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Multifamily Industry Update

The U.S. economy will keep growing.  But the pace is clearly starting to slacken as the boost from last year’s tax cuts starts to fade and the slowing global economy weighs on the U.S.   Figure on GDP growth of 2.5% or so, a noticeable step down from 2018’s 2.9% rate.  And the economy could flag by year-end.  Don’t be surprised if growth in the fourth quarter slips below 2%.  With so few workers to hire, firms will be hard-pressed to increase their output much unless they can figure out how to get more efficient with their existing workforces, a challenge lately.  Look for the jobless rate to fall to a slender 3.4%.  We expect the Federal Reserve to raise rates twice over the course of 2019, taking the bank prime rate to 6% by December.  Long term rates are a different story, though.  They may rise in the middle of the year before pulling back by the end of 2019 to near 3%, not much higher than now.  Investors who are worried about an economic slowdown or recession in 2020 or 2021 will buy up Treasuries as a safe haven, which will keep yields fairly low.  Rate hikes and slowing growth will keep inflation muted at 2.3% in 2019.

In an increasing interest rate environment with flat cap rates multifamily investors are looking more at secondary and tertiary markets such as ours in order to achieve their desired returns.  We are also seeing many real estate investors from other asset classes looking to purchase multifamily assets because of its recession resistant nature.  Many investors look at multifamily investing as similar to purchasing long term bonds.  Their belief is that as long as you have professional management and competent maintenance your investment is very safe.  The lack of easily available construction capital, or at least tighter standards for new construction is likely to be a self-correcting phenomenon for restricting new supply.  This coupled with the high increase in construction costs has caused many investors to switch from development mode to acquisition mode which bears well for existing multifamily assets.

There has been an increased demand for class B and C apartments by investors as the retention rates for the new shiny apartment communities tends to be low.  With less than half of the residents opting to stay when their leases expire.  Such turnover results in high expenditures for marketing and unit make-ready in order to attract new residents.  In short, net operating income is low if vacancies are high.