November 25, 2021
Best Ever CRE Community

Is the Multifamily Market Softening?

The pandemic changed the way that we work, live, and learn. The majority of industries and businesses took a hit as markets and trends were turned completely upside down. The multifamily real estate investment market was no exception. The face of multifamily property real estate investment had changed substantially since the market was at an all-time high in 2019. But does this change mean that the multifamily market is now softening?

From Boom to Bust

Before March 2020, multifamily originations reached a high of $59.2 billion. Before news of the pandemic, multifamily originations were forecast to jump even higher in 2020. Things were seemingly booming in the multifamily investment market with historically low rates, high leverage, and aggressive underwriting.

Before 2021, multifamily assets, from apartment buildings and townhomes to condominiums, duplexes, and beyond, were flying off the market.

When COVID-19 took hold around the United States, the multifamily market went from boom to bust like most things. Similar to sales for single-family homes, commercial real estate and sales of apartment complexes and multifamily properties saw a significant drop.

After March 2020, multifamily housing sales fell by 35%, and most deals under contract and in the due diligence period fell through. Given the uncertainty of the times with rental properties and real estate investments falling drastically, the market came to a dramatic stop. As a result, many lenders halted or slowed down funding for many multifamily investment opportunities.

While 2020 was looking bleak for real estate investors and the multifamily property market, things began to look better as the year progressed. With the overall decreases in multifamily housing starts and loan originations, the market was left with major uncertainties.

As 2021 got underway with the hope of vaccinations and the return of some normalcy, rents, investments, and acquisitions began to climb again. While there was initial speculation about the multifamily market softening, experts predict a comeback for multifamily investing.

Market Trends

Like most areas of real estate and investing, 2020 rocked the multifamily home market. The face of multifamily and rental property real estate has drastically changed as we try to come out on the other side of the pandemic. As a result, the market is seeing many new trends. While the pandemic still impacts multifamily property investment, many trends show that the market has stabilized and is returning with a new look.

Workforce housing has become the rising star in the multifamily market. Catering to police officers, firefighters, healthcare workers, and other middle-income professions, workforce housing is proving to be immune to the impacts of the pandemic and recession. The multifamily property market is bouncing back in a great way because of the essential workers of 2020.

Due to the real estate demand created by workforce housing, new investors are making their way to the multifamily home market. Class A multifamily properties continue to be a rocky area for brokers, lenders, and investors. However, Class B and Class C properties show solid performance as a part of investment portfolios.

Unlike the retail and commercial real estate sector, multifamily residential property is having a strong showing since 2020. Many developers with planned mixed-use amenities are now cutting the first-floor commercial properties and building all multifamily unit facilities.

Additionally, investors are now finding that the greatest investment opportunity exists in value-add buildings. Even in areas where rents have fallen or become stagnant due to the pandemic, value-add multifamily properties are selling well. Investors can spruce up these buildings with well-chosen amenities and renovations to draw in tenants, decrease vacancy rates, and generate new rental income.

Sector Turnaround

Market trends suggest a new iteration of the multifamily property market but seem to indicate a sector turnaround. The multifamily home industry weathered the 2020 pandemic and recession better than commercial real estate and most other sectors.

Due to lost rental income, postponed rents, and delinquencies over the last 18 months, cash flow has been tough for some investors. As a result, it seemed as though the market would soften as pandemic-era regulations made multifamily properties a higher-risk investment.

The 2021 economic rebound, however, is leading to a new rise in multifamily home demand. Many experts believe that demand will fall short of the peaks in 2019, but trends seem to indicate that demand will continue to improve over 2020 numbers.

Multifamily property markets have shown signs of a turnaround in 2021 with increasing rents and declining vacancy rates. Many of the top markets showed increases of 2% or more in early 2021 as a market turnaround emerged. Due to the limited number of units available, many property owners and landlords saw strong rent growth.

The COVID-era trend that saw tenants move to the suburbs en masse also proved beneficial for secondary and tertiary markets. Metro areas like Dallas, Atlanta, Tampa, and Charlotte have become high-migration areas and have seen an increase in renters and new investors.

As market trends suggest, Class B and Class C multifamily units continue to perform well with low vacancy and steady rent growth. The demand for affordable rental units driven by middle monthly income workers has kept the multifamily home market above the watermark.

As market conditions continue to improve, multifamily home investment volume is expected to increase. Research predicts that new investors will continue to add family properties to their real estate investment portfolio. As a result, investment volume is anticipated to see a 33% gain over 2020.

Multifamily Market Outlook

While the pandemic battered many experienced investors and lenders in the investment property industry, recent market trends provide great insights for the sector’s future.

Late 2021 and beyond is expected to be strong for real estate in the multifamily market. Data suggests that nearly 98% of potential investors and experienced investors seek to expand their multifamily portfolios. As investor confidence rises, the market could see a significant surge in investment activity.

With no slowdown anticipated, new lease agreements and occupancy rates for affordable units are expected to create strong demand for Class B and Class C multifamily properties. As a result, the Class A asset market is expected to continue to soften and lag behind. With little demand for expensive housing, a value-add investment property is the best way to see a better return.

In general, leverage and proceeds will remain lower than pre-coronavirus, interest rates will likely remain low, and capital will be available from lenders. Even with the ups and downs, real estate lenders and investors will be eager to increase holdings in multifamily properties as that segment is still seen as having the least amount of risk.

Additionally, organizations like Fannie Mae and Freddie Mac continue to mitigate economic downturns by providing support with available debt capital and financing options.

As multifamily investors journey into a new era of post-pandemic rental property income, the market continues to provide great investment opportunities. While market trends have shifted toward value-add and smaller multifamily units like duplexes and triplexes, industry investment is still a great wealth-building tool.

COVID-19 will continue to shape occupancy demands and expectations. However, purchase prices are holding up well and have led to greater clarity on future revenue streams. Steadily improving markets in the real estate industry are decreasing risk factors and driving a positive outlook for multifamily investments.

About the Author:

Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast:

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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