Multifamily CCIM Feature

Multifamily Investors Step on the Gas

After a quiet 2020, the multifamily market is revved up for a booming year as the economy and commercial real estate industry open.

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. 

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.

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 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 180,000 new multifamily units scheduled to come online during 2021, which is about on pace with 2020.

Tertiary Markets See Increased Demand

One thing that investors are keeping a close eye on is migration trends that could alter market growth and demand for rental housing. According to the annual National Migration Study from United Van Lines, the pandemic accelerated trends that were already underway - -namely a population that is continuing to move West and South. In 2020, Idaho, South Carolina, and Oregon were the states with the highest percentage of inbound movers, while New Jersey, New York, and Illinois saw the highest rate of outbound movers. On a metro level, the cities with the highest percentage of outbound migration during the pandemic were New York and Newark, each at 72 percent outbound, and Chicago with 69 percent. The two cities with the highest inbound moves were Wilmington, N.C. (79 percent inbound), and Boise, Idaho (75 percent inbound). 

Many tertiary markets are also benefiting from population shifts, which drives demand from both renters and investors. “Towns such as Bend, [Ore.], Bozeman, [Mont.], Boise, [Idaho], and Coeur d'Alene, [Idaho], are getting massive amounts of interest and in-migration as a result of companies getting very comfortable with people working remotely,” says Dan Kemp, CCIM, president of Compass Commercial Real Estate Services in Bend. In the past, people who lived in Los Angeles or San Francisco who were not happy where they were living often stayed because of their job. People are now more able to live anywhere and keep that job and salary, he says. Even before COVID-19, Bend was No. 1 in the country for people who lived in the town and earned a paycheck from somewhere else, which has only increased in the wake of the pandemic. “We have seen a lot of people moving into Central Oregon from San Francisco, Seattle, and Portland,” Kemp adds.

Investor interest in Central Oregon is resulting in cap rates that trended lower over the past year, with some sales this year dipping below 5 percent. For example, Kemp and colleague Pat Kesgard represented Hunter Renaissance Development in the sale of a 58-unit property in Redmond, Ore., that sold for $13.2 million, or roughly $227,500 per unit, in the first quarter. The Central Oregon multifamily market is dominated largely by a few ownership groups. According to Kemp, much of the property trades that do occur consist of smaller assets, such as 20- to 40-unit apartment buildings, duplexes, and fourplexes.


Las Vegas is another market that is enjoying strong in-migration. “It's mind boggling when you think about it. We have the third highest unemployment in the country, and yet we're probably one of the top three housing markets in the country as well,” says Lee. During 1Q2021, Las Vegas posted average annual apartment rent growth of 9.3 percent, fueled largely by people relocating from California. For example, across the high-rise portfolio Northcap Commercial manages in Las Vegas, 60 percent of the new residents in 2020 came from California versus 35 percent in 2019. “That's a big change, and I think it's permanent,” says Lee.

Even in cases where employers in San Francisco or San Jose stated that they will cut the pay of employees who choose to work remotely, the lower cost of living in a city such as Las Vegas more than offsets those pay cuts, notes Lee. In addition, he expects more people to continue to move to Las Vegas in 2021 as the Strip fully opens back up. People also like the fact that Nevada has no state income tax, he adds. 

Will Relocations Be Permanent?

A key question is whether the population shifts will turn out to be temporary. Will people decide to return to major metros once the pandemic subsides and companies bring employees back to the workplace? “I think you are going to have both,” notes Kemp. Some people will embrace the change and make it permanent, while others might miss living in a busy city with lots of people and 24/7 activities. However, while demand might taper off, the uptrend in growth is likely here to stay, he says.

Those major metros that saw renters pick up and leave during the pandemic are facing some tough short-term challenges to entice renters back to markets. Those that had active development pipelines prior to COVID-19 have even more heavy lifting. According to Trepp, the top five cities with the biggest occupancy challenges are Boston; Santa Monica, Calif.; Tallahasse, Fla.; San Francisco; and Seattle. The caveat is that Trepp is looking at stress in those markets through assets that also have a high exposure to apartment-backed CMBS loans. According to the Freddie Mac 2021 Outlook, the bottom five metros based on negative income growth in 2021 are Washington, D.C.; Richmond, Va.; San Francisco; New York; and West Palm Beach, Fla.

San Francisco, for example, saw an exodus of people leaving the city during COVID-19, but the situation wasn't as dire as some of the news stories suggested, notes Knutson. Apartment rents in the San Francisco Bay Area have held fairly steady. The notable exceptions being the core urban neighborhoods in San Francisco, and to some degree San Jose and Oakland. According to Knutson, anecdotally, some apartments saw asking rent reductions of 20 to 30 percent during the pandemic.

It has been a tumultuous year in the economy, and another way to add value for clients in the current marketplace is to give owners frequent updates on changing market values that could influence decisions to sell assets.

The fundamentals softened in those core neighborhoods for two reasons. Tenants moved to get lower rents and more outdoor space during the pandemic, and there was also a surge in supply as new projects were completed and came online. “If people could work from home, they generally preferred more open space and less density, and it's also not as fun to live in San Francisco if the restaurants and bars are not open and there is not as much to do,” says Knutson. However, people are starting to move back, and there is renewed interest that as things open back up. Owners are working to speed that recovery by offering concessions and discounted rents to entice renters to return, he adds.

Even in hard-hit markets, investors have yet to see the distressed buying opportunities or deep discounts that many had hoped would materialize in the apartment sector. According to Trepp, multifamily delinquencies were at 2.3 percent for April, which is well below the 10.8 percent in retail and 15.6 percent in lodging. “In the early few months of the pandemic, we were trying to get a footing on value, and we didn't have enough transaction data to really peg what the interest was for these properties,” Knutson says. By October, private buyers returned to the market and listings were generating multiple offers. “We were getting anywhere from eight to 12 offers on most listings in the range of $10 million to $40 million,” he says. The institutional investment market was a little slower to return. “For multifamily, we still have a tremendous amount of capital out there seeking deals — far more than how much product is available in the market,” he says. “So, we continue to see strong bidding for almost every offering that we have.”

Issues to Watch in 2021

Although many commercial real estate professionals are hopeful that COVID-19 is in the rearview mirror, a number of issues could impact the investment sales marketplace. One potential hurdle is inflation. “I don't see how inflation can't happen when you add the kind of money to the money supply that we've added,” says Kemp. “Are we going to have inflation? I think the answer is absolutely yes, but there is a lot of political interest in pushing that off as long as possible, so that leads me to believe the next few years will be pretty steady in terms of demand, and real estate is going to be a great asset as inflation takes hold.”

Investors are also watching President Joe Biden's tax proposals that could have big implications for the entire commercial real estate investment sales market. The Biden administration has proposed raising the capital gains tax rate, significantly reducing the amount of gain that an investor could defer under a 1031 like-kind exchange, and eliminating the step-up basis when passing property to heirs. “We're watching that very, very closely, because that is something that can definitely have an impact on our sales cycle,” McConnell says. That is an issue where commercial real estate professionals have the potential to add value to clients and advise them on how to get through any potential changes. If someone is on the fence and considering selling in the next two to three years, it may be wise for them to sell now rather than waiting to see what happens with proposed changes to capital gains taxes, notes McConnell. “We are definitely seeing owners that are moving forward with sales now to get in front of possible changes,” he says.

It has been a tumultuous year in the economy, and another way to add value for clients in the current marketplace is to give owners frequent updates on changing market values that could influence decisions to sell assets. For example, Baez is reaching out to clients every three-to-six months with updates on estimated property valuations. Everyone knows what the value of their 401(k) is because they get that quarterly statement. Real estate is an asset, and it is important to give owners those macro- and micro-level updates to show how values have shifted due to market conditions and interest rates, he says.

Beth Mattson-Teig

Beth Mattson-Teig is a freelance business writer based in Minneapolis. 



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