INCREASING INTEREST
Investment in multifamily assets reached new highs in 2021 . Colliers ’ 2022 National Multifamily Report notes that multifamily sales volume reached $ 335.3 billion — more than office and industrial sales combined . With increased demand and higher rents , the sector continues to look strong midway through this year . But like all other industries , it ’ s also facing challenges as well , including inflation , higher interest rates , higher construction costs , and supply chain issues .
“ We ’ re seeing higher interest rates , and that , of course , increases the cost of capital for apartment investors ,” says Christopher Bruen , senior director of research for the National Multifamily Housing Council . “ Up until the first quarter of the year , that ’ s been more than offset by higher rent growth , with cap rates remaining at record lows . But while rent growth has more than compensated for inflation over the last two years , the question remains whether that can continue going forward if we come up against affordability constraints .”
Perhaps the biggest challenge has been an increase in demand . Apartment List ’ s May National Rent Report noted a national vacancy index of 4.6 percent — up from a low of 3.8 percent in August 2021 but still considerably lower than the 7.1 percent figure in April 2020 , at the start of the pandemic .
And while 1Q2022 multifamily construction starts increased by 501,000 units — an increase of 37.3 percent over February 2021 — the number of completed units declined 16.9 percent to 266,000 units , according to the National Apartment Association ’ s Spring 2022 Apartment Market Pulse . NAA also pointed out that apartment construction could be sluggish for the rest of 2022 because of labor market challenges and rising energy prices .
Construction costs continue to play a major role . The National Multifamily Housing Council conducts a quarterly survey of construction and development activity and , says Bruen , respondents have reported a 45 percent increase in lumber costs over the first part of 2022 . “ That ’ s the most extreme ,” Bruen says , “ but other materials have been affected , too — electronic components , finishes , and roofing . This is making construction more difficult — all at a time where we have a housing shortage and vacancies at all-time lows .”
“ The intensity of the supply chain issues that we saw in the midst of the pandemic are , hopefully , beginning to even out ,” says Candice Chevaillier , CCIM , principal at Lee & Associates in Seattle , “ but I think we have a ways to go .” Items produced overseas , for example , “ are still going to be at mercy of additional waves of COVID-19 — many governments are serious about [ quarantine ] restrictions .”
RENT GROWTH AHEAD Increased costs and demand have made their mark on rents . Apartment List reported a national year-over-year rent growth of 16.3 percent from April 2021 . For comparison , the site reported a 3.3 percent increase in 2018 , a 2.3 percent increase in 2019 , and a 1.6 percent decline in 2020 . Yardi Matrix figures put overall March rents at $ 1,642 , $ 212 higher than March 2021 .
Rents have increased fastest in Sunbelt areas . A study by three universities looked at the most overvalued U . S . rental markets , with
Higher interest rates and inflation also deter renters looking to make the move toward home ownership . As of May , mortgage rates rose to 5.1 percent , up 2 full percentage points from January ’ s 3.1 percent .
the top five all in Florida . The research — produced by Florida Atlantic University Real Estate Initiative and Florida Gulf Coast University ’ s Lucas Institute for Real Estate Development and Finance — examined historical data that show where rents should be and compared that with current marketplace rents . Miami-Fort Lauderdale is the most overvalued , with an average rental price of $ 2,832 , 21.75 percent higher than the area ’ s long-term leasing trends .
Chevaillier points to another factor for dramatic rent increases . During the pandemic , she says , “ a lot of buildings in our region were under eviction moratoriums , and rent increases were banned . For two years , costs continued to increase , but there was no way to increase income as well . Now that we ’ ve come out of that , rents are moving quite quickly .”
Rental demand has also been squeezed by the single-family housing market , which faces supply shortages of its own . A market report from real estate brokerage firm
HouseCanary noted that the net new listings for U . S . single-family homes dropped 12 percent from April 2021 to April 2022 .
Higher interest rates and inflation also deter renters looking to make the move toward home ownership . As of May , mortgage rates rose to 5.1 percent , up 2 full percentage points from January ’ s 3.1 percent . “ What we ’ re seeing is that the higher interest rates may bring home values down in the shortterm because people can ’ t pay as much ,” says Chevaillier . “ But realistically , it makes the debt service on those homes more expensive , which puts them out of reach and locks renters into renting , not buying .” And , she adds , inflation in general makes saving difficult for renters because the increased cost of living can whittle away savings for a down payment .
Among those hardest hit by home ownership affordability are millennial buyers . Recent statistics from Apartment List show that in 2021 , nearly two-thirds of those surveyed reported that they had no savings , and only 16 percent had saved more the $ 10,000 . (“ The average savings of just over $ 12,000 represents a 4 percent down payment on a median-priced condo today ,” Apartment List noted .) Post-pandemic , 24.7 percent of millennials surveyed said that they never expected to buy a home and would rent permanently .
MARKETS TO WATCH So given the challenges , what opportunities are available to multifamily CRE professionals ? A closer look at burgeoning markets , for starters . While growth remains strong in Sunbelt areas , Marcus & Millichap ’ s April multifamily research brief countered that gateway markets such as New York , Boston , Chicago , and Los Angeles were picking up strength as well . “ After encountering a disproportionate number of hurdles in 2020 and early 2021 , apartment demand has soared in the nation ’ s gateway metros ,” the report notes , and these markets were in strong competition with Sunbelt metros such as Dallas-Fort Worth , Houston , and Phoenix for the country ’ s largest increases in occupied units .
The report cited several reasons , including an increase in job creation as well as new household formation in these areas . The leaders in the report ’ s survey of post-pandemic rent increases remained Sunbelt stalwarts Tampa-St . Petersburg , Phoenix , Atlanta , Dallas-Fort Worth , and Orange County , Calif . However , the report noted that there was still room for rent growth in gateway markets , as their rents hadn ’ t increased as significantly as other markets with large population influxes . “ Furthermore ,” the report adds , “ none of the gateway metros have vacancy issues or
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2022