The State of Multifamily | Spring 2021
To say the least, 2020 was a year that shook the real estate industry across all sectors in at least some way. After most investors initially braced for impact during the early phases of lockdowns and the news was filled with doom and gloom day after day, we saw the world adapt. With the acceptance of the new normal many investors quickly became quite active within specific sectors and classes of real estate. Multifamily was one of those sectors that boldly stood out, and was only outshined by industrial.
Was it all good?
Although multifamily investments have weathered the storm of the pandemic incredibly well, this side of the market did see its own challenges. As the year progressed, we saw numerous markets impose restrictions around eviction rights of landlords, many going significantly stricter than any national or state moratoriums. For obvious reasons, most of these markets saw multifamily investment activity grind to a halt.
Another area of multifamily that we saw pump the breaks was the previously bullish push for new Class A community development. Whatever market you are in if your MSA had even the slightest positive outlook you have most likely seen developers buying up any suitable land they can find for amenitized multifamily development in recent years. Of the 54 largest metros in the U.S., 44 have fewer units underway now compared to twelve months ago. As of March 2021, roughly 565,000 apartments are under construction, this time last year there were over 700,000.
It’s also important to note that there has been some ongoing debate concerning the stability between the different property classes in the coming years. Some investors feel we are approaching additional turbulence when it comes to the Class A market. The theory is these renters may be feeling the financial effects of the pandemic for years to come which may lead to renters paying top dollar for new amenitized apartment complexes being forced to make a lifestyle change and downgrade to older more affordable units.
So why does everyone feel Multifamily is still so strong?
It’s simple, even with all of the challenges the pandemic has brought over the last year multifamily has proved to still be one of the most stable investments one can make. In times of uncertainty what more do investors want but to take the direction with the most stability. The sunbelt had been one region that has really stood out due to strong rents, low vacancies, and minimal numbers of tenants falling behind. In Charlotte, NC for example the overall metro has still seen a 4% year over year rent growth.
Personally, going into the second half of 2020 my eyes were focused on Cap rates, watching for signs of changes in buyer and seller expectations. A year later we are instead seeing Cap rates compress into record territory for most of the growing markets within the sunbelt.
Has this changed investor habits?
I personally have seen many of my own clients reassessing their acquisition criteria over the last twelve months. Most commonly I have seen large REIT’s that have previously had little interest in mid-tier / tertiary markets change their stance and become rather bullish on investing in these markets. Much of the motivation seems to be stemming from two very specific factors; the fact the hot primary markets are seeing Cap rates compress further than we previously have seen, and the fact that the pandemic has been a catalyst for significant numbers fleeing places like New York City in search of less crowded destinations.
Additionally, with the limited inventory of available investment properties I have seen an overall strategy change when it comes to minimum door count with many investors. Buyers that previously refused to entertain less than maybe 150-200 doors often times are opening their eyes to the fact that the 50-100 door assets will not only give them a significantly better Cap rate, but there is generally less eyes on these properties than when a 350 door property hits the market.
Future outlook…
Most analysts seem to be giving the multifamily sector a very favorable forecast in the coming years with predictions of a full recovery by 2022. I feel in the next twelve months we will see most markets within the Southeast be back to pre covid vacancy rates, if they aren’t already there. I even expect rent growth in many of the tertiary markets that had gone stale. Even if the recovery continues to be slow on a global economic level, B and C class property will almost certainly remain strong and continue to be attractive investments with long term stability. The primary area of caution I have for investors is to carefully watch markets with large numbers of new Class A inventory coming online. Most of these projects were pre-pandemic so only time will tell whether this new inventory will hurt existing Class A vacancies and rents.
Jim Davis - Commercial Broker - Broad River Capital | NAI Beverly-Hanks