The multifamily housing market will remain strong despite facing economic headwinds this year, according to the new Freddie Mac Multifamily Outlook.

The sector is coming off a year in which rental housing demand kept pace with a big wave of new units that was delivered in 2015. Approximately 306,000 multifamily units entered the market—the most in a single year since 1989—and the level of new supply is expected to remain elevated over the next few years.

David Brickman
David Brickman

That’s creating concern that the market is taking on too much supply, but renter demand is expected to absorb the new units being built. Much of the demand is fueled by favorable demographic trends and reduced affordability of owning a home.

A look at the recent multifamily origination volumes shows the market continuing to grow, says David Brickman, Freddie Mac’s executive vice president of multifamily.

“This is clearly due to the overall trend we see in multifamily in terms of the movement to renting and growth in rental housing,” he says. Independent of that shift in housing preference, there’s also growth coming from household formation, new jobs, and favorable demographics.

Even with all this momentum behind the sector, changes in the financial markets could create pressure on price appreciation and potentially slow economic growth, according to Freddie Mac.

“Cautious optimism is the view we’re expressing,” Brickman says. “We think 2016, while it will have its challenges, will continue to be a good year, not a great year, but a good year for multifamily.”

In its outlook, Freddie Mac examines several key metrics, including vacancies and revenue growth.

Despite the large number of rental units being built, vacancy rates barely moved last year although they ticked up at the end of the year to about 4.4%. Freddie Mac projects vacancy rates to inch up to 4.8% by 2017, which is still below the long-run average of 5.3%, says Steve Guggenmos, Freddie Mac Multifamily vice president of research and modeling.

The lowest vacancy rates will be seen in the West, led by Sacramento, Calif. , with a rate of 2.7%, according to Freddie Mac.

At the same time, revenue will grow at a rate of 3.9% and 4.3% in the coming years, according to Guggenmos.

Freddie Mac officials anticipate that the 2016 industry origination volume will reach between $250 billion and $260 billion due to increasing property prices, new completions, and favorable investment opportunities. That’s in line with a slight increase from 2015 levels.

“We expect our purchases to be slightly greater this year than last year in part due to the expectation that the market will be slightly greater, so we expect to grow proportionately with the market,” Brickman says. That will put Freddie Mac at approximately $50 billion compared with $47.3 billion in loan purchase and bond guarantee volume last year.

Finally, cap rate spreads are expected to tighter, but for the overall multifamily market Freddie Mac projects cap rates will remain in the low 6% range this year.