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Multifamily Market Commentary – February 2018

2018 Multifamily Affordable Market Outlook – A Long Way to Go

Momentum in the overall multifamily sector will likely slow in 2018 due to elevated levels of new supply. As a result, the 

national vacancy rate is expected to increase slightly in 2018, and, while rent growth should remain positive, it is expected 

to grow at a more modest pace. This is likely to do little to reverse the significant erosion in affordability of multifamily 

rentals seen since the end of the recession. 

Vacancies for Affordable Rentals Likely at Trough 

As shown in the chart below, after bottoming out in 2015, vacancy for affordable rentals remains low. According to CoStar, 

vacancies for units in the Workforce category, which generally corresponds to Class B units, rose slightly to 5.8 percent as 

of the end of 2017, after reaching as low as 5.0 percent in 2015. Vacancies for even lower-cost rentals in the Naturally 

Occurring Affordable Housing (NOAH) category, which generally corresponds to Class C units, rose slightly to 5.1 percent 

as of the end of 2017, an increase of 0.1 percent from the trough recorded in 2015. Even with these increases, these vacancies 

remain on the low side by historical standards. 

Vacancies for rent-restricted affordable properties remain even tighter. As of the end of 2017, Reis, Inc., estimates a 1.9 

percent vacancy rate for rent-restricted properties, which consist of multifamily rental properties assisted with federal Low 

Income Housing Tax Credits (LIHTC) and Section 8 project-based vouchers, reflecting ongoing demand for all types of 

affordable multifamily rentals. 

Vacancies by Affordable Market Segment 2009-2019 

Source: CoStar, REIS, Inc. 

Note: CoStar High-Rent Segment is approximated by five and four star category properties. CoStar Workforce Segment approximated by three star 

category properties. CoStar Naturally Occurring Affordable Housing (NOAH) category approximated by two star and one star category properties. 

Vacancy Levels for Affordable Multifamily Rentals Expected to Remain Relatively Stable 

According to the Dodge Data & Analytics SupplyTrack Construction Pipeline, which distinguishes between multifamily 

properties consisting of either apartment or condo units, about 381,000 apartment units were completed in 2017 and 

another 443,000 units are expected to come online in 2018. Most of this new supply is believed to consist of Class A units, 

which command the highest rent levels in their location. 

According to CoStar, although its estimated vacancy rate for the high rent/Class A multifamily segment declined slightly in 

2017 to 8.9 percent, it is expected to remain elevated at about 9.0 percent in 2018 due to anticipated new completions. 
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Furthermore, although CoStar’s Workforce/Class B vacancy forecast calls for vacancy to rise slightly in 2018 to 6.0 percent, 

it is expected to remain approximately 3.0 percent below the high rent/Class A category in 2018. Similarly, vacancies in the 

NOAH category/Class C category are expected to rise modestly to 5.3 percent in 2018 but remain well below the anticipated 

9.0 percent vacancy rate of high rent/Class A units. By comparison, Reis estimates that there will be little change in vacancies 

at rent-restricted properties, for which vacancies are expected to remain below 2.0 percent over the next 12 to 24 months.

Little New Affordable Class B/C Supply

As most new multifamily supply underway over the past few years has been clustered in the high rent/Class A segment, 

there has been little growth in the stock of the more affordable Class B/C segment, as shown in the chart below. Strong 

demand for multifamily rentals has also prompted developers to renovate more affordable Class B/C properties into Class

A properties which command the highest rents. The net impact of the two trends has been that while the number of Class A 

units has grown by an estimated 1.1 million units or so since the end of the recession to an estimated 5.0 million units, the

number of Class B/C units is estimated to have remained virtually unchanged at an estimated 5.7 million units, according 

to the sample data tracked by Reis, Inc. This trend is unlikely to change in the next 12 to 24 months as most of the new 

supply underway is estimated to consist of Class A units.

Class A Properties vs. Class B/C Properties

Source: REIS, Inc.

Rent Growth for Affordable Units Remained Elevated 

in 2017

According to CoStar, rent growth was positive for all classes of 

rentals in 2017, as shown in the adjacent chart. However, 

asking rent growth in both the Workforce/Class B category and 

NOAH/Class C categories outpaced that for Class A rental units 

by an estimated 1.0 percent – a still significant premium. Rent 

growth for units in the Workforce/Class B category grew by an 

estimated 2.9 percent in 2017, to end the year at $1,152. Rent 

growth for the NOAH/Class C segment, where rents are likely 

comparable to those for rent-restricted units, grew by an 

estimated 3.0 percent in 2017, to an estimated $1,003. Both 

segments still grew well above the pace of inflation, which stood 

at 2.1 percent year-over-year, as of the end of December 2017. 

Going forward, the onslaught of new supply expected in 2018 should start to spill over to Workforce and NOAH units as 

slowing or even negative rent growth on high rent/Class A units in some submarkets dampens the increases in rent that 

owners can command on more affordable units. Even so, rent growth for all types of multifamily rentals should remain 

positive, doing little to improve affordability. 
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Rent Growth Expected to Ease Slightly

The expectation for 2018 is that rent growth in the Workforce/Class B rental category will moderate but remain positive at 

1.8 percent. Similarly, rent growth in the NOAH/Class C category is projected to moderate to an estimated 2.2 percent. In 

both cases, rent growth will be above the 1.6 percent rate projected by CoStar for those units in the high rent/Class A 

segment.

Rent-Restricted Supply is the Main Source of New Affordable Housing 

Most new affordable multifamily supply falls into the Targeted Affordable category, which is generally funded by LIHTC. 

Since its creation in 1986, the LIHTC program has created almost 3 million units and an estimated 2.4 million low-income 

units. Many of these units are now older and require a new infusion of credits for renovation, leaving fewer credits available 

for constructing new units.

As shown in the chart below, after falling below 80,000 units during the recession, the number of new rent-restricted units 

placed in service appeared to be returning to more normalized levels of about 90,000 to 100,000, based on the most recent 

data from the U.S. Department of Housing and Urban Development’s (HUD) LIHTC database. The actual number may be 

even higher, however, as this data has a lag in reporting and may be subject to upward revisions. Even so, the recent Tax 

Cuts and Jobs Act (TCJA) may cause these numbers to plunge.

Low Income Housing Tax Credits (LIHTC) placed in Service Since 2000

Source: HUD Low Income Tax Credit Database; based on low income units only

Tax Cut Increases Need for Gap Funding

While the TCJA left LIHTC intact, the decline in the corporate tax rate from 35 percent to 21 percent will likely still have 

negative consequences for new rent-restricted supply. Tax credits are now less valuable and their price has declined 

substantially since discussions on implementing a corporate tax cut began last year. 
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In fact, at the start of discussions in early 2017, the LIHTC investment market assumed there would be a lowering of the 

corporate tax rate to 25 percent, which caused the value of a LIHTC credit to decline from $1.01 in January 2017 to $0.92 

in February, as shown in the chart below. However, the final corporate tax rate of 21 percent caused the price to decline 

further, to $0.89 as of December 2017. This means that developers may end up struggling on new projects to fill the 

financing gap left by lower proceeds from the sale of LIHTC. 

Low Income Housing Tax Credit Equity Pricing per Credit (January 2016 – December 2017)

Source: Novogradac & Company LLP; https://www.novoco.com/atom/165191 

Fannie Mae Re-Enters LIHTC Market

In late 2017, the Federal Housing Finance Agency (FHFA) approved Fannie Mae's re-entry into the LIHTC market as an 

equity investor to provide support for the production and preservation of affordable rental housing. Some of the anticipated 

lower pricing may be partially mitigated by the GSEs’ re-entry into the LIHTC market.

Furthermore, Fannie Mae’s first LIHTC investment fund closed in February of 2018. The fund will invest up to $100 million 

in markets impacted by Hurricane Harvey, as well as rural markets and Native American housing, by backing multifamily 

projects in these underserved areas with funding for rehabilitation and construction. The fund will also work to incorporate 

resiliency features into properties that are situated in markets subject to flood and storm activity.

The Upside of Tax Reform

Tax reform also contained some good news in the form of a new program that could provide funding for affordable housing. 

Among other incentives, the TCJA allows investors to defer (up to nine years) paying tax on gains if those gains are invested

in Qualified Opportunity Funds that in turn invest in economically distressed communities designated by the governor of 

each state. These areas are known as qualified “Opportunity Zones.”

$1.06

$1.01

$1.03

$1.05

$1.04

$1.06$1.06

$1.05$1.05

$1.04

$1.05

$1.02 $1.01

$0.92

$0.93

$0.91$0.91

$0.93

$0.91$0.91

$0.92

$0.93$0.93

$0.89

3 month moving average
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Wage Growth Slowly Strengthening 

Wages measure earnings from work, while income can 

include non-work earnings such as interest and dividends. 

While growth in income will help with rental affordability, 

many renters rely solely on wages, making wage growth an 

important indicator of affordability. 

As shown in the adjacent chart, as of January 2018, the yearover-year change in private-sector nominal average hourly 

earnings for all non-farm employees strengthened 

considerably to 2.9 percent, which was the fastest pace of 

growth seen since June 2009. However, the wage growth of 

production and nonsupervisory employees, some of whom 

are likely renters, lagged at just 2.4 percent.

Economic Improvement Continues in 2018

Meaningful improvement in rental affordability can only be attained when wage growth meaningfully outpaces rent growth. 

With the recent tax cuts anticipated to stimulate the economy, Fannie Mae revised its economic growth forecast for 2018 

upward by 0.6 percentage points to 2.7 percent and anticipates the addition of over 2 million jobs. The improved outlook 

stems largely from stronger anticipated consumer spending and business equipment investment.

With the unemployment rate at just 4.1 percent, and employment adding a strong 200,000 new jobs in January 2018, it is 

hopeful that wage growth will continue to strengthen and perhaps even outpace rent growth in 2018.

2018 Affordable Multifamily Outlook: A Long Way to Go

The outlook for affordable multifamily housing for the coming year is mixed with both positive and negative trends. On one 

hand, rent growth is likely to slow and wages are likely to strengthen in 2018, positive signs for the affordability of 

multifamily housing. On the other hand, the production of new rent-restricted housing will struggle due to the growing need 

for additional gap financing. According to the recently released America’s Rental Housing report from the Harvard Joint 

Center for Housing Studies, an estimated one quarter of renters spend over half of their income on rent and utilities. As a 

result, the supply/demand imbalance for all types of affordable housing is expected to remain an ongoing issue for at least 

the next 12 to 24 months – if not longer.

Tanya Zahalak

Senior Multifamily Economist

Multifamily Economics and Market Research

February 2018

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Multifamily Economics and Market Research 

Group (MRG) included in these materials should not be construed as indicating Fannie Mae's business prospects or 

expected results, are based on a number of assumptions, and are subject to change without notice. How this information 

affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts and 

other views on information it considers reliable, it does not guarantee that the information provided in these materials is 

accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these 

views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published 

by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie 

Mae or its management.