Insights for the Savvy Investor on California’s Multifamily Outlook

By Greg Newman

With so many factors affecting multifamily businesses in California today, it’s more important than ever for investors to stay informed. I recently met with Victor Calanog, Chief Economist at Reis, to discuss California’s multifamily market—and what key factors investors here should be aware of to drive lasting success in today’s constantly changing marketplace.

Here are some of the key highlights from our conversation:

Q: How High Might Interest Rates Get in the Coming Years?

A: One factor that is on the mind of multifamily investors across the country is interest rates. If investors want to know what spreads will look like in the next two to three years, it’s important to know what is driving interest rates up. First, it’s essential to have a solid understanding of the Fed’s policies; second, without getting too granular, it’s important to understand that at the end of the day, the price of money is contingent on how quickly the economy can grow.

“If we are looking at an era of 2 percent growth, then you should expect interest rates to also remain relatively low. If you don’t believe that the US economy will hit a 4 percent growth rate in the coming years—our highest GDP growth rate this millennium was back in 2003 at 3.7 percent—then you should expect a period of relatively low interest rates,” Calanog said.

Q: Vacancies Are on the Rise—Should You Be Concerned?

A: Overall, supply growth in the multifamily asset class across most major markets in the US is at levels last seen in the late 1990s. But, it’s important to note that the influx of new units is being driven by robust rent growth, low vacancies and strong demand. However, with that said, vacancies have begun rising in some of the more expensive markets across the broader US and California.

Consider San Francisco, which in 2012, had vacancy levels at 3.1 percent—but by 2015 vacancies had jumped to 4.5 percent. While vacancies continue to rise, the speed at which they are increasing has tapered: In the first quarter of 2017, vacancies in San Francisco were at 5 percent.

Q: Do Demographics Support Your Strategy?

A: One key topic many investors are looking at is millennials and whether they’re simply postponing the home-buying decision, or foregoing it altogether. The fact that millennials, who make up the largest generation, aren’t buying homes like previous generations has been a definite positive for multifamily investors, but it’s unlikely to last forever.

However, even if the older millennials—who are 30 to 37 years old today—stop renting, you still have significant drivers of demand from 17-year-olds who haven’t started forming households yet and likely won’t do so for years to come.

Greg Newman is Managing Director and California Area Manager, Multifamily Lending for Chase

For comments, questions or concerns, please contact Dennis Kaiser