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High Construction Volume Softens Multifamily Investor Sentiment

A majority of apartment owners would prefer to hold apartments rather than buy or sell, according to Marcus & Millichap.


Investors in the overall commercial real estate market are proceeding with more caution on new investments in the third quarter of 2017, according to real estate investment and advisory firm Marcus & Millichap. The third-quarter NREI/Marcus & Millichap Investor Sentiment Survey shows a gradual cooling trend in commercial investor sentiment. The investor sentiment index fell to 150 this quarter, down from 153 in the fourth quarter of 2016.

In the multifamily sector, sentiment about apartments has eased among investors in the past year, despite strong demand for multifamily units and strong fundamentals. A majority (46%) of apartment owners believe it’s better to hold apartments now, while 27% think it’s time to buy and 27% believe it’s time to sell. Marcus & Millichap attributes this softening to the high volume of new-apartment construction across the country, particularly in Class A properties.

“Competition for tenants in the Class A space is becoming more and more significant, particularly in the urban core,” says John S. Sebree, first vice president and national director of the National Multi Housing Group at Marcus & Millichap.

An estimated 371,000 units are expected to come on line this year. Value-add opportunities are also becoming popular, which has increased competition for Class B property purchases.

More than half of the survey respondents (58%) expect apartment values to rise in the coming year, with an average predicted increase of 3.8%. Marcus & Millichap estimates that apartment vacancies will rise by 40 basis points to reach 4.3% by the end of the year, with annual rent growth ahead of inflation, at 3.8%.

“Construction is still limited in many metros, but in markets with significant development there’s lots of competition at the upper echelon of the apartment market,” adds Sebree. “At the other end of the spectrum, Class C vacancies are still falling, and there’s a definite supply shortage for more-affordable workforce housing.”