There is a wide variety of opinions about the multifamily market and pricing—and a cornucopia of answers for every question. Are developers, enticed by the seemingly never-ending product demand, overbuilding? Is pricing for class A assets creating a brutal, more competitive class B sector? Will the demand for product hold as the economy seems to continue its recovery? The drivers, population and job growth, are undeniable in some cities. In other markets, big questions loom about the sustainability of a booming multifamily sector. The many schools of thought have brought to light some strong opinions on the matter. In short, the real question: Is the market pricing itself out?

According to Real Capital Analytics data, sales of significant apartment properties topped $26 billion in the second quarter, representing a 39% year-over-year increase, the highest among property types. For the first half of the year, volume totaled $45.6 billion, 9% lower than a year ago—not bad considering the huge Archstone portfolios included in last year's totals.

Volume gains are still strong, up 25% year-over-year even though the second quarter increase was below that registered in first quarter. While volume trends in both quarters this year show that secondary and tertiary markets are experiencing the greatest growth, cap rate compression has been most evident in the six major metros, particularly over the most recent quarter. In fact, average and top quartile yields for garden properties in non-major metros are up marginally this year, perhaps reflective of the increased trading in tertiary locations.

Dan Fasulo, formerly managing director with RCA, says some would say the market has plateaued. But he doesn't necessarily agree. “We've seen just under $50 billion in multifamily sales in the first half of the year and that's just down slightly from last year,” says Fasulo. “There is so much capital flowing in. The gateway markets have surpassed all-time highs and we're seeing ultra-low cap rates.”

Fasulo says a wave of capital hitting the sector is causing prices to go up, but low interest rates and banks becoming aggressive with fixed-rate financing are keeping the market competitive, if nothing else.

As far as outpricing is concerned, the matter boils down to individual markets and, in some cases, submarkets. “There is a lot of strength in many localized markets where values have exploded, where there's been an inflow of capital in secondary markets like Dallas/Fort Worth, Houston and Atlanta. On the one hand, values and rents are at an all-time high; mortgage rates are at an all-time low. We've come this far and still haven't seen a full economic recovery. It's a unique moment in the cycle and there are 50/50 views. We have this explosion of transaction activity and so I think people can see both sides of the bet.”

Fasulo says he is seeing some unrealistic pricing in the gateway markets, although the for-sale market is strong. Condo conversions are a reasonable alternative as an exit strategy for getting into properties at low yields. And, as usual, opportunistic investors are seeking out value-add strategy as lenders are increasingly willing to make loans for transitional assets.

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Shimon Shkury, president of Ariel Property Advisors, specializing in the New York multifamily market, says though prices have gone up considerably the past year, there is still a tremendous amount of volume and value in the market. Prices in Manhattan per square foot between January and June 2013 averaged $597. He says this year, in the same time frame, prices are hovering around $760 per square foot.

Shkury attributes the strength of the New York market to strong fundamentals and a healthy rental market, which, he says, allows investors to project rent growth. “Investors are willing to take the risk on turnover assumptions,” he says. “That's a lot of what is driving this market. Some people are priced out, yes. But overall the market is healthy.”

“In the value-add sector, there is a lot of opportunity,” continues Shkury. “We're seeing a lot of buildings converted to luxury condos, a lot of knock-downs and a lot of repositioning of retail where it's undervalued and then converted to multifamily. In general I would say there is huge, aggressive competition for every piece of land. There is a scarcity, but the assets are considered safe. There is a lot of money chasing very few deals.”

“The party is not over.” So says Peter Muoio, senior principal and economist for Auction.com Research. “The apartment sector went from being a shotgun approach to being a rifle shot approach—it's coming down to a market-by-market distinction, not the market as a whole.”
New York City based-Muoio explains that expansion and supply side are further along and that vacancy is dropping lower faster than in the past. “Occupancy is as high as it can go,” he says.

On the investment side, Muoio says the market boasts healthy levels—back to peak—and he's not seeing investors pulling out of the market. But the point he stresses is that investing in multifamily is more difficult than in the past. Investors can no longer throw in a wide net and come up with a number of great offerings.

“You have to know your specifics; you have to have a more nuanced view of the industry,” Muoio says.

Mark Lippman of the New York City-based Praedium Group says the question of whether the market is pricing itself out is on people's minds. “Multifamily is a favored asset class,” he says. “Construction has started making up for lost time—making up for units not delivered in some areas. We're seeing some bigger portfolios come into the market this year, different pools of capital—it's a fairly wide and robust market.”

Lippman explains that the continued—and future—demand for multifamily rests with the echo boom generation. “This generation is coming into its prime renting years. People are getting married later, mortgages are still not easy to get, and the echo boomers want that mobility. They are also getting those class A amenities—those granite countertops, resort-style pools, fitness centers—everything you could get from homeownership. All of this drives demand and there is a better demographic of renter, renting longer,” says Lippman.

The Texas market, Lippman explains, is a prime example of the echo boom generation at work. “Texas is so business friendly, it's got cheap labor, the most jobs in the country—in energy, trade, the space industry, technology, engineering. Young people want to be there. And they're not interested in homeownership right now.”

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Bard Hoover, a broker with Marcus & Millichap's Dallas office, says the local market has become very aggressive. “Pricing has gotten extremely aggressive for class A assets, resulting in a compression of yields that is tighter than I can remember, pricing out many buyers. These buyers have therefore begun pursuing class B,” says Hoover. “The market is crazy competitive.”

Hoover says the competition for multifamily in Texas has created a feeding frenzy resulting in an average of 20 to 30 tours per property and 10 to 12 very competitive buyers pursuing each deal.

In Texas, replacement costs have skyrocketed as labor, materials and land prices have risen, though land in certain locales is still quite affordable.

The success of the Dallas/Fort Worth, Houston and even Austin markets is attributed to strong fundamentals. “I think it is safe to say that the fundamentals in Texas are equal to or better than any state in the country primarily because of strong employment and population growth,” says Hoover. “Rents are going up and pricing is high, but what is the ceiling? What is someone willing to pay based on where pricing is in other states? Yields are not as strong as three to four years ago. There's a lot of equity on the sidelines that needs to be placed and that is the catalyst in continuing to drive prices up.

“I've had clients who wouldn't pay $40,000 a door four years ago, but are now willing to pay $60,000 for comparable properties in the same submarkets,” adds Hoover.

There are approximately 27,000 new units under construction in Dallas/FW. Research shows there is enough job and population growth to support that. And while land values have increased, it is still affordable compared to other parts of the country.

Miami-based Jubeen Vaghefi, head of multifamily investment sales for JLL, says emphatically: no, the market is not pricing itself out. “The pricing is healthy and there's plenty of demand. There has been great performance, which is no surprise given job growth, population growth—there's no shortage of interest,” says Vaghefi.

He explains there is no oversupply of debt and that in some markets, absorption is outpacing delivery of supply. In Texas, for example, jobs are outpacing supply. He says returns are stellar and interest in value-add is stronger than ever. “Creating value in older properties, there's a lot of interest there in the market. Right now there are more capital opportunities than there are value-add assets available. It's performed well through the recovery.”

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David Kessler serves as the national director of CohnReznick's commercial real estate industry practice. He says the answer varies depending upon submarkets, with gateway markets reaching peak pricing. He adds that B markets provide tremendous opportunity at reasonable pricing for repositioning.

“Construction starts are so high,” says Kessler. “There is a lot of product coming on the market, though vacancy is declining and we are seeing rent growth. Texas, for example, is going gangbusters with new construction, though I do believe that overall we will begin to see construction activity begin to moderate. Right now there is still a lot of demand as evidenced by huge absorption. The issue is, will the absorption hold with all the new product coming on line?”

Like many of his colleagues, Bethesda, MD-based Kessler explains that a heavy amount of multifamily success lies with the younger generation, those who are seeking easy mobility and a certain lifestyle free from homeownership. The quality of class A assets on the market is seductive: from the kitchen and bathroom finishes, to the asset's amenities like lap pools, dog walk parks and gyms—condo style amenities. The echo boom generation can have a resort-style quality of life without the burdens of home ownership. This is occurring in both urban and suburban settings.

“We also have a lack of a robust housing market right now,” adds Kessler. “There are families who would like to get back into home ownership, but for one reason or another, are simply unable to at this point.”

Kessler admits, though, that many institutional investors do feel there is a bubble in multifamily and it's taking a toll in gateway cities with a slight shift away from multifamily and more money being allocated toward office, retail and hotel.

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“But there is still demand,” he says. “There is still opportunity in market-specific areas like Texas where there is an appetite for job growth. So is the market pricing itself out? Yes, or no—based on job growth. I think we will continue to see robust development, steady market dynamics, especially with the housing sector not showing tremendous growth. Multifamily will continue to be vibrant, but deliberate and market specific.”

“The market is definitely not priced out,” says Tyler Anderson, vice chairman, institutional properties, multifamily for CBRE's Phoenix office. “Our price recovery is just now approaching correction. Most markets are beyond increase.”

There are 4,600 new units coming on line this year and 6,400 slated for next year. “We haven't overbuilt yet,” adds Anderson. “We've got strong absorption and the best product that's ever been offered. Phoenix is forecast to be a leader in job and population growth, and along with that comes rent growth.”

Anderson says developers are finding opportunities for infill projects within a downtown area that doesn't have much land to offer. “Developers are getting creative with obsolete properties and turning them into multifamily assets where the demand is. There is a healthy abundance of capital for investment and development, and interest rates are as attractive as they could possibly be.”

He is also a believer in the attractive, amenity-rich asset class, which draws long-term tenants. “Investors have an expectation now to see a certain level of build here in Phoenix. They are seeing what's available in other larger markets and expecting the same for the Valley, and the amazing part of the cycle is the level of product that's being delivered.”

In a city beleaguered with financial woes, unemployment and crime, Chicago still finds itself amid a booming multifamily market. Doug Fisher, a broker with Essex Realty Group, says class A assets in the city really are in a class of their own. “This is where we have that stable cash flow, the institutional players representative of revenue drivers. There are a lot more investors snapping up those class A assets. Pricing is very aggressive, but I wouldn't say we're priced out.”

Fisher says that as new supply occurs, rents are increasing. One concern is the 8,000 new units coming on the market by 2016, possibly creating some downward pressure. Absorption has been about a quarter of that, leaving the possibility that revenues may go down.

“There is a ton of demand and capital for value-add,” says Fisher. “In fact, Chicago Public Schools is selling a portfolio of schools, which will be used for multifamily. We're also seeing a lot of warehouse properties come into use for multifamily. For a while, new construction was dead, but that's coming back strong.”

The rental market in Chicago is most definitely benefiting from what is negatively affecting the housing market. Like in cities across the country, many former homeowners are still unable to re-enter the housing market. And the younger generations are putting off home ownership in favor of ease of mobility—a key factor in the strength of the rental market.
Though multifamily experts' general consensus is that the market is not outpricing itself, there is caution fueled by rising prices and uncertainty about the future of interest rates. While it mainly boils down to fundamentals in individual markets, experts rely heavily on the echo boom generation's resistance to home ownership and poor recovery in the housing market. For now, the outlook seems to be healthy. Time will tell.