Apartment Market Yet to Hit Peak

2/12/2016 | By Allen Kenney

David Kessler

In the latest episode of the NAREIT Podcast, David Kessler, partner with CohnReznick, discussed major themes in the apartment and office markets.

Regarding the multifamily sector, Kessler noted that speculation is growing that the sector is approaching its peak. He rebutted that suggestion, however.

"I think [the multifamily sector] has a long way to go still because we're so far away from the norms as far as supply and demand," Kessler said.

The millennial generation is having a "huge impact" on the apartment market, according to Kessler, with concentrations in urban areas and central business districts. That has helped prop up rent growth in secondary markets such as Minneapolis and Pittsburgh, Kessler said.

Kessler also pointed out that foreign investors are directing capital into multifamily assets. Furthermore, private equity investment in the multifamily sector has reached its highest level since 2007.

Given the popularity of the multifamily sector, Kessler acknowledged the concerns about the possibility of overbuilding. In general, the supply-and-demand dynamics remain favorable across all markets, he said, but many apartment companies are shifting development towards sub-markets. Additionally, private equity funds are engaging in less development activity, according to Kessler.

Turning to the office market, Kessler said it has been "a little slower on the curve" than the multifamily sector. Vacancy rates in the sector are now moving closer to pre-recession levels, he observed, and demand for class-A properties remains heavy.

One key trend in the office sector is the "enormous shift" in the amount of space allocated per employee, Kessler said: "Companies need less space." That has created opportunities for office companies to convert class-B facilities into creative spaces for tenants.

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