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2016 was a very lucrative year for multifamily investors

In the past few years, multifamily properties have been the biggest success story in real estate. The figures for 2016 continue to bear this out.

Industry resources lists the following information for multifamily properties in the United States for 2016:

  • The total net operating income for 4,362 multifamily properties containing around 750,000 units was $5.2 billion.  This translates to an average NOI/per unit of $6,942, which is a 5.3% increase over the average in 2015 for the same properties.  The 2016 increase is higher than the 2015, 2014 and 2013 growth rates, which were 5.2%, 4.1% and 5% respectively
  • Top-tier multifamily properties (about 118,850 units) with an NOI/unit of $10,000 or more posted a growth of 6.15% over 2015.
  • For properties with NOI/unit between $5,000 and $10,000 (about 354,400 units), the growth rate over 2015 was 5.74%.
  • For properties with NOI/unit below $5,000 (about 276,200 units), the growth rate over 2015 was 2.83%, lower than the previous year’s growth rate of 4.4%.
  • In California alone, the average NOI/unit was $10,870, a growth of 7.9% from the previous year.
  • The average physical occupancy for the year was 94.53%, up slightly from 2015’s and 2014’s 94.3%

Forecasts for multifamily properties

Over the next two years, it is projected that an estimated 500,000 new units will be available on the market. Despite the surge in the number of properties, Fannie Mae expects the market to remain stable but with a slight rise in vacancy rates.

Industry resources forecasts a surge in Class B properties as renters look for cost saving options. This in turn, will cause a similar surge in Class C Properties, although not as strong as in Class B assets. Additionally, further growth is projected in more affordable markets because of the lack of new supply in this category.

Both Fannie Mae and industry resources forecast a slowdown of rent growth for 2017, as the market absorbs the new supply. Forecasts also suggest that steep rent increases in 2016 justified by property upgrades will prevent higher increases this year. Additionally, projected are more properties upgrading to catch up with competitors.

Multifamily properties investment outlook

Freddie Mac believes a moderate increase in interest rates will not significantly affect investments in multifamily properties. However, it also sees cap rates to range from 5.8% to 6%, which will help reduce the growth of property prices from 13% in 2016 to somewhere between 2.9% and 4.5% in 2017.

With rental growth expected to slow down, investors who have factored in repairs, improvements and upgrades in buying a property in 2016 have better profitability chances this year.  Property owners who have invested in such improvements also stand to make more profit this year. As rents flatten, investors who now need to address property improvement issues will find it more challenging to offset improvement costs.

Projections indicate that  modest physical improvements, rather than large-scale repositioning, will yield better profits in 2017. Additionally, more efficient operations through proactive management will play a large part in improving profitability this year.