While the pandemic-induced recession has upturned much of the commercial real estate world, the multifamily asset class is proving to be among the most resistant sectors for commercial real estate investors.
In this article we’ll explore the condition of the apartment market before and after COVID-19, and explain why many investors continue to seek multi unit properties for sale in 2020 as a safe and sound investment.
Historic Trends of Multifamily Properties
The multifamily industry in the US was thriving in recent years as the perfect trifecta of demographic, economic, and societal trends. This combination made multifamily property for sale the most liquid and sought after commercial real estate asset class in the country:
- Population migration south and west due to factors such as lower cost of living, business-friendly governments, strong job growth and higher quality of life drove investment in multifamily property in Las Vegas, Texas, and Arizona
- Historically low housing supply options, with housing starts lagging behind population growth since 2007 helping to limit the impact of the recession since the risk of oversupply is low
- Rise of rent controls in major urban markets in states such as California had the unintended consequence of increasing market rent levels due to reduced inventory
- Low interest rates combined with a limited housing supply increased cap rate compression for multifamily properties as new supply reached a cyclical peak
Impact of COVID-19 on multifamily investing
Although migration from large metropolitan areas to the suburbs was already taking place, COVID-19 has helped to accelerate that shift and the growing demand for suburban multifamily property:
- Geographic emphasis shifting to the suburbs with both mid-rise “urbanesque” construction in more dense suburbs and traditional garden multifamily apartments in greenfield locations
- Suburban multifamily unit properties for sale should outperform urban, with lower vacancy rates and higher rent growth
- Top suburban markets for multifamily performance in 2020 include Austin, Atlanta, and Phoenix
- Smaller markets with less than 2 million residents are seeing exceptional multifamily performance due to favorable supply/demand fundamentals, with some smaller metros reporting rent growth of 4% or higher
Future of the Multifamily Industry
The multifamily sector remains relatively resilient. As a recent report from Cushman & Wakefield notes, there are no fundamental changes in long-term demand after digesting the near-term shock of COVID-19 to net operating income. CBRE agrees that the future of the multifamily industry remains strong, while acknowledging that the multifamily landscape has changed significantly:
- Strong pre-pandemic demand for workforce housing should act as an impetus to rapidly reach high occupancy levels as the job market continues to recover
- Upper end product should also perform well since most residents are in a better financial condition to weather economic uncertainty
- PropTech and e-payment platforms are helping to mitigate declines in showing traffic, leasing, and tenant rent collections
- Continued ongoing support for tenants and operators from local municipalities and the federal government are crucial to the continued stabilization of the overall multifamily industry
- Multifamily owners and operators will need to monitor property maintenance, rent collection, and increased home deliveries to ensure increased hygiene and safety levels are met
Fundamentals of Investing in Multifamily Properties
Although the housing market crash in 2008 may understandably be in the minds of many multifamily investors, the effect the Global Financial Crisis had on housing seemed the exception and not the rule.
According to the most recent report from the National Association of Realtors (NAR), the housing market is well past the recovery phase, booming with higher home sales compared to pre-pandemic days.
Existing home sales rose 24.7% month-over-month, while the median price for existing homes was $304,100, up 8.5% from a year ago. Too, this increase marked the first time that the median home price has ever surpassed $300,000. As the NAR observes, the limited supply of existing homes will continue to be an issue, as the imbalance between supply and demand continues to grow.
However, while people can’t buy what’s not for sale, what they can do is continue to rent.
What to know about multifamily investing
There are several key trends to consider when buying multifamily property in 2020:
- Absorption of multifamily product should continue to be strong since the asset class is viewed as a safe haven with lower volatility relative to other CRE asset classes
- Diversified renter base with short-term leases that can be adjusted for inflation offer better market value and less capital required for upkeep
- Rising cost of homeownership and lifestyle preferences by both millennials and baby boomers alike are creating a new “renters-by-choice” tenant base
- Yields from multifamily property will likely continue to tighten with equity and debt flows into the multifamily sector expected to increase
- Secondary markets and high-growth gateway markets in states such as Nevada, Texas, South Carolina, and Maryland may continue to outperform urban areas
Multifamily Property Trends by Region
Demographic patterns favor investors as migration to the suburbs continues and more people choose to rent rather than own. Here’s a quick look at multifamily property trends in several key states for multifamily investments:
Recent trends on apartment buildings for sale in Florida
Investors continue their interest in an apartment complex for sale in Florida, with projects such as the $97 million Sunny Isles Beach apt building for sale. This property debuted in Fort Lauderdale as the largest co-living project in the US.
Recent trends on apartment buildings for sale in Texas
Despite the oil downturn, Houston apartment buildings for sale retain investor interest. The metro area mirrors multifamily property trends in Texas, with strong in-migration and employment growth.
Recent trends on apartment buildings for sale in California
Multifamily investment activity in California remains mixed in the short-term, with the San Francisco Bay Area reporting a 7.4% increase year-over-year. Conversely, Los Angeles and the Inland Empire are seeing cap rates rise due to declining sales volumes and prices.
Recent trends on apartment building for sale in Las Vegas
Colliers reports that Las Vegas apartments for sale saw only a slight increase in vacancy rates to 5.1% in 2020 due to a surge in new development added earlier in the year. As COVID-related population migrations continue, signs indicate a healthy market for investors seeking an apartment complex for sale in Las Vegas.
Recent trends on apartment buildings for sale in Maryland
The apartment market in Maryland remains strong with continued demand from national investors. The D.C. metro in particular saw $1.3 billion in multifamily properties traded with nearly 3,000 units added to inventory by the end of Q2-2020.
Recent trends on apartment buildings for sale in South Carolina
Although uncertainty remains, steady demand for South Carolina apartments for sale is keeping effective rents on the rise. For example, the secondary market of Charleston is of particular interest to national investors due to the addition of several Class A communities in recent years.
Multifamily investors in 2020 should continue to benefit from the law of supply and demand. High occupancy rates and rising rents, combined with a limited availability of apartment product, will keep fueling investor demand even if asset values increase and multifamily cap rates continue to compress.