MULTIFAMILY MARKET TRENDS IN 2021

Nearly every real estate asset class was upended to some degree as a result of the COVID-19 pandemic. Multifamily, though, proved to be one of the most resilient asset classes. Suburban markets in the Midwest and Southeast fared especially well as renters moved away from the urban core in search of more living area, more outdoor space, and generally more affordable housing.

It remains to be seen how the shift to remote work will impact multifamily trends moving forward. Will people continue to work from home, or will they start heading back to the office, or will there be increased flexibility that allows for some combination of the two? Despite this unknown, there are several other multifamily trends we are watching.

Here are a few of the things we expect to see in 2021.

The Multifamily Market Will Begin to Stabilize

COVID-19 upended the U.S. apartment market during last year’s prime leasing season. By Q2 2020, the apartment vacancy rate had hit a 22-year high. The tide has begun to turn. Around June 2020, leasing activity began to normalize and has remained stable ever since. As of Q4 2020, the apartment vacancy rate had dipped to just 6.7 percent. This is a healthy vacancy rate, and one that is slightly skewed by the unusually high vacancy rates in downtown urban locations.

Demand for Multifamily will Increase

There were many unknowns associated with COVID-19. With urban areas like New York, Boston and Philadelphia hit hard, many people retreated to the outer suburbs and even rural locations. This caused a major drop-off in lease renewals.

Now, as the vaccine rollout is becoming more widespread, we expect a slow but steady return back to these urban locations. Demand for suburban areas will also continue to remain strong.

Demand for Urban Multifamily

Leasing volume may be slow initially but will increase this spring and into summer as employer expectations shift, requiring more people to return to the office. Workers may not return to the office full-time (remote work may continue to be an option for some), but the need to attend in-person at least on occasion will cause apartments to fill up once again.

What’s more, as the vaccine becomes more widely available, the fear factor associated with riding public transit will begin to subside, bringing more people back to urban areas. Previously, renters who felt uncomfortable taking public transit and whose private transportation options were limited, had few options to remain in urban areas.

Urban areas will also benefit from the gradual reopening of restaurants, museums, entertainment venues and more.

Apartments in urban parts of the Midwest and Southeast weathered the 2020 recession relatively well, and as such, are expected to perform significantly better than Class A assets in more traditional gateway markets, such as San Francisco, New York, Los Angeles, Washington, D.C. and Boston. The coastal markets were hit particularly hard by the COVID pandemic and may not recover until the latter half of 2021.

Demand for Suburban Apartments

Despite the gradual shift back toward urban areas, demand for suburban apartments will continue to remain strong. Some people will be allowed to work remotely indefinitely, and as such, these renters will be drawn to the affordability that suburban areas provide.

Experts agree. “Buying or building in the suburbs will remain the best bet based on market performance and investment returns. Suburban multifamily will outperform urban, maintaining lower vacancy and achieving higher rent growth,” according to CBRE, a national leader in multifamily sales and brokerage. CBRE cites Austin, Atlanta and Phoenix as three of the top markets for growth. They expect to see demand grow in smaller markets, too, including the suburban areas of Albuquerque, Birmingham, Greensboro, Memphis, Dayton and Tucson.

The suburban markets that perform the best will be areas with small live-work-play environments of their own. Industry experts have used the term “hipsturbia” to describe the new urbanism movement that’s making its way to suburban areas as young people move to suburban areas but look for places with the amenities “big city” living once offered.

Regardless of location – urban or suburban – we expect to see renters who originally bunked up with roommates or moved home with family to begin looking for apartments of their own. This will drive demand for multifamily in all areas and in all metros across the country.

Leases Will Become More Customized

We are going to see a major shakeup as it pertains to the standard one-year lease term. Short-term leases, ranging from one to six months, have risen in popularity. Renters are increasingly looking for more personalized leases that provide flexibility given economic uncertainties. According to the National Apartment Association, nearly 35 percent of landlords said that at least some portion of their lease renewals were tenants looking for short-term leases. That is a trend that is expected to last well into 2021 and perhaps, beyond.

Cash Flows Will Stabilize

Widespread eviction moratoriums – at both the federal and many state levels – caused a major disruption in apartment owners’ cash flow. Tenants were essentially allowed to withhold rent payments, sometimes indefinitely, without the landlords having any recourse. It is expected that these eviction moratoriums will be lifted in 2021, which will allow landlords to evict tenants for non-payment of rent and then release those units to rent-paying tenants.

Investment Activity Will Increase

Even pre-pandemic, there was a lot of pent-up demand for multifamily investment property. Many of these investors have been sitting on the sidelines for the past year, just waiting to see how the COVID-19 pandemic shook out. Would there be widespread defaults? Would there be bargains to be had? Today, there is more capital than ever at the ready to put into apartment deals.

We expect to see investment in multifamily soar throughout 2021. Investors are starting to feel more confident, particularly now that we have vaccines at the ready. Investors also benefit from a continued low-interest-rate environment. Fannie Mae and Freddie Mac, two key multifamily lenders, are reported to have sizable capital availability to support increased buying activity. Moreover, existing owners are starting to refinance at record rates, pulling out equity to be redeployed into other assets.

Sales volume will continue to increase as the year goes on, with well-priced properties expected to sell swiftly. It is expected that roughly $150 billion will pour into U.S. multifamily this year, a 33% gain over what was previously expected.

Despite the disruptions of 2020, we expect the multifamily market to continue to improve through 2021. There are still some risk factors, such as record-high unemployment in some areas, but the “return to normal” is already underway. As COVID vaccines become more widely available, demand for apartment buildings will increase as more people move back to urban areas and/or renew their leases in suburban locations.

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