Sacramento, Las Vegas, Dallas, Atlanta and Phoenix Named Top 5 Markets to Buy Multifamily Units

Ten-X, the nation's leading online real estate marketplace, today released its latest U.S. Apartment Market Outlook, including the top five 'Buy' and 'Sell' markets for multifamily real estate assets. The long-term forecast reveals the sector remains strong after years of booming growth, but may now be primed for a slowdown after far surpassing its prior cyclical peak.

The forecast indicates Sacramento, Calif., Las Vegas, Atlanta, Phoenix and Dallas are the top markets in which investors should consider buying multifamily assets. These regions are being fueled by robust local economies, with a steady influx of new jobs attracting residents still eager to forgo home ownership for the opportunity to rent in a large metropolis. 

San Francisco, New York City, San Jose, Calif., Miami and Milwaukee are the top markets where Ten-X Research estimates market conditions might cause multifamily investors to consider selling their properties. These cities have generally been at the forefront of the massive shift toward urban centers over the last decade, and are now coping with rising vacancies and flattening rents as new supply continues flooding the market.

The Ten-X Research report notes that a record 260,000 completions were reported in 2016, with another roughly 250,000 expected to arrive this year. While absorption remains strong, this massive infusion of supply will drive vacancies as high as 5.6 percent over the course of 2017 before climbing above 6 percent during a modeled cyclical downturn beginning in 2019.

The mild uptick has already begun to slow rent growth, as evidenced by a 0.7 percent seasonally adjusted increase in the third quarter – the slowest quarterly gain since 2013. Ten-X Research predicts rents will continue to grow by roughly 3 percent per year until 2018, before leveling off to roughly 1 percent gains in the two-year modeled downturn.

Ten-X also notes that home ownership, which has been declining sharply for years, has begun to show signs of stabilization. While demand for apartments should remain largely unaffected, absorption rates could slow should the trend begin to gain steam. Overall economic indicators, including steady employment growth and rising wages, may provide a boost to the market by pushing millennials saddled with student debt out of their parents' homes and into the rental market.

"For years, the multifamily sector has been reveling in the spoils of a massive cultural shift toward urbanization and falling home ownership. As Americans continue to move to certain major cities in droves, developers have responded by making huge investments in those areas, flooding the market with new apartments," said Ten-X Chief Economist Peter Muoio. "While many larger metros appear to have reached a critical mass of supply and are now seeing fundamentals begin to cool, a strong economy and more limited development continue to make multifamily an attractive bet for investors across the country."

Effective rents were up 3.8 percent year-over-year in the third quarter, further extending their all-time peak, while strong absorption pushed nationwide vacancies down slightly to 4.3 percent. Cap rates showed a slight increase of 10 bps over the second quarter, moving to 4.9 percent.

Overall deal volume in the sector totaled $36.9 billion during the third quarter - an 8.1 percent increase from the same period in 2015.

The Apartment Sector's Top Five 'Buy' Markets:

Sacramento

Rents in California's capital have been soaring as of late, jumping 8.3 percent over the last year, and are set to soon surpass the national average. Vacancies remain extremely low at 2.1 percent, according to Ten-X Research, a figure that is expected to hold steady despite a glut of supply that will hit the market over the next three years. The region's robust economy – highlighted by steady population growth and nearly a 3 percent increase in jobs since early 2016 – continue to make it among the most attractive bets for multifamily investors.

Las Vegas

A strong economy, continues to make for appealing prospects for investors in Las Vegas. Employment grew 2.1 percent over the last year, including 1.6 percent in the city's massive hospitality and leisure sector. Steady population growth continues to drive down vacancies, which stand at 3.8 percent and are projected to plunge even lower by 2018. Meanwhile, Ten-X projects rent growth to sustain better than 4 percent growth over the next two years, providing investors with returns of more than 5 percent.

Atlanta

Atlanta's economy has begun to show signs of slowing from its formerly breakneck pace, though it remains the picture of strength to begin 2017. Job growth, fueled by significant gains in the professional/business services sector, remain better than 2 percent year over year, while unemployment hovers just over 5 percent. Despite the slight slowdown, vacancies continue to decline and rents should see solid gains through 2020. Ten-X forecasts that owners in the region should reap considerable returns of more than 5 percent over the next two years.

Phoenix

Rent growth has been soaring in Phoenix, measuring between the high 6 percent and low 7 percent range year over year in the last three quarters. While a steady supply pipeline may drive vacancies up over 5 percent by the end of 2018, healthy economic and demographic indicators make the region an appealing venue for multi-family investors. The city's outsized financial sector saw strong gains during 2016, while unemployment has declined to a cycle-low of 4.3 percent, well below the national average.

Dallas

Employment in Dallas is at an all-time peak following 3.7 percent growth over the last year, while unemployment sits at 3.5 percent – more than 100 bps lower than the national rate. Strong population growth bodes well for the city's economic prospects, and has driven multi-family vacancies to a cycle-low of 4.2 percent. Rents are also measuring their best growth of the cycle, and Ten-X projects landlords can expect returns of roughly 4.5 percent through 2018.

The Apartment Sector's Top Five 'Sell' Markets:

San Francisco

Though San Francisco's economy remains healthy, its reliance on the volatile tech industry makes it a risky bet for multi-family investors. Though both population and employment continue to see solid year-over-year growth, most of the region's largest industries have begun to lose steam, according to Ten-X Research. A healthy supply pipeline is expected to fuel a steady rise in vacancies, while already flat rents are projected to decrease by approximately 10 percent by the end of the modeled two-year downturn in 2020. While the city remains one of the hottest real estate markets in the country, its apartment market appears to be past its cyclical peak, making it tops on our list of areas where investors should consider selling their assets.

New York City

New York's multifamily market is suffering from many of the same symptoms as tech-heavy San Francisco, with years of booming growth creating a massive infusion of supply that has contributed to rising vacancies and weakened rents. Both unemployment and rent increases have leveled off over the last year, though the city continues to add jobs – albeit at a slowing pace. Ten-X Research indicates rents are likely to fall by as more than 5 percent by 2018as vacancies mount due to supply additions in Brooklyn and Queens. Landlords can expect returns to contract sharply in the years to come, making the market a prime candidate for potential sellers.

San Jose

Another heavily tech-dependent market, San Jose's multi-family market has become increasingly risky as the industry's explosive growth begins to slow. Vacancies have increased to 4.1 percent as a robust infusion of supply is meeting with declining demand. Rent growth has also begun to cool, measuring 1.5 percent over the last year – well off its cycle-high of 10.3 percent in late 2014. Though the region's economy continues to grow, returns on multifamily investments are projected to remain flat through 2018 before entering outright decline.

Miami

Apartment vacancies in Miami have been on the rise as of late, reaching 4.7 percent in the third quarter of 2016. While rents are currently at an all-time high, growth has already begun to decelerate. The city's fundamentals point to further slowing, with annual growth falling below 1 percent by 2019. Though its economy continues to grow, data points to a stabilizing effect that should give continue to give multifamily investors pause. 

Milwaukee

Hampered by consistently low population growth, Milwaukee's economy remains mired in a rut. Though unemployment is currently at a cycle-low of 4.2 percent, jobs in the city actually declined 0.2 percent over the last year. A new infusion of supply is projected to nearly double the vacancy rate to more than 7 percent by 2020, according to Ten-X Research, while rent growth grinds to a halt. The sluggish economy is expected to result in flat NOI for landlords over the same period.