Last week's Marcus Millichap Multifamily Forum provided a comprehensive look into the current state of the economy, shedding light on the challenges and opportunities shaping the future of multifamily real estate in Texas. Despite broader economic uncertainties, the Lone Star State's fundamentals remain robust, making it an attractive destination for real estate investment. Let's delve into key takeaways from the conference and explore the factors influencing the multifamily market in Texas.
Government Intervention and Economic Dynamics:
The impact of government intervention during crises was a focal point of discussion. Comparing the financial crisis to the recent pandemic, it's evident that the government played a significant role, contributing 26% of GDP during the pandemic. This influx of funds has had its toll on the economy, causing increased government borrowing and hence increased interest rates; at the same time devaluing the dollar and causing a spike in inflation. Even with this economic backdrop, Texas stands out with rock-solid fundamentals compared with most of the nation.
Federal Reserve Actions:
The Federal Reserve's response to economic shifts was highlighted, particularly the increase in the Fed Funds rate from 0.08% in July 2021 to the current 5.5%. While there's speculation about one more increase, experts believe we are closer to the top than the bottom.
Interest Rates and Treasury Yields:
The fluctuating interest rates and Treasury yields were discussed, focusing on the pressure created by the Federal Reserve selling treasuries. Despite the temporary nature of this pressure, the expectation is for yields to decrease slightly in the future. This dynamic, combined with the increase in CPI to 3.7%, influences the real estate market, particularly in terms of borrowing costs and inflation.
Texas Job Growth and Population Dynamics:
Texas emerged as a beacon of economic resilience, boasting significant year-over-year job growth in cities like DFW, Austin, and San Antonio, all ranking in the top 10 nationally. The influx of young adults to Texas from cities like Los Angeles and New York further emphasizes the state's economic vibrancy. As the young adult population continues to grow, so does the demand for housing, potentially driving rent growth over the next few years.
Future Outlook:
Looking ahead, the consensus is optimistic about the multifamily market in Texas. With ample supply currently available, concerns shift to navigating the next 24 months. While there's an increase in units projected for 2023 and 2024, this surge is expected to taper off in 2025 and 2026, driving demand. Despite varying vacancy rates, the highest migration of population in the nation to the Southeast and Texas assures a sustained demand for multifamily properties.
Investment Landscape:
Despite a national apartment yield (CAP) of 5.2%, institutional investors are sitting on the sidelines due to the relatively small delta compared to the riskless treasury at 4.6%. The historical delta between cap rates and 10-year treasuries has significantly decreased, currently standing at 40 to 60 basis points, while historically it ranged between 200 and 400 basis points. With pension funds and private capital waiting on the sidelines, the market anticipates a substantial influx of cash once there's increased confidence in market stability and a clearer picture of new construction and interest rate trajectories.
The Marcus Millichap Multifamily Forum shed light on the multifaceted dynamics shaping the Texas multifamily real estate market. As we navigate economic uncertainties, the rock-solid fundamentals of the state position Texas as a resilient and attractive destination for real estate investors. The next 24 months may pose challenges, but the long-term outlook remains positive, with the multifamily market poised for sustained growth in the years to come.