Multifamily has weathered the 2020 recession better than most property sectors and is looking at a quicker rebound next year, according to a recent report by CBRE. However, it still has been a tough year with many owners losing rental income as well as ancillary income from waived fees, deferred rents, and delinquencies.
CBRE’s “2021 U.S. Real Estate Outlook” calls for multifamily returning to pre-pandemic occupancy levels in 2021 with rents fully recovering by 2022.
“The economic rebound will lead to rising multifamily demand, largely from ‘unbundling’—certain renters moving out of their parents’ homes or those of friends as job opportunities provide more financial flexibility to live independently,” stated the report. “Demand levels in 2021 likely will fall short of pre-COVID peaks in 2018 and 2019 but should rise significantly from 2020.”
For affordable multifamily housing, vacancy rates are expected to remain relatively low next year. More affordable housing inventory—Class B and Class C—has maintained low vacancy rates and modest rent growth this year, which is unlike previous recessions. Class C properties also had higher delinquencies, according to the report.
However, Class A assets have been impacted the most by the pandemic with higher turnover from young adults moving home, the steady delivery of new supply, and renters concerned about affordability and seeking less expensive housing. Class A assets, according to the report, may not start to recover until mid-year 2021, but Class B assets should continue to outperform with low vacancy and steady rent growth.
While many investors moved to the sidelines as the pandemic spread, investor demand for multifamily still has been more than previous recessions would have indicated. On the investment front, volume is projected to rise to $148 billion in 2021, 33% over 2020’s estimate of $111 billion but still short of 2019’s total of $191 billion.
CBRE expects, with greater clarity on future revenue streams, institutional investors and value-add investors to be more active next year as well as an increase of activity from offshore buyers, if travel restrictions are eased.
Expectations are good for development next year since most of 2021’s scheduled deliveries were started prior to COVID-19. CBRE predicts that deliveries will reach 280,000 units on top of the estimated 300,000 units this year. “The level of new supply will temper improvement in Class A vacancies and rents in many markets,” stated the report.
In addition, COVID-related factors as well as high housing costs and shifting demographics have currently impacted the appeal of urban submarkets. Suburban multifamily communities are expected to outpace urban properties in the recovery. While there are no indications that these changes are permanent, urban submarkets will lag in the overall recovery and lower-density and less-expensive suburban markets are holding up well in 2020 and positioned to lead market performance next year, according to CBRE.
In particular, suburban assets in the Midwest and Southeast regions are slated for the best opportunities for achieving expected revenues and seeing solid market performance in 2021. In the Midwest, Indianapolis has been cited as the best-performing market of 2020, with Memphis, Tennessee; Detroit; Columbus, Ohio; Cleveland; Cincinnati; Kansas City, Missouri; Louisville, Kentucky; and St. Louis also among the best markets in the country.
In the Southeast, the leaders seen in 2020 are Greensboro, North Carolina; Richmond and Virginia Beach, Virginia; and Jacksonville, Florida. Other markets that performed well and are positioned for solid performance next year include Charlotte and Raleigh, North Carolina; Tampa, Florida; and Atlanta.
In addition, Phoenix, Dallas-Fort Worth, and Denver have compelling demand dynamics and performed at about the national average this year, putting them on investors’ radars in 2021.
The most impacted markets this year have been San Francisco; San Jose, California; and New York. Other underperformers include Los Angeles; Boston; Seattle; Oakland, California; Austin, Texas; Miami; Chicago; Washington, D.C.; and Orlando, Florida. However, according to CBRE, investors may favor high-tech markets for their potential quicker economic recovery, but tech firms’ work-from-home policies may not restore demand as quickly.