According to a forecast by Marcus & Millichap, Minneapolis/St. Paul climbed two spots to head this year’s National Multifamily Index, as sustained apartment demand kept vacancy persistently tight, allowing for steady rent growth. San Diego also inched up two notches on solid rent growth to claim second place.
Los Angeles and Seattle were two of the markets that remain in the top five but are less attractive than in previous years.
Other highlights from the forecast:
- Accelerated job creation in 2018 drove the unemployment rate of young adults between 20 and 34 years old to a 48-year low of 4.5 percent. With two-thirds of this age group living in rentals, they are a dominant force supporting apartment demand, and the strong job market has empowered more of them to move out on their own.
- The monthly payment on a median-priced home increased by $175 last year to nearly $1,700 per month, dramatically widening the disparity between a mortgage payment and the average monthly rent. This widening payment gap, together with tighter underwriting, has restrained young adults’ migration into homeownership, reducing the under-age-35 homeownership rate to 37 percent, down from the peak of 43 percent in 2007. This confluence of factors will likely carry into 2019, sustaining young adults’ preference for rental housing.
- Though consumption and corporate investment will support economic growth in 2019, trade imbalances and a likely weaker housing market will weigh on momentum. Job creation, facing an ultra-tight labor market, will dip to the 2 million range, but wage growth should push above 3 percent.
- As new households are formed next year, much of the rental demand will center on apartments that serve the traditional workforce: class B and C properties.
- New inventory largely caters to more affluent renters. As a result, class A vacancy is expected to rise to 5.8 percent while class B apartment vacancy remains relatively stable at 4.7 percent. The most affordable segment of the market, class C apartments, faces strong demand, and vacancy for these rentals is expected to tighten to 3.9 percent, its lowest year-end level in 19 years.
- While primary markets such as Boston, Los Angeles, the Bay Area, and New York City are expected to see the largest dollar rent increases, smaller U.S. metro areas are generating faster increases on a percentage basis. Metro areas across the Southeast and Midwest in particular are generating outsized employment growth and housing demand.