Consistent Multifamily Growth

Multifamily is proving that it is not just the “flavor of the month” for investors. The sector has continued to see sustained investor demand and property values that continue to contribute to record sale prices and transaction volumes.

Key Takeaways:

Record Breaking Deal Volume

So far, 2019 has been a record-breaking year for deal volume and sales price appreciation in the multifamily sector. Nearly 411,800 multi-unit properties traded hands in the first half of the year — representing an 8.9% increase in national deal volume year-over-year.

Movement to Secondary and Tertiary Markets

Investor capital is increasingly moving into secondary and tertiary markets. Reonomy data shows an increasing proportion of sales during the past 4 years were within the top 20 MSAs identified as high growth areas.

Big Trends in Low Priced Assets

Investor appetite for smaller, vintage assets is also on the rise. Buyers are deploying capital at an increasing rate for multifamily properties valued at or below $500,000 to $1 million. Reonomy data shows in the first half of 2019, 74% of the multifamily assets that traded hands were valued below $500,000, while 86% of the properties acquired were valued under $1 million.

Demand Continues

Sector fundamentals point to sustained demand in the multifamily sector continuing through the end of the year and into 2020. Vacancy rates are hovering below 5%, and rental rate growth has declined to between 3.5% and 5%, coming off highs of 8-9% toward the peak of the cycle.


Reonomy’s national multifamily sales data shows a clear upward trajectory in deal volume by number of properties sold over the past five years. Last year, the number of properties to trade hands nationally jumped 15% YOY to 788,725. Despite a slow start to the year, 2019 appears to be back on pace for another record-breaker with 411,765 in recorded sales during the first half of the year – an 8.9% increase over the same period in 2018.


Properties Selling, Vacancy Rates Stable

From a macro perspective, the story in multifamily is a fairly simple one that boils down to strong performance fueled by good supply and demand metrics. The steady flow of new units coming out of the robust development pipeline has barely moved the needle on vacancy rates.

Market research from a myriad of sources consistently places national vacancies at or below 5%. For example, Freddie Mac’s Mid-Year Multifamily Outlook reported vacancies hovering at 4.8% with an expectation of them holding steady in the second half. Reis is reporting similar stable vacancies at 4.7%.

The steady demand for multi-unit housing is coming from a combination of factors that include a diverse renter pool of people who are renting by choice or by necessity, strong growth in both jobs and new household formations and lower levels of homeownership.

Rent growth has been slowing, coming off highs of 8% to 9% earlier in the cycle to more modest levels of 3.5% to 5%. However, that rent growth still stacks up favorably compared to other commercial real estate sectors, such as office and retail.

Is Demand Affecting Price?

Demand for multifamily assets is continuing to drive price appreciation. According to Reonomy data, the average sale price based on Q2 transactions in 2019 was $585,679 compared to $546,935 in Q2 2018. However, there are signs that slowing rent growth along with the run-up in values that have already occurred could take some of the edge off of rapid price appreciation.


According to the most recent CPPI from August published by Green Street Advisors, multifamily assets reported a modest 3% rise in sale prices YOY. It remains to be seen how the drop in interest rates could impact cap rates and sale prices in the second half of the year.

Investors Looking to Secondary Markets

Investors remain active at all price points. In fact, Reonomy data also shows an increasing proportion of sales over the past 4 years within the top 20 MSAs identified as high growth areas. These sales are occurring among properties that are valued at less than $1 million.

Top 20 Markets with Growth in Transaction Volume:



During the first half of 2019, 74% of the properties that traded were valued below $500,000 and that number was even higher – 86% – for properties valued under $1 million. A recent CBRE report also showed strong investor appetite for small asset sales. CBRE classifies these “small assets” as properties priced between $2.5 million and $10 million. The 1,531 in small asset sales that occurred in first half 2019 accounted for 37% of all multifamily sales, according to CBRE

Capital Targets Secondary & Tertiary Markets

The prolonged bull run in the multifamily investment market has pushed investors to expand strategies further out into secondary and tertiary markets in search of buying opportunities where there is less competition and more favorable yields.

Cap rates are compressing even in secondary and tertiary markets, but in many cases, investors are still finding yields that are 150 to 300 basis points higher than what they can find in gateway markets.

Likewise, investors who are looking for good growth stories today are finding them in smaller metros. The economic recovery that started in major gateway markets is now trickling down to create accelerated job and population growth in smaller metros around the country.

Transactions occurring in Reonomy’s identified Top 20 MSAs are accounting for a bigger slice of the pie when it comes to sales percentages. In 2018, these Top 20 MSAs represented more than 19% of transactions with data also showing more secondary and tertiary markets falling into that Top 20 list.

Vacant land sales also have experienced some of the biggest increases in those Top 20 MSAs, which suggests more avid developer interest and activity.

In comparison, Reonomy data also indicates that sales in the Top 5 primary markets, specifically New York City, Los Angeles, Boston, San Francisco, and Chicago, have been relatively stable during the past 10 years, mostly hovering between 0% to 20% for YoY growth.

Investors searching for better yields are hoping to find them in the Midwest. Although the Midwest tends to have a reputation for slower growth metrics as compared to other regions of the country, there are some positive growth stories.

Indianapolis, for example, shows some strong momentum. Indianapolis was the lead Top MSA in the first half of the year in terms of the number of properties sold with a 40% jump in sales year-over-year. Indianapolis is trying to position itself as more of an 18-hour city with a resurgence in downtown living that has fueled development in both the apartment and condo markets.

Multifamily Sales In Indianapolis


The Outlook

Generally, most agree that the near-term outlook for multifamily remains stable. Absorption continues to outpace new supply being delivered. Capital remains firmly targeted on the sector with considerable liquidity for multifamily from both equity and debt markets. Fannie Mae and Freddie Mac have been active lenders in 2019 and it appears that caps for 2020 will be set at comparable levels.

It remains to be seen how the decline in interest rates this year will filter down to impact cap rates and pricing. As of the end of September, the 10-year Treasury had dropped nearly 100 basis points from the start of the year. Although cap rates have been firmly settled on a plateau in many metros in recent years, cheaper capital could result in more cap rate compression – even with slower rent growth ahead.

Yet investors also are price-sensitive, and they are weighing acquisitions carefully in the context of the late stage of the cycle, high valuations that exist and the potential slowing of economic growth ahead.

Investors also are mindful of potential headwinds. Homeownership that hit a high of 69% has dropped back to hover around 64%. However, falling interest rates could make homeownership more affordable and more attractive to some renters.

Additionally, investors are keeping a close eye on aging millennials (now 23 to 38 years old) as their preferences do carry significant influence on demand. Will they continue to choose to rent versus own? Will they begin to migrate more to suburban locations? What types of amenities will drive renting decisions? Transaction momentum is likely to continue at or near the same levels in 2020, but there could be some shifts in strategy in terms of where investors choose to place capital.


Unlock commercial real estate insights and opportunities with ease Start Searching

Related Posts