A Look at the Top Buy Markets for Multifamily

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In its latest multifamily report, Ten-X ranked the top five buy and sell markets for multifamily investment through 2022, even factoring in a potential recession in the next two years. The buy markets have strong fundamentals with economic and population growth, while the sell markets have matured already for this cycle with ultra low vacancy rates and high cost of rents.

“The buy markets are places where we have the strongest outlook for multifamily fundamentals and valuation prospects. The sell markets are really the inverse of that,” Matthew Schreck, senior quantitative strategist at Ten-X, tells GlobeSt.com.

Houston, Las Vegas, Raleigh, Atlanta and Salt Lake City made the top five list, while San Jose, Oakland, Miami, San Francisco and Milwaukee topped the sell list. “The top markets tend to be markets that are strong and have been strong economically and demographically with an undercurrent of relative affordability,” says Schreck. “There is still demand in the sell markets, but they are facing a stiffer supply pipeline, and they are already really expensive with already really low vacancy, so there is upward pressure.”

Notably, this ranking factors in a potential light recession in the next two years, giving investors a more secure tool to make investment decisions in these markets. “For the past two-to-three years, we have been modeling in a stress test downturn scenario. It was originally built in for 2019 and 2020 years, but we have since pushed it back to be late 2019 through 2020,” says Schreck. “We are modeling in the effect of a potential light downturn because we think that it is useful tool for investors to be able to factor that in when considering the outlook for these markets. That is especially true when you think about the fact that this is the longest recovery in history, so, when you look at the top and bottom of the list, those factor in a light downturn scenario and which of these markets are defensive and well-positioned to thrive and which would be facing the biggest potential for downturn.”

Even outside of the top-buy list, Ten-X has a healthy outlook for multifamily investment. According to the same report, multifamily investment outpaced all other commercial asset classes in the first quarter, and construction pipelines are starting to shrink in response to a slew of new deliveries over the last few years. “Demand has been strong for multifamily, and the story has really been more about the lack of supply,” adds Schreck. “In the last few years, new completions and construction really ramped up and a lot of new units have hit the market. That supply has pushed vacancy rates up higher and crimping rent growth a little. Now, we are starting to see that supply pipeline taper off in the multifamily space. That is in pretty sharp contrast to other sectors where new supply is still in the process of ramping up, like in office and industrial.”

Compared to office and industrial, multifamily is ahead of the cycle. “In office, there is a solid amount of supply but pretty weak demand prospects. In industrial, the demand has been really strong, but now we are seeing a big wave of supply that is hitting the market in the next couple of years and is dampening the outlook for that segment of the market,” says Schreck. “For multifamily, the market is cresting. We expect vacancy to remain tight and for rent growth to keep chugging along over the next three to four years. That is the biggest differentiator.”