BY THE NUMBERS WITH
By Thomas P . LaSalvia , PhD , and Victor Calanog , PhD
STILL THE DARLING OF CRE ?
The multifamily sector has seen continued low vacancy and solid rent growth , but the continued difficulties of the COVID-19 pandemic is putting this strong run in jeopardy . Unemployment that has settled in approximately two percentage points above the natural rate , an uptick in suburban migration to single-family homes , and a slowing of household formation have combined to create uncertainty and concern for a multifamily sector that weathered the Great Recession and has been increasingly thought to be recession-proof .
IS THE CONCERN WARRANTED ? Yes , at least on the surface . Rents are down about 2 percent , vacancies have hit 5 percent for the first time in eight years , and transaction volume is 50 percent of its recent yearly average . We all should be at least somewhat concerned . But as with any CRE analysis , context and nuance are necessary .
Effective rents in 3Q2020 fell 1.9 percent — the largest quarterly decline on record since REIS began publishing quarterly data in 1999 . This is certainly cause for concern , but is it a death sentence ? Absolutely not . First off , much of the rent declines came from just three MSAs : San Francisco , New York , and Washington , D . C . Eliminating these dense , expensive cities from the list dramatically decreases the magnitude of the nationwide rent decline . Most areas recorded declines closer to 0.5 percent with some even boasting growth . Secondly , we do expect household formation to pick up and lead to absorption gains as the weather warms up in the spring and vaccines become more widely available . While we still expect vacancy to inch up toward 6.5 percent by the end of 2021 , much of this will be due to an overwhelming amount of supply finally coming online after delays caused 2020 to record far fewer completions than initially expected . Supply increases are as much , or maybe more , to blame than declining demand .
What about the capital markets ? To blame the decline in activity wholly on the economy would be imprudent . Mandatory office closures , understaffed appraisers and courts , and limited site visits certainly
Competing Trends in the Multifamily Sector
|
2.0 % |
5.5 % 5.0 % 4.5 % |
|
|
1.5 % |
|
|
Effective Rent Growth |
1.0 % 0.5 % 0.0 % -0.5% -1.0% -1.5% |
4.0 % 3.5 % 3.0 % 2.5 % 2.0 % 1.5 % |
Vacancy Rate |
-2.0 % |
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2015
2016 2017 2018
|
2Q 3Q 4Q 1Q 2Q 2019
2020
3Q
|
|
Source : Moody ' s Analytics REIS
Effective Rent Growth Vacancy Rate
12
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE WINTER 2021