Top 10 Markets for Multifamily Sales Volume in 2020

This article was originally published on Arbor Chatter as "Top 10 Markets for Multifamily Sales Volume in 2020", and all charts and images are from Arbor Chatter.

-----

• Dallas finished as the top destination for multifamily capital in 2020, for the fifth consecutive year. 
• Sun Belt markets such as Atlanta and Phoenix continued to attract investors. 
• U.S. multifamily sales overall fell 28% in 2020, compared to 2019’s record total.

The U.S. multifamily market weathered the COVID-19 pandemic better than most sectors of the economy during 2020, boosted by stimulus packages that allowed tenants to generally keep up with rent payments. According to Real Capital Analytics (RCA), sales activity was down 28% in 2020, compared to 2019’s record total. However, the year finished strong. After moderating in the third quarter, the market posted $56.7 billion in sales in the fourth quarter, which was higher than the volume seen in the entire first half of the year. 

Sun Belt markets led the recovery, as investors sought out affordable markets with positive migration trends, strong economies and good job growth.

Dallas Remains Strong

For the fifth year in a row, Dallas led the nation in multifamily investment activity, with $10.3 billion in sales volume. This was only an 8.0% drop from the $11.2 billion in sales recorded during 2019. Dallas was a strong performer during the recent expansion, finishing as the No. 2 sales market for the 2010s, behind only Manhattan.

 
The Dallas economy fared relatively well during the downturn, with employment declines well below the national average. The ability to work from home buffered job losses among the area’s high concentration of corporate headquarters, while the increased demand for housing boosted the construction industry. These factors, along with positive migration trends and a growing technology sector, make Dallas an attractive market for multifamily investment coming out of the recovery.

Sun Belt Markets Shine

Atlanta finished second in the nation for 2020, with $9.5 billion in multifamily sales volume, a 17.4% drop as compared with 2019. The area’s diverse economy lessened the effects of the recession, although the recovery has been slow as the level of COVID-19 cases remains high.

 
After posting a historical market record in multifamily sales volume in 2019, Phoenix finished 2020 with $8.2 billion in sales. This was the third highest total in the nation, although it was down 22.1% year-over-year. The area’s economy fared better than most markets during the pandemic. Tremendous population growth and business relocations have driven the market's recovery, but an extremely high level of positive COVID-19 cases have hindered this progress.

 
Additional Sun Belt markets filled out 2020’s top 10 multifamily sales volume leaders, including Denver, Austin and Charlotte, with Houston, Tampa and Orlando finishing as runners up.

Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.

This article was originally published on Arbor Chatter as "Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.", and all charts and images are from Arbor Chatter.

-----

• Indianapolis multifamily rent growth topped the rankings in Q3 2020.
• Vacancy rates remained near record lows for the market.
• The Indianapolis metro area’s economy has performed better than most during the COVID-19 crisis, with unemployment recovering to near pre-pandemic levels.

The Indianapolis multifamily market experienced the nation’s highest rent growth during the third quarter of 2020 and the vacancy remained near record lows. Employment levels recovered to near pre-pandemic levels, driven by a developing technology industry and strong logistics base. While the course of the COVID-19 pandemic will be the ultimate driver of short-term growth, Indianapolis is well-positioned for long-term success.

Rent Growth Continues

According to Moody’s Analytics REIS, effective rent in Indianapolis grew 3.7% year-over-year, the highest rate among major markets in the country. This was well higher than the U.S. overall rate which fell -1.2% during that time. The strong rent growth was not a new trend. Indianapolis outgrew the U.S. overall for 2019 also, at 4.3% vs. 3.7%. Asking rent for Class A properties increased 3.3% year-over-year, compared to 2.2% for Class B/C, going against the national trend of rents in high-end properties falling faster than workforce units.

The market vacancy rate was at historic lows coming into the pandemic, reaching 5.0% at the end of 2019. By the end of the third quarter of 2020, the rate had increased to only 5.2%, although remaining slightly higher than the U.S. overall rate of 5.0%. The vacancy rate for Class A properties increased to 5.8% from 5.4% at year end, while the Class B/C rate improved to 4.4% from 4.5%, following the national trend of stronger workforce housing performance.

Economy Remains Strong

The Indianapolis metro area’s relatively affordable housing prices and cost of doing business has led to positive migration trends over the last few years. The already strong distribution sector has been further boosted by the growth in e-commerce during the pandemic, and the developing technology sector has provided a well-educated workforce. Additionally, the area’s low reliance on hospitality tourism has shielded its exposure to the recession, although the public sector has shown weakness.

According to the REIS COVID-19 impact tracker, the Indianapolis economy has performed better than most major markets during the coronavirus crisis, and the forecast calls for continued strong job growth.

The U.S. Bureau of Labor Statistics (BLS) reported that payroll employment for the Indianapolis metro area had nearly recovered to pre-pandemic levels by the end of October, down only 0.6% since February, or 6,400 jobs. For the U.S. overall, there were 10.1 million fewer jobs at the end of October compared to February, down 6.6%.

The BLS also reported that the unemployment rate for the area was 4.9%, approaching the the level prior to the COVID-19 outbreak of 2.8%, and well below the peak of 13.3%. As a comparison, the unemployment rate for the U.S. overall was 6.9% at the end of October, and peaked at 14.7%.

Outlook

As with most markets in the U.S., the course of the pandemic will determine the outlook for Indianapolis. However, the local economy has low exposure to the industries that have been hit hardest. The multifamily market entered the pandemic on a strong note and the area’s population growth, well-educated labor pool and growing high-tech industries will drive a fast recovery from the COVID-19 slowdown.

U.S. Multifamily Market Spotlight Q3 2020

This article was originally published on Arbor Chatter as "U.S. Multifamily Market Spotlight Q3 2020", and all charts and images are from Arbor Chatter.

-----

• U.S. multifamily rent growth fell 1.2% year-over-year, yet renters have kept up with payments.
• Vacancy rose to 5.0%, up from 4.6% one year ago, although remained in line with long-term averages.
• Investment activity dropped to half the volume from at the same time last year.

While not immune to the effects of the recession, the multifamily real estate market has shown resilience thus far in the pandemic, compared with other property sectors. Rent payments have held steady, although rent growth slowed and vacancy increased. Investors showed caution, with sales volume and lending activity declining compared to last year. Additional assistance to support renters through the remainder of the pandemic would solidify the stability of the sector.

Multifamily Market Rent Growth

Rent growth in the U.S. multifamily market showed further declines in the third quarter, as the COVD-19 recession dug deeper into the U.S. and put the brakes on a strong 10-year run for the sector.

Moody’s Analytics REIS reported that effective rent growth fell 1.2% year-over-year, down from an increase of 3.7% in 2019. A 1.9% decrease was measured for the third quarter alone, which was the steepest decline on record. The declines in rents have been primarily driven by Class A properties, which fell 1.7% year-over-year. In comparison, Class B/C properties fell 0.6% year-over-year. Overall, rent growth is forecasted to decline by a record 2.6% in 2020, steeper than the declines posted during the Great Recession, and is expected to continue to decline in 2021 before turning positive again in 2022.

The U.S. vacancy rate rose to 5.0%, up from 4.6% one year ago, and reaching its highest level since 2011. However, the vacancy rate remained in line with long-term averages, as the market was starting from a strong point. REIS forecasts that the vacancy rate could increase to 6.5% by the end of 2021. The vacancy rate for Class A buildings jumped to 6.4%, from 6.0% at the end of 2019, while Class B/C properties increased only slightly, to 3.7% from 3.6%.

Despite the overall market downturn, a few markets were able to post positive results. Indianapolis posted the strongest rent growth year-over-year, at 3.1%. According to the REIS COVID-19 impact tracker, the rate of job decline in Indianapolis has been better than most Midwest metros. The city’s diverse employment base and well-educated work force will help accelerate the Indianapolis recovery.

Additional Midwest markets also were among the national rent growth leaders, such as Cleveland (up 2.8% year-over-year), Kansas City (up 2.6%), and St. Louis (up 2.6%). Last year’s growth leader Phoenix increased 2.3%. The high-priced coastal markets continued to post the largest declines. The San Francisco multifamily market dropped 9.6% year-over-year, while the New York Metro fell 7.4%.

Thus far, an overwhelming majority of renters have been able to keep up with rent payments throughout the pandemic. The National Multifamily Housing Council (NMHC) Rent Payment Tracker found 94.8% of apartment households made a full or partial rent payment by the end of October, down slightly from 96.6% one year ago. With the CARES Act benefits expiring on December 26, the NMHC warns that the federal government will need to deliver additional stimulus to protect the stability of the nation’s rental housing sector.

More than 13 million workers were being supported by pandemic unemployment benefits at the end of October. Renter households could see a bigger impact from the expiration of the extended benefits, since renters tend to be more cost burdened than homeowners. Renters are not the only ones who will struggle. Without rental income many landlords will be unable to pay property expenses, such as taxes and utility bills.

Capital Markets

Investment activity continued to slow, as a price disconnect remained. Through the first three quarters of the year, multifamily sales volume dropped to $81.3 billion, half the total from at the same time last year, according to data from Real Capital Analytics (RCA).

Cap rates for multifamily transactions remained at historic lows, averaging 5.3%, and were in line with the level measured at the end of 2019. Multifamily cap rates remained the lowest among the major property types, followed by industrial (6.1%), office (6.6%), retail (6.6%) and hotel (8.7%).

RCA also reported that their Commercial Property Price Index increased 7.2% for the apartment sector, down from an 8.8% increase one year ago. However, the rate of increase remained significantly higher than the U.S. overall rate of 3.6%. The industrial index was the only segment to post a higher increase than apartments, rising 8.5%

Refinances accounted for 74% of apartment loans through the first nine months of the year, which was the highest level of year-to-date refinance activity on record. Through the same time period in 2019, refinances accounted for 63% of multifamily lending, which was in line with the five-year average.

Historically low interest rates spurred the high percentage of refinance activity. RCA reported that the average multifamily mortgage rate fell to 3.4% in August, sliding from 4.1% at the same time last year, and the lowest on record.

The Mortgage Bankers Association (MBA) projects multifamily originations will fall to $288 billion for this year, down 21% from 2019’s record total of $364 billion. Going forward, MBA forecasts an increase in multifamily lending volume for 2021, rising to $305 billion.

Economic Overview

The economy made strong gains in employment over the summer, although through October total employment was still down over 10 million jobs since the start of the pandemic, according to data from the U.S. Bureau of Labor Statistics. The unemployment rate finished at 6.9%, a significant improvement on the COVID peak of 14.7%. However, this figure remained higher than the pre-COVID rate of 3.5%.

The Department of Labor reported that a total of 21.1 million people were receiving unemployment benefits in October, including 13.1 million receiving extended pandemic assistance. Jobless claims still remained elevated, with more than 700,000 people per week filing claims. Prior to the pandemic, the previous record weekly high was 695,000 for the week of October 2, 1982. Claims have eclipsed that 40-year record every week since March 21st.

Gross domestic product jumped an annualized 33.1% in the third quarter, yet total production remained a net 3.5% below pre-pandemic levels. The GDPNow model estimate from the Atlanta Federal Reserve for the fourth quarter was 2.2% as of the end of October.

Ultimately, the duration of the recession will be determined by the course of the pandemic. Recent vaccine news has been encouraging, although timelines for widespread accessibility of an effective vaccine still remain unknown. With COVID-19 cases surging as the country heads into winter and no sign of additional fiscal support from Congress, a clear timeline of recovery remains unknown.

Top Multifamily Rent Growth Markets Q3 2020

Indianapolis posted the strongest multifamily rent growth year-over-year, at 3.1%. Additional Midwest markets also were among the national leaders, such as Cleveland (up 2.8% year-over-year), Kansas City and St. Louis (both up 2.6%).

Source: Arbor Chatter

U.S. Multifamily Market Snapshot Q3 2020

 

The multifamily real estate market showed resilience in the third quarter, despite the COVID-19 pandemic. Rent growth posted declines, yet rent payments have held steady and the market fared better than other property sectors.

Source: Arbor Chatter

U.S. Multifamily Market Snapshot Q2 2020

 

The multifamily market felt the effects of the COVID-19 pandemic in the second quarter. Following a historically strong 10-year run, rent growth slowed and sales volume declined, as investors showed caution. Although the quarter’s results show that multifamily is not immune to the recession, and the course of the pandemic is still unknown, the sector has shown resiliency as compared with other sectors.

Source: Arbor Chatter

Midyear 2020 Multifamily Investment Market Update

This article was originally published on Arbor Chatter as "Midyear 2020 Multifamily Investment Market Update", and all charts and images are from Arbor Chatter.

-----

- Refinances accounted for 73% of apartment loans, up from 61% in 2019.

- Apartment mortgage rates fell to 3.6%, marking the lowest rate on record.

- A total of $55.0 billion in sales volume was recorded, sharply down from the pace of 2019’s record high.

-----

Refinance Activity Increases

During the first half of 2020, the multifamily lending environment experienced a historically high level of refinance activity.

Refinances accounted for 73% of apartment loans through June, according to data from Real Capital Analytics (RCA) reflecting property and portfolio transactions of at least $2.5 million. This was the highest level of first-half refinance activity on record. In comparison, refinances during the first half of 2019 accounted for 61% of multifamily lending, which was in line with the five-year average.

The high percentage of refinance activity has been spurred by historically low interest rates. RCA reported that apartment mortgage rates fell to 3.6% in the first half of 2020, down from 4.5% at the same time last year, and marking the lowest rate on record.

Sales Activity Slows

Although there has been an increase in refinancing, the COVID-19 pandemic led to a steep drop in sales activity. Through the first six months of the year, $55.0 billion in multifamily sales volume was recorded, not the lowest volume on record, but sharply down from the pace of 2019’s record high of $190.0 billion. However, apartments remain the preferred commercial real estate sector, leading all other major types in investment volume during the first half of 2020 as it had for all of 2019.

RCA commented that the pause in investment activity signaled that the market is in a “shock and triage” phase of the cycle, as potential buyers remain cautious. The market won’t enter the “price discovery” phase until forced sales lead to an increase in volume.

The recession caused by the pandemic has also affected apartment values. As of June 2020, the Real Capital Analytics Commercial Property Price Index (RCA CPPI) fell to an annualized rate of 7.1%, down from 8.4% compared to the same time period of last year. Cap rates remained stable, averaging 5.3% through June, in line with the 2019 average.

The Sector Shows Resiliency

Although these measures show the multifamily market is not immune to the effects of the recession, and while the course of the pandemic is still unknown, the sector has shown resiliency thus far. Renters have prioritized paying their rent, despite the high level of unemployment. The National Multifamily Housing Council’s Rent Payment Tracker found 91.3% of apartment households made a full or partial rent payment by July 20. Additionally, with high prices and tight supply in the housing market, many would-be home buyers will be forced to remain renters, which will help to stabilize the multifamily market.