The multifamily market has shaken off the lingering effects of the COVID-19 pandemic , and investors are once again moving forward full throttle with acquisition strategies .
The apartment sector did not skate through the pandemic unscathed . Owners faced several operational challenges , as well as uncertainty on how the shutdown and spike in unemployment would impact rent collections , occupancies , and net operating income . That uncertainty also weighed on transaction volume as owners paused to see how the pandemic might play out . But data points to a sector that has not only weathered the COVID-19 downturn relatively well , it also outperformed in comparison to other sectors . The underlying fundamentals coupled with compelling long-term demand drivers for affordable , workforce , and market-rate rental housing are once again fueling a white-hot investment sales market .
“ We have now been through a big bump with COVID , and we saw what it did to the psychology of the market ,” says Richard Knutson , CCIM , senior managing director , multifamily capital markets in the Oakland , Calif ., office of Newmark . “ But it didn ’ t last very long , and there is a lot of enthusiasm about the long-term demand for apartments , and , therefore , the long-term performance of apartment investments .”
Although plenty of capital appears to be lined up for multifamily , transaction volume is still trailing its pre-pandemic pace . Apartment sales totaled $ 35.5 billion in 1Q2021 , which was down 12 percent compared to the same period in 2020 and 2.5 percent lower than the $ 36.4 billion in sales recorded in 1Q2019 , according to Real Capital Analytics . However , first quarter sales data also suggests a market that is heating up with aggressive bidding on properties that has resulted in a further cap rate compression to an average 4.9 percent in the first quarter and a year-over-year increase in CPPI of 7.1 percent .
“ We ’ re seeing a lot of money coming into Florida chasing multifamily with little supply of inventory for investors ,” says Luis Baez , CCIM , managing director of multifamily investments and founding partner of the Florida Multifamily Team at Colliers International in Tampa . Although value growth is supported by rent growth , cap rate compression also stems from basic principles of supply and demand , he adds .
One deal that Baez and his team put under contract in May highlights the heightened competition in the Florida market . The team listed a two-building apartment portfolio with 95 units in a Class C submarket in Tampa near the University of South Florida . The same property had been under contract for sale in January 2020 , but the deal fell through during the shutdown . The then-versus-now comparison shows a stark contrast . The recent listing attracted seven interested parties versus three a year before , a contract price of $ 9.1 million that was 30 percent higher than the previous
Optimism in strong apartment fundamentals is also buoyed by the buying frenzy in the single-family home market that ’ s making it difficult for renters to shift to homeownership .
contract price , and a new cap rate of 5.8 percent versus 7 percent . Also , the winning bid wasn ’ t an outlier — four offers came in between $ 8.8 million and $ 9.1 million . In this case , several bids came from out-of-state buyers based in the Northeast , adds Baez .
CONFIDENCE IN MARKET OUTLOOK Multifamily has been a top-rated property sector for investors for the better part of a decade , and more recently the sector has been running neck and neck with industrial as the favored asset class . The steady investor appetite is fueled by confidence in the performance and outlook for the multifamily sector .
“ Buyer demand is as strong as it was pre-pandemic . The only thing that really slowed down the market , even during the height of the pandemic , was when lenders were being more conservative and restrictive on escrows ,” says Thomas McConnell , CCIM , managing partner at Redwood Realty Advisors in Hasbrouck Heights , N . J . In New York City , investors are now looking to sell apartment assets and reinvest in other areas such as suburban New Jersey — not because of COVID-19 , but because of new regulations , such as rent controls and moratoriums on evictions , notes McConnell .
Fundamentals held up relatively well during the pandemic even as unemployment surged to nearly 15 percent in April 2020 . Data also shows that markets have been impacted very differently over the past year . According to the National Multifamily Housing Council rent tracker , rent collections among large institutional investor-owned multifamily properties during most of 2020 were within 1 percent of 2019 levels . The Freddie Mac Multifamily 2021 Outlook is forecasting that vacancies will rise to 5.8 percent this year , and average rent growth will be slightly negative at -0.5 percent .
Data also shows that markets were impacted very differently over the past year , which requires strong analysis on the local market dynamics when underwriting future income projections . “ The rent growth assumptions are definitely being done on a case-by-case basis . You have to drill down on the market and the particular deal ,” notes McConnell . For example , if Redwood Realty Advisors is selling an apartment building in New Jersey for someone who has owned a property for 30 years and hasn ’ t been aggressive in pushing the rent , then certainly incoming buyers are going to be looking for rent growth . In comparison , no one is really expecting to capture significant rent increases on stabilized assets that have been held for 10 years , he says . In addition , investors are being very conservative underwriting retail rents on mixed-use assets , he adds .
Optimism in strong apartment fundamentals is also buoyed by the buying frenzy in the single-family home market that ’ s making it difficult for renters to shift to homeownership . According to the National Association of REALTORS ® ( NAR ), the median existing single-family sales price rose at an annual pace of 16.2 percent during 1Q2021 , a record high since 1989 . The inventory of homes for sale remains near historic lows , with a 2.1-month supply as of March . “ We really don ’ t have enough single-family or multifamily , so both of them are just running together , and I think rising construction costs are going to hold development back ,” says Devin Lee , CCIM , director , Multifamily Investments | Finance at Northcap Commercial in Las Vegas .
Single-family home construction can ’ t keep up with demand . The multifamily development pipeline also remains relatively modest , which should help absorption and occupancy levels in current stock . According to Moody ’ s Reis , there is an estimated
Cover and previous spread , Photo by Busà Photography
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2021