« What Is Business Email Compromise? | Main | Share Tips, Best Practices About Wire Fraud During National Consumer Protection Week »

02/11/2021

Multifamily Housing Down in 2021 but Will Rebound in 2022

Regulatory and supply-side challenges coupled with slowing rent growth and rising vacancy rates will weaken the multifamily construction market in 2021. However, the development market should stabilize by 2022, according to economists from the National Association of Home Builders (NAHB).

"Though the multifamily sector is performing much better than nonresidential construction, developers are facing stiff headwinds in 2021," said NAHB Chief Economist Robert Dietz. "Shortages and delays in obtaining building materials, rising lumber and OSB prices, labor shortages and a more ominous regulatory climate will aggravate affordability woes and delay delivery times."

NAHB analysis of Census data reveals that 34 percent of total multifamily construction occurred in lower density, lower cost markets in 2020. "These areas have outpaced higher density markets over the past four quarters and we anticipate this trend will continue this year," said Dietz.

Turning to the forecast, multifamily starts are expected to fall 11 percent this year to 349,000 units from a projected total of 392,000 in 2020. The downturn will be short-lived, as multifamily production is expected to post modest gains in 2022, up 5 percent to 365,000 units.

After four years of a steady, upward trajectory, rent growth flattened in 2020. "Due in part to pandemic-related issues, rent growth in December 2020 was up just 0.4 percent from a year ago," said Danushka Nanayakkara-Skillington, NAHB's assistant vice president of forecasting and analysis.

Looking at another metric, four of the top five multifamily markets, as measured by the number of permits, posted yearly declines from November 2019 to November 2020.

The New York-Newark-Jersey City region, the largest in the nation, registered a 14 percent drop in permits. Houston-The Woodlands-Sugarland, Texas, was down 10 percent, Los Angeles-Long Beach-Anaheim, Calif., fell 16 percent and Dallas-Fort Worth-Arlington, Texas, posted the sharpest decline at 46 percent.  Meanwhile, Austin-Round Rock, Texas, the No. 2 market in the nation, posted a robust 54 percent increase in permits.

Commercial real estate services and investment firm CBRE forecasted a return to pre-COVID vacancy levels and a 6 percent increase in net effective rents in 2021, with a full market recovery occurring in early 2022. The economic rebound will lead to rising multifamily demand, largely from “unbundling”—certain renters moving out of their parents’ homes or those of friends as job opportunities provide more financial flexibility to live independently. Demand levels in 2021 likely will fall short of pre-COVID peaks in 2018 and 2019 but should rise significantly from 2020.

MULTIFAMILY INVESTMENT

Mutifamily graph

*2020 forecast is based on actual numbers through September. Source: CBRE Research, Real Capital Analytics (historical), Q4 2020.

According to CBRE, development will remain robust this year. Most of 2021’s scheduled deliveries were started before COVID-19 and likely will reach 280,000 units on top of the estimated 300,000-unit total this year. This level of new supply will temper improvement in Class A vacancies and rents in many markets.

With steadily improving market conditions, multifamily investment volume is expected to increase in 2021. CBRE predicted U.S. multifamily investment volume will reach about $148 billion next year, lower than 2019’s record level of $191 billion but a 33% gain over the 2020 estimate of $111 billion.

CBRE reported that suburban assets in the Midwest and Southeast regions will provide the best opportunities for solid market performance and achieving expected revenues next year. In the Midwest, Indianapolis was the best-performing market in 2020. Memphis, Detroit, Columbus, Cleveland, Cincinnati, Kansas City, Louisville and St. Louis also were among the best in the country.

Meanwhile, most Southeast metros weathered the 2020 recession relatively well, according to CBRE. The leaders were Greensboro, Jacksonville, Richmond and Virginia Beach. Atlanta, Charlotte, Raleigh and Tampa also performed relatively well and are positioned for solid performance in 2021.

Multifamily segments that had greater market deterioration in 2020—such as Class A assets in urban submarkets, particularly in gateway cities—may not stabilize until well into 2021 and present more investment risk, CBRE predicted.

CBRE said the most impacted metros in 2020 were San Francisco, San Jose and New York. Other underperformers included Los Angeles, Boston, Seattle, Oakland, Austin, Miami, Chicago, Washington, D.C. and Orlando. Among these, investors may favor high-tech markets for their potential quicker economic recovery, but tech firms’ remote working policies may not restore multifamily demand as quickly.

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.