The multifamily sector of the commercial real estate industry performed stronger than expected during the COVID-19 pandemic in 2020, according to Berkadia’s 2021 Outlook Powerhouse Poll.
The proprietary poll, which was conducted in December, collected insights from nearly 150 Berkadia investment sales advisers and mortgage bankers in 60 offices to assess activity and opportunities in the year ahead.
More than three-quarters of the respondents, 76%, said the CRE fared better than expected in 2020. The investment sales advisers and mortgage bankers also are optimistic that this year will be strong for the industry, as they prepare to address the shift in both investor and renter needs due to the pandemic. According to the poll, 85% said they anticipate the ongoing pandemic and economic uncertainty to only have somewhat or little impact on deal closings this year.
“The multifamily industry is one of many that faced challenges last year due to the COVID-19 pandemic,” said Ernie Katai, executive vice president and head of production at Berkadia. “CRE professionals were forced to rethink their business operations and reimagine how to interact with and support their clients. It was an unprecedented year, but we were encouraged by the industry’s response and multifamily’s resilience. We’re optimistic about the future of CRE, including the year ahead and believe 2021 will be a year of recovery and growth from a fundamentals perspective for the multifamily industry.”
More than half of the respondents, 52%, said they expect commercial real estate capital conditions to return to normal by the end of this year. As for the most prominent investor trends for 2021, they said they anticipate investors actively pursuing acquisitions (49%), seeking immediate financing on currently owned properties (22%), and turning attention toward new property types for their portfolio (8%).
“We’ve seen record-breaking private real estate equity fundraising in the past few years, with $83 billion raised in 2019 and $23 billion through June 2020, according to Preqin,” said Katai. “We expect to see strong investor interest in multifamily, particularly from institutional, private, and foreign investors who are currently weighted heavily toward the hospitality, retail, and office sectors looking to diversify portfolios due to its prospects for stability and ROI potential.”
Increasing Need
According to Berkadia’s investment sales advisers and mortgage bankers, investors have shown an increased focus on affordable housing properties due to the economic hardships and uncertainty from the COVID-19 pandemic.
“Americans are still facing economic insecurity because of the pandemic, a reality that has only worsened our national affordable housing crisis,” said Katai. “This past year has intensified the need for affordable housing, especially for the essential workers in the cities across our country who cannot work remotely or relocate to suburbs in order to reduce rental costs.”
Looking at solutions, the respondents ranked modifying tax credit policy (45%), increased investor prioritization (16%), and regulatory changes for the government-sponsored enterprises (14%) as top catalysts for potential relief. In addition, they said the housing properties they think will be most of interest to investors this year will be Class B (49%), true affordable (16%), and Class C or true workforce (14%).
As for markets, Berkadia’s Research Team anticipates rent appreciation to be highest among secondary and tertiary metros with above-average job growth. Drilling down, the poll respondents added that they expect the Southeast to hold the greatest commercial real estate financing and deal activity for 2021.
“In hand with wide-scale layoffs and other economic hardships, the U.S. has seen drastic demographic shifts as more and more Americans—who have the ability to—have moved outside of costly primary markets,” said Katai. “As a result, the demand for multifamily housing in secondary and tertiary markets is increasing, as renters seek more square footage for remote work. Investors have taken notice.”
Lending Power
Lending activity was strong in 2020, with Fannie Mae and Freddie Mac as well as the Department of Housing and Urban Development (HUD) providing liquidity. For 2021, Berkadia’s mortgage bankers said they expect to see the most activity from the GSEs. With low interest rates and the potential increase in GSE and HUD activity, lending volume could meet or exceed the record-breaking levels seen last year, according to Berkadia.
Tech Trends
The commercial real estate industry quickly transitioned to remote work with a heavy reliance on technology early in the pandemic, and the majority of poll respondents (97%) don’t see that going away, strongly or somewhat agreeing that the industry will continue to operate digitally more than before once the COVID-19 pandemic is behind the nation.
Looking ahead to the next five years, respondents said streamlining deal processes (43%), enhancing investment decision making (25%), enhancing insight into tenant behavior (11%), and increasing flexibility around deal making (11%) top the list of what will have the greatest impact on the commercial real estate market.
“CRE has continued to look for ways to integrate and innovate with the help of technology. In the year ahead, we hope to find new ways to transform our offerings via tech and data capabilities to best advise our clients and meet their ever-changing needs,” said Katai.
