with a long-range strategy, these yields are appealing.

According to NREI, if jitters around tax law and the economy abate along with worries about the volume of new construction, apartment sales should “normalize” and the gap between the “bid/ask” price should shrink. The flexible multifamily investors will continue investing in tertiary, smaller markets which supports “broad-band liquidity.” Should these factors all combine as seems somewhat likely, 2018 could prove an inviting, invigorating year for multifamily real estate investors.

Elizabeth Wheeler