The 10 Worst Multifamily Markets for Investors

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We previously examined the multifamily segment and selected 10 hot markets for investors. The sector is still benefitting from long-term expansion, with positive job growth expected in most of the nation’s major metros over the next couple of years, according to Fannie Mae’s Multifamily Market Commentary for June 2017. New supply is a concern for multifamily properties, but even that is expected to moderate as only 12 metro areas have more than 20,000 units that have been completed or underway since 2016.

The great outlook is not uniform across all multifamily markets, however. Employment rates in some areas have yet to fully recover to their pre-recession levels. Even in an environment with robust demand, certain smaller segments are bound to disappoint.

The letdown is affecting even highly desirable markets, including Los Angeles and New York City. Why? Rents have skyrocketed to the point where they are becoming unaffordable. Also, rent control laws like the ones in Los Angeles are beginning to make investors hesitate about making new forays into an otherwise strong sector.

This roundup takes a look at markets that have a ways to go before they become investor favorites, and ones that are already so desirable that they leave limited upside potential.

The city received two strong economic infusions in 2016—the Republican National Convention and a team in the World Series. Those dual benefits were not enough, however, to tip Cleveland’s delicate balance. Information from Moody’s Analytics, via Fannie Mae, suggests that Cleveland will add an estimated 15,000 jobs in 2017, thanks to the healthcare research and development sectors. Yet investors should use caution, because new multifamily supply here is looking like it will outpace demand.

Not too long ago oil prices seemed destined to stay high forever, and Houston would perpetually benefit from domestic and global demand for the energy source. Much of the city’ exceptional growth was tied to the oil market, which has seen took a nosedive. Unless oil prices recover, Houston will need to diversify the sources of its affluence. Expect to see a period of rising vacancy rates and declining rent growth, according to Fannie Mae.

Kansas City’s recovery has been underwhelming, thanks to a job market. Going ahead, Fannie Mae expects an average population size, meager job growth and affordability of single-family homes to keep the rental market embers too weak to generate much heat.

Sometimes a city’s success can bring its own backlash. In California, state legislators are aiming to repeal the Costa-Hawkins Act of 1995, a law that favors landlords in banning caps on single-family houses and putting restrictions on which apartments are eligible for rent control. Now, the idea is to allow municipalities to make those decisions. In Los Angeles, a city with already tight rent restrictions, some investors believe firmer rent controls could mean less incentive for development, writes Mark Ventre, a director at capital provider Berkadia in Insiders’ Insight, a newsletter from the firm.