MULTIFAMILY MARKET TRENDS IN 2022
When the COVID pandemic first struck in early 2020, there were many questions about how the commercial real estate industry would fare. People wondered whether it would lead to widespread defaults on multifamily apartment buildings. Unemployment skyrocketed, leaving property owners to ask: will my tenants still be able to pay their rents? Will I be able to remain afloat?
Fortunately, the federal and many state governments were quick to respond with a stimulus package that boosted household income for those struggling. This allowed many people, even those who had been laid off from work, to continue paying their rent on time each month. The widespread defaults that many initially anticipated thankfully never came to fruition.
The economy began to improve in 2021, especially as the vaccine rollout went underway. Last year, the multifamily housing market proved to be resilient—something analysts predict will continue well into 2022 and beyond.
In this article, we offer a multifamily outlook for 2022. Here’s what investors can expect, as well as a few trends we will be watching closely.
A Look Back at 2021
According to a recent Freddie Mac Multifamily report, strong economic conditions and changing migration patterns pushed multifamily housing to record-breaking highs. This was driven largely by economic gains: the unemployment rate dropped, weekly unemployment claims dipped, and gross domestic product rose.
This created accelerated demand for multifamily housing, especially during the second and third quarters of 2021 as the vaccine rollout began in earnest. Multifamily rents rose approximately 10% year-over-year and vacancy rates dipped to just 4.8% nationally.
Given the resiliency of multifamily housing during the latest economic crisis, it’s no wonder more investors have shown interest in the sector. Q3 2021 hit a quarterly record of almost $79 billion in property sales.
What’s in Store for Multifamily in 2022?
Most experts agree that the multifamily sector will continue to be commercial real estate’s darling moving into 2022 and beyond. Here are some of the specific trends we are watching this coming year:
• National vacancy rates expected to remain well below 5%. Demand for multifamily housing remains strong and in turn, has pushed vacancy rates to sub-5% in most metro areas. During the pandemic, vacancy rates peaked at 4.8% in June of 2020 but have since dropped to as low as 2.7% nationally as recently as October 2021, according to RealPage data.
There are several factors contributing to this demand. For example, there are now two years’ worth of college graduates’ who had moved home during the pandemic and are now seeking their own apartments for the first time. Moreover, there are many people who opted to live in roommate situations when the economy crashed in 2020. These individuals are now beginning to look for units of their own, as well.
• Widespread rent growth at variable rates nationwide. Rent growth was especially strong in 2021. In the 12 months ending in October 2021, rents had increased a staggering 14.9% with most of that growth happening since March of 2021. Given pent-up demand for apartment rentals and correspondingly low vacancy rates, this type of double-digit rent growth is very much a possibility in 2022.
Rent growth will vary from market to market, and even within markets. The Sun Belt states are expected to experience the most significant rent growth, with the Northeast and Midwest lagging slightly behind.
• Lease renewal rates expected to remain strong. Lease renewal rates surged during 2021, in part because of the rent increases upon turnover versus those associated with rent renewals. In short, leasing a new apartment tends to come at a premium rather than simply renewing an existing lease (where rent increases tend to be more modest). Multifamily lease renewal rates are expected to approach 58% in 2022, up from a previous high of 56% in mid-2020.
• Rent concessions will continue at a more modest pace. According to RealPage data, just over 19% of Class A apartment buildings had to offer rent concessions during the height of the pandemic. Roughly 16% of Class B properties and 15% of Class C properties followed suit. This has since dropped to 10.1% (Class A), 6.7% (Class B) and 5.7% (Class C) as of October 2021. It is expected that some properties will continue to offer rent concessions in 2022, but these rent concessions will be less common and worth less than they were at the pandemic’s peak.
• New multifamily growth patterns will emerge. When the pandemic first hit, many renters fled pricy urban areas for more affordable suburban locales. This trend is expected to continue, particularly as more people are offered the flexibility to work from home – in full, or at least on a part-time basis. This is expected to reshape the demand for multifamily in markets across the country.
• Multifamily loan originations could hit $500 billion in 2022. With multifamily investor demand at an all-time high, and prices correspondingly following suit, it comes as no surprise that the loan origination market will be strong in 2022. Multifamily loan originations are expected to increase between 5- to- 10% this coming year, which could result in a staggering $500 billion in loan originations (up from $450 billion in 2021 and $360 billion in 2020).
Inflation’s Impact on the Multifamily Industry
Inflation is a concern at the top of every American’s mind. Inflation has averaged more than 5% year-over-year each month since late spring 2021. In November 2021, inflation grew by a staggering 6.8% – the steepest jump in nearly four decades. The food and energy sectors have been especially volatile. Food prices have climbed 6.1% over the past 12 months and energy is up a staggering 33% this year. These price increases all have a direct impact on household budgets, especially since certain food and energy costs cannot be avoided.
That said, if inflation is going up, that means our rents will also increase. Meanwhile, our biggest expense – mortgage loan – is a fixed number. So, multifamily investors also benefit in an inflationary environment. It's one of the reasons that real estate is one of the best investment vehicles available.
Rising Interest Rates? Maybe.
The multifamily industry has enjoyed historically low interest rates for several years. It is not uncommon for borrowers to secure non-recourse loans below 3.5%. This has expanded investors’ purchasing power, which in turn, has driven up the prices for multifamily assets.
As inflation continues to increase, the Federal Reserve Bank has indicated it will start raising interest rates. However, as new COVID variants emerge and cases continue to skyrocket, the Federal Reserve Bank is hesitating to take action just yet for fear of curtailing economic growth.
While the Fed may tweak monetary policy in 2022, any changes are expected to be nominal. Multifamily investors can expect to access low-cost debt for the foreseeable future, at least through this year and likely into next.
Conclusion
The multifamily industry is poised to have another strong year in 2022, bolstered by the long-term fundamentals and stability of the multifamily market—as well as the demographics and trends that feed it. This is particularly true when compared to other investment alternatives, such as the volatile stock market. Another example, the 10-Year Treasury yield has hovered between 1.4% and 1.5% this past year, which is well below multifamily cap rates. Even in a compressed cap rate environment, multifamily investors are earning on average 5-7% returns on their investments.
The markets Rezilient Capital focuses on continue to demonstrate strength in fundamentals with rent growth at historically high levels, as well as robust absorption of newly constructed properties. In the second quarter of 2021, these fundamentals contributed to a significant uptick in transaction volume, which we assume will continue throughout the remainder of 2022. Keep an eye out for an updated 2022 multifamily outlook in June.
Ready to invest in multifamily real estate? Contact us today to learn more.
