The Top 5 Reasons Apartment Demand is Strong

Property investors are increasingly looking towards multifamily apartments as an investment vehicle - and for good reason - the sector is experiencing significant tailwinds not seen in the last 10 years.  Data from the latest Marcus & Millichap Apartment Outlook Research Report (Summer 2015) highlights the top 5 tailwinds:

1) Strong Employment

The single most important factor in apartment investing is a ensuring a strong employment base.  Nationwide, the strongest employment markets have experienced rising wages which have driven rent gains.  Tier II and Tier III markets are experiencing similar growth as workers opt to commute rather than pay the higher rents in Tier I locations.

2) Single Family Housing Market Accelerating (& Decelerating)

Unique to this cycle is the fact that single family housing prices have increased significantly over the past 3 years, rising 7% nationwide in the last year alone.  Certain Tier I and Tier II markets, particularly on the coasts, have seen gains in the double digits percentage-wise within the last 12 months.  Despite the price gains, home ownership rates continue to decline as millennials opt to live in urban centers and rent as they determine their career paths and boomers prefer to down-size and relieve themselves of the maintenance costs associated with home ownership.

3) Demographic Trends

The millennial generation is 80 million, making it larger than the boomer generation - and 68% of millennials rent.  Home ownership rates may improve slightly as some millennials eventually begin to move into the SFH market (albeit later in life than previous generations).

4) Construction Picks Up - But Not Where It Is Needed Most

In 2014, over 230,000 apartments were completed, surpassing the previous peak in 2000.  In 2015 that number is expected to be exceeded with 250,000 apartments coming to the market.  Despite the all-time construction completions, many will take place within Tier I markets, and as a result, vacancy rates for Class A buildings will increase slightly, towards 6%, while vacancy rates for Class B/C buildings will continue to decline towards 3%.

5) Investors Focus on Yield

During the recession, investors focused on safer assets in Tier I markets.  Today, investors are picking up properties in Tier II and Tier III markets as they take on riskier assets in order to generate above-average returns.  This is necessary as cap rates have compressed over the last 5-year period, mainly due to the Federal Reserve's low interest rate policies.  Cap Rates in Tier I markets have returned to their pre-recession peak levels of 4-5% while those in Tier II and Tier III markets continue to decline as asset prices rise.