Multifamily was the most actively traded U.S. real estate asset class for the third consecutive year, as investors continue to be wooed by multifamily's strong performance in occupancy and rent growth.

Investors continue to have a healthy appetite for U.S. apartment properties, with investment sales up 15.1% to $167.5B in 2018 compared with the year before, according to a new report by JLL. Stribling, Dees (March 10, 2019) Multifamily Still The King Of Investment Volume, But This Year Could Be Different. Retrieved from https://www.bisnow.com.

Multifamily is one of the few classes where voracious investor appetite is matched by voracious consumer appetite for apartments where demand consistently swallows up supply as it becomes available. In commercial real estate, a popular measure of supply and demand is Net Absorption, which in the simplest terms is the difference between the spaces vacated in a specific period vs. the spaces newly taken up by tenants. Positive Net Absorption means more space was leased than what was vacated/supplied in the market, leading to a reduction in supply. Rents typically rise in this scenario. Negative Net Absorption means that more commercial space was vacated/supplied in a particular market than what was leased or absorbed by commercial tenants. Under a negative Net Absorption scenario, rents tend to fall or cool down.

Positive Net Absorption in the multifamily class is the reason why so many investors are attracted to it. In 2018, multifamily Net Absorption totaled a positive net of over 323,000 units even as development continued at a feverish pace. The data shows that new construction and newly vacated units are almost immediately snapped up, as evidenced by the low national vacancy rate, which continued down to a cyclical low of 4.6% last year. This demonstrates the strength of demand even as new development is added to the market.

So why the strong demand and strong positive Net Absorption of multifamily? Simply put, we are becoming a renter nation.

• According to recent U.S. census data, the following are three eye-opening facts about the renter market:
  
  The population of almost a quarter of the 100 largest U.S. cities has changed from homeowner to renter-majority between 2006 and 2016.
• The increase in the number of renters at the national level in a decade almost equaled the total population growth over the same period, demonstrating a BIG swing toward renting.
• The growth of the renter population is now outpacing the owner population, with owner population growth in negative territory.

What groups are the main drivers behind this renter trend?

Baby Boomers, Echo Boomers (children of Baby Boomers or Gen-Xers) and Millenials who are all choosing to downsize and live more simply are all driving demand.

Now, it's not all sunshine and lollipops in the multifamily sector. There's talk of a slowdown with some experts pointing to signs of a slowdown in major gateway (i.e., primary) markets with a lack of value-add opportunities available in these markets due to the influx of foreign investment. These same experts point to the slowdown in the residential class in some of these primary markets as evidence of an inevitable slowdown.

Take, for example, a May 2019 report by real estate website Redfin.com, which identified Seattle and five other major cities in the nation that experienced lower home prices than they were at the same time last year. The study found that median Seattle home prices dropped by 1.3 percent between April 2018 and April 2019. The report also found that the number of homes on the market in Seattle rose by 57 percent over the same time last year - the second-highest rate in the nation. This glut of homes, along with a dip in demand explains the price drop.

Experts have also pointed to potential dips in the economy that could lead to a slowdown in the multifamily class. Some believe economic growth is expected to slow in 2019, if not fall into an outright recession. February's employment report, which the Bureau of Labor Statistics said reflected the creation of only 20,000 net new jobs nationwide, might be a hint of trouble to come.

However, what happens in the big primary markets like Seattle, Miami, and San Francisco doesn't necessarily reflect what's happening in the rest of the country. Also, the lack of value-add opportunities in these markets exists at the high end of the spectrum with Class A properties, which only accounts for a fraction of the entire investable multifamily pool.

We recently spoke with Kent Leach, managing partner of Hickory Creek Capital Partners about the state of the market and what he thought of the warning signs given off in the big markets. "Because we concentrate on secondary markets for our investments where the market isn't saturated with investors like in the gateway markets and where strong value-add opportunities still exist, especially in the Class B and C sectors, we feel prepared for an economic downturn. Why do we like Class B and C properties? Because our experience has taught us that in a downturn, there is actually increased demand in the mid to lower levels."

Kent's experience is borne out by nationwide data that shows affordable housing is consistently undersupplied and is not only recession resistant but thrives in a downturn. Since the Financial Crisis, the gap has continuously widened between demand and supply leading to a shortage in the affordable housing sector making Class B and C properties ideal for steady income, rent growth, and appreciation.

With no slowdown in sight, we don't see multifamily losing its top spot as the most actively traded class of real estate anytime soon.