The COVID-19 pandemic has affected almost every aspect of people’s lives all over the world. From remote working to the urban exodus- change is the face of the ‘new normal’. The multifamily real estate investment horizon has also been subjected to transitions. A sharp rise in unemployment led to unpaid rents and an increase in vacancy rates. This, in turn, decelerated the demand for multifamily investments. However, forbearance relief and stimulus packages by the Government helped the US economy to rebound. As a result, multifamily investment in 2021 has a higher-than-average risk tolerance. Reports suggest that multifamily occupancy will reach pre-pandemic levels quicker than most commercial properties this year. CBRE forecasts multifamily investment volume will reach $148 billion in 2021- a 33 percent increase from the 2020 estimate of $111 billion.
COVID-19 brought about several trends in the commercial real estate sector. Amid these, the multifamily investment in 2021 is will gravitate towards value-add properties, suburban properties, and affordable housing.
Multifamily investment in 2021- trends to look out for
Labeling 2020 as “difficult’’ would be an understatement with the onslaughts of a global pandemic and the presidential election. However, multifamily properties held a strong ground amidst the economic recession. Along with industrial properties, the multifamily buildings fared better than most commercial properties. Still, with renters moving out, many multifamily owners failed to receive rental incomes or faced deferred rents.
Nevertheless, as local economies are reopening and vaccines are rolling out, the multifamily investment will gain pace this year. CBRE forecasts a 6% increase in net effective rents in 2021 with a full market recovery by early 2022.
Since other commercial properties are potentially uninvestable right now, investors are preferring multifamily ownership to expand their portfolio. This is because they consider this asset class to be one of the safest. Equity allocation to multifamily investments and lending commitments to this sector by Fannie Mae and Freddie Mac has helped investors and developers to re-enter the market. In addition to this, it is anticipated that a $140 billion commitment to the sector by the Federal Housing Finance Agency in November 2020, will bring the lifeblood back to the investments.
#1 The urban exodus
The desire to move to the less populated suburbs to escape the virus and high housing costs in the urban areas has resulted in the rising demand for suburban multifamily properties. A remote working culture coupled with residents seeking less costly yet spacious apartments further impacted this urban exodus. Investors seeking to invest in multifamily in 2021 should tap this trend to monitor whether this shift is temporary or long-lasting.
As the companies resume work-from-office culture, it is unclear whether renters will telecommute to their workplace or reside permanently in the suburbs. Also, it is currently uncertain whether the urban dwellers will return to the cities once the pandemic subsides. Overall, the major factors affecting the appeal of urban submarkets are remote working, prolonged lockdowns, unavailability of public transit, and a desire for more living space and greenery. The suburban multifamily properties will rebound faster than their urban counterparts.
Which regions are in the lead?
Hence, affordable suburban areas have emerged as the hotbed of multifamily investment in 2021. In particular, suburban properties in the Midwest and the Southeast regions are proving to be the most opportune market for the multifamily sector. Some of the markets that have stood out in terms of their demand and performance for multifamily in 2021 are:
- Kansas City,
- Salt Lake City,
- North Carolina,
- Charlotte and Raleigh,
- San Antonio,
- Dallas-Fort Worth.
On the other hand, San Francisco, New York, Los Angeles, Seattle, California, Chicago, Washington DC, Oakland, Texas, and Miami do not seem to be as favorable for faster economic recovery as the others. This is because urban migration continues to be a rising cause for higher vacancy rates in such densely populated metros. However, the trend seems to have stabilized in most urban sub-markets. Inland Empire, Sacramento, Long Island, Honolulu, Ventura, and Madison are among the few markets that have reported some of the lowest vacancy rates.
#2 Value-add properties
Value-add properties in secondary markets hold a potential market for multifamily investment in 2021. Investors who can modernize a property with renovations that suit the requirements of the renters will reap better ROI. After adding in the required upgrades to the property, investors can attract quality tenants with higher rents. Moreover, it will spruce up the competitive advantage of the asset significantly.
However, before implementing changes in a property Investors must monitor the lifestyle and requirements of people. Since the pandemic confined people to the indoors, self-sustaining apartments that provide a dedicated outdoor space have been in demand. Renters are now demanding a greater autonomy of their living spaces and spacious additional bedrooms. Tenants shifting to the suburbs are looking for increased square footage, as well as a private outdoor eco-friendly space in the form of a patio or a balcony.
Furthermore, self-sustaining multifamily properties with various amenities such as virtual restaurants, video intercom systems, high-speed internet, or large built-in storage will sell themselves. In addition to this, investors can also introduce more gut renovations in the floor plans or ventilation for better filtration. In addition, renters are seeking apartments that enable seamless remote working facilities. To facilitate this, investors should overhaul apartment layouts to accommodate a dedicated office space with a built-in desk or other required amenities.
Hence, renovating a multifamily property to suit a more personalized and intimate post-COVID lifestyle will be profitable for the investors. Moreover, such value-add properties will also have the potential to make a profitable sale in the near future.
#3 Affordable housing
COVID-19 and the resulting economic recession have caused many to rethink their living conditions. With homeownership being way too costly, people are precipitating towards affordable housing. However, the National Low Income Housing Coalition reports that the US is facing a shortage of affordable housing. It is estimated that the country is 7 million rental homes short- a crisis that the pandemic further aggravated. As a result, investors and housing authorities are shifting to humble Class B assets for multifamily property investments in 2021.
As rents are escalating, Class B and C properties are witnessing relatively low vacancy rates and modest rent growth in 2021. Class C properties reported higher delinquencies in 2020 than in previous recessions. On the other hand, 2020 negatively impacted Class A assets with young adults losing their jobs and seeking affordable housing. Class A vacancy rates were the highest at 5.5% with vacancy rates being 4.4% for Class B and 4% for Class C properties.
How is the Government assisting investments in the affordable housing?
According to the United Nations’ Habitat Agenda, affordable housing “means more than a roof over one’s head: It also means adequate privacy, adequate space, physical accessibility, adequate security, adequate lighting, heating and ventilation, adequate basic infrastructure, all of which should be available at affordable cost.” The prices and profit margins of developers were previously significantly low. However, as the demand for affordable housing is skyrocketing, the profit margin for investors is widening. Federal aid to the local governments for the construction of affordable housing is aiding investors to undertake development from the ground up.
In addition to this, federal legislation that proposes competitive local housing innovative grants to state and local governments assists investors. Government funds would help investors to purchase distressed properties, and renovate and modernize them to draw in more renters. Furthermore, benefits from government-sponsored enterprises such as Freddie Mac and Fannie Mae and the U.S Department of Housing and Urban Development (HUD) with their historically low-interest rates bolstered a majority of the lending activity in 2020. Such stimulus will finance the investment activities in 2021 as well. To keep up with the demand, the Government is also easing local zoning laws and housing restrictions. Hence, multifamily investment in 2021 is expected to converge to the affordable housing inventory.
The Lilypads Bottomline
2021- A profitable year for multifamily investment
Although the commercial real estate market is stabilizing, multifamily investment in 2021 relies on the country’s economic restoration. Notwithstanding the pandemic, multifamily has managed to stay afloat with value add properties and affordable housing driving in the majority of investments and demand.
CBRE Q1 2021 US Multifamily Figures reports show that the national multifamily market has become steady in the first quarter of 2021 after almost three-quarters of declined activity. The same report also expects that the multifamily market will further improve due to “seasonality, widespread vaccinations, an improving economy, additional fiscal stimulus and a return of office workers.” Most of the construction for multifamily properties was started before the pandemic. Hence, around 280,000 properties are expected to be delivered against the estimated 300,000 in 2021. Overall, 2021 is predicted to be a profitable year for multifamily investments.