Multifamily

Record-high demand and construction pipeline

The U.S. multifamily sector is poised to finish 2021 with overall occupancy and net effective rents above pre-pandemic levels. While certain markets face challenges, the overall health of the sector will lead to a record 2022.

The growing economy is boosting household formation, which had been artificially suppressed by the pandemic. New households are catalyzing demand for rentals, which is expected to match the pace of new deliveries in 2022. We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year.

Construction will remain elevated in the near term. Completions in 2021 will likely reach a new high, and another 300,000-plus units will be delivered in 2022. For context, deliveries averaged 206,000 units annually since 2010 and 171,000 per year since 1994.

Despite strong demand, the volume of new Class A product coming online will limit the performance of higher-quality assets. However, Class A rents were most negatively affected during the crisis and there is more room to recover. Overall, we project 8% growth in urban effective rents in 2022. These exceptional growth rates will moderate to 3% in 2023 and slightly below that in subsequent years. These strong fundamentals, together with the expectation that debt will remain available and at a relatively low cost, is welcome news to developers as construction costs rise.

From urban to suburban—and back again

Downtown multifamily properties are filling back up and occupancy rates are nearing pre-pandemic levels, spurred by a confluence of factors: fewer restrictions on urban amenities, higher vaccination rates, a growing willingness to use public transit, the reopening of college campuses and more workers returning to the office.

Urban areas saw an average vacancy rate increase of nearly 200 bps during the peak of the pandemic. As of Q3 2021, urban vacancy rates average 5%, just 70 bps above their pre-crisis level, and are expected to fall to 4% by the end of 2022. By contrast, suburban properties fared better, as both secular and cyclical factors—income uncertainty, a preference for outdoor options, a need for more space and more millennials with growing families requiring schools—drove demand for apartments in lower-density and lower-cost submarkets.

Investors still favor multifamily

We predict U.S. multifamily investment volume will reach a record of nearly $213 billion in 2021 (year-to-date volume totaled $179 billion through Q3 2021), well above 2019’s level of $193 billion. For 2022, we expect at least a 10% increase from 2021 to $234 billion.

While capital continues to flow from both domestic and foreign sources, the targets seem to be shifting. Investors find strong non-coastal markets more acceptable than ever and there is also a growing trend toward favoring ESG compliant assets, especially from European investors.

The Federal Housing Finance Agency (FHFA) established a $78 billion cap on multifamily purchase volumes for Fannie Mae and Freddie Mac for 2022, up 11.4% from 2021. This level of liquidity should facilitate strong value growth. In addition, we expect a resurgence in the flow of foreign capital targeting multifamily assets. Liquid multifamily debt capital markets, which includes traditional lending sources and alternative lenders like debt funds and mortgage REITs, will further stabilize and could even compress cap rates—even as interest rates rise.

Investment strategies for 2022

As always, multifamily investment strategy relies on a balance between risk and reward. Class A assets in urban areas—particularly in gateway cities—present tremendous opportunities. These markets were hit hard during the pandemic-led downturn but have the most favorable outlook over the near and medium term. However, they also present some downside risk amid new domestic migration patterns.

Lower-risk, lower-reward markets include strong secondary ones that were less affected by the pandemic. Markets like Atlanta, Dallas, Denver and Philadelphia are expected to offer more modest income and appreciation returns compared with gateway markets and a relatively stable investment return outlook.

Markets with increased regulation—particularly those with new or proposed rent controls—limit the income opportunities from rent growth and require greater operational efficiency to drive NOI.