Ten-X Commercial, the nation's leading dynamic and data-powered online commercial real estate transaction platform, released its latest U.S. Apartment Market Outlook, including the top five 'Buy' and 'Sell' markets for multifamily real estate assets. The long-term forecast shows that after years of booming growth, the multifamily sector is beginning to hit its inflection point with national rent growth decelerating and vacancies creeping upward.

The Ten-X Research report identifies Sacramento, Raleigh, Riverside-San Bernardino, Jacksonville and Fort Worth as top markets where investors should consider buying multifamily assets. In these regions, demand for apartment rentals continues to be driven by household formation coupled with a dearth of single-family starter homes for purchase.

San Francisco, San Jose, Oakland, New York City and Miami are the top markets where market conditions might cause multifamily investors to consider selling their properties. These cities face rising vacancies and flattening rents, as a flood of new supply is hitting the market following years of development.

Ten-X Commercial's research team notes that nationally, multifamily completions look to exceed 260,000 units for the second straight year, while absorption will be approximately 200,000 units for the fourth straight year. As a result, vacancies are forecasted to rise in 2018 and beyond. In a modelled cyclical downturn from 2019-2020, vacancies would approach 6.0 percent in 2020 before an economic recovery in 2021 brings renewed demand.

Rent growth will remain at three percent in 2018 before slowing, yet remain positive during the modelled recessionary years. Ten-X sees this down cycle as more benign for the apartment sector than previous downturns when rents actually declined.

"All good things come to an end, and this truism is now to become manifest in the multifamily sector where the long-anticipated turning of the cycle is underway," said Ten-X Chief Economist Peter Muoio. "Developers have spent years betting on the shift in preferences towards renting and living in walkable urban downtowns. Now the critical mass of supply deliveries is weighing on the sector. While the downturn's effects should not be cataclysmic for multifamily owners in most markets, there's no denying that the sector's outlook is distinctly grayer than a year or two ago."

U.S. apartment rents rose 3.3 percent over the past year — a fairly healthy pace, but a clear deceleration from the nearly 6-percent growth rate enjoyed in late 2015 and early 2016. The sector's overall deal volume totaled $41 billion during the third quarter, an 11-percent increase from the same period in 2016.

3Q 2017 - 2021 U.S. MULTIFAMILY PROJECTIONS 

The Apartment Sector's Top Five 'Buy' Markets:

Sacramento

California's capital city is enjoying vigorous multifamily rent gains, with rent growth forecasted at 4.6 percent in 2018 and expected to remain at a healthy pace through 2021. Apartment vacancies will achieve a new cyclical low in the low 2.0 percent range by 2018. They will edge up only 40 bps during the modeled downturn before settling back into the low two percent range by 2021. Even though the city's dominant sector, government, is creating jobs at a fairly modest rate, ancillary sectors including leisure and hospitality are picking up the slack.

Raleigh-Durham

Job growth has fizzled in the education, healthcare, and leisure/hospitality sectors, but the overall market continues to enjoy rapid expansion. With annual job growth in the three percent range, payrolls at an all-time high and unemployment below the national average, the region's major driver is the professional and business services sector. Effective apartment rents are at an all-time peak and are expected to maintain robust growth even throughout the forecasted downturn while vacancies are expected to hold steady.

Riverside-San Bernardino

Because of its restrained supply pipeline, Riverside-San Bernardino is comparatively resilient to the cyclical downturn expected by Ten-X Commercial Research. Per Reis, rents rose 2.7 percent in the past year to reach an all-time peak and rents are expected to continue seeing gains throughout the forecast period. Lack of development in prior years is off-setting a number of factors that would otherwise have weighed on the market's apartment outlook. These include elevated unemployment, tepid population growth, and a slowdown and contraction in the region's government and retail trade sectors, respectively. The local economy is also getting a boost from its construction sector, which boasts annual job growth of more than 15 percent.

Jacksonville

The destructive effects of Hurricane Irma have given Jacksonville's existing apartment market a boost, even as the city's economy has softened. This weather event delayed completions in the market while healthy demand pulled vacancies down to a cyclical low of 4.7 percent. Vacancies should move up to the low five percent range with the onset of cyclicality, but the market should recover quickly. As a result, rent growth will remain steady in the three percent range through 2021.

Fort Worth

Manufacturing job growth, combined with gains in leisure and hospitality employment, are underpinning the expansion of the Fort Worth economy and Ten-X sees resiliency in the market's apartment sector. Vacancies and rent growth data shows this local market will recover swiftly from a minor forecasted downturn. In fact, Fort Worth is projected to see NOI gains in the mid four percent range — some of the strongest growth in the country. Demand will keep vacancies near 3.5 percent through 2018, and rents will grow vigorously even as completions ramp up.

The Apartment Sector's Top Five 'Sell' Markets:

San Francisco

San Francisco is one of the most cyclically vulnerable large markets, due to a heavy construction pipeline that is already having an effect on the market. At 4.5 percent, apartment vacancies are up 140 bps from their cyclical low, and that mark is expected to continue climbing through 2020. With rents contracting 7.5 percent over the forecast's recessionary period, San Francisco will face severe NOI declines. San Francisco will likely continue to weaken, as key sectors feel the brunt of the tech slowdown.

San Jose

San Jose's unemployment rate remains about 100 bps below the national average, but the city's job creators – professional/business services and the information sector – are not generating jobs at the pace of previous years. With the tech slowdown and a heavy supply pipeline, San Jose is expected to see rising vacancies and falling rents drive overall NOI declines through 2021. Vacancies are already approaching their recessionary peak, while rent growth is decelerating and the supply issue will only be exacerbated, as more than 7,000 new market-rate units are expected to hit the market this year. In fact, by 2021 availability will stand nearly 200 bps above its prior peak, while rents will contract seven percent during the cyclical downturn.

New York City

An unrelenting supply pipeline continues to plague New York City where the local economy has slowed across a variety of business sectors. New York City's unemployment rate is above the national average, the city's population growth has slowed for the fourth consecutive year, and key sectors like education/healthcare, professional/business services and information technology are experiencing either tepid job growth or none at all. In the past year, heavy multifamily completions pushed vacancies up 160 bps to 4.8 percent, while rents grew by less than one percent. Vacancies are projected to rise to a record 7.8 percent before the onset of cyclicality, while rents start to contract. Amid the downturn, rents will fall an additional 2.4 percent, and NOIs are projected to decline in the coming four years.

Note: Our analysis of the New York City market explicitly focuses on market-rate rental complexes consisting of 40+ units in Manhattan, Brooklyn, Queens and the Bronx. It excludes affordable housing, condos and co-ops.

Oakland

Oakland's economic growth is decelerating and the metro faces considerable tech-related downside risk. Employment growth has already dropped to the mid-one percent range in recent months and the crucial professional/business services sector has been essentially flat this year. A heavy construction pipeline has not helped the multifamily sector and rent growth slowed to just 1.6 percent in the third quarter, per Reis. As demand falls and supply continues to deliver unabated, Ten-X Commercial Research forecasts a spike in vacancies of nearly 200 bps. As a result, rents will see a cumulative drop of four percent during the cyclical downturn, far outpacing the national average.

Miami

Miami's economy is losing steam and a heavy construction pipeline will exacerbate the effects of the cyclical downturn. A steady stream of completions through 2018 will push vacancies beyond their 2009 peak to an unprecedented 10.1 percent, which will extinguish rent growth. Demand will improve in 2021, but not enough to revitalize fundamentals, and NOI growth will hold flat on average over the next four years due to the cyclical decay.