The impacts of COVID-19 on the U.S. multifamily market vary significantly across metro areas. Not surprisingly, the nation’s denser gateway markets have been hardest hit, while secondary and tertiary markets have fared better.
Emily Bostic, Avison Young
In a reversal of pre-pandemic trends, suburban locations have gained favor over urban submarkets from both renters and investors. As many employees continue to work from home, larger and more affordable units in suburban submarkets have become more appealing. Elevated construction costs are also a factor, driving garden-style development versus more costly podium construction.
The Triangle’s suburban submarkets are experiencing the strongest construction activity, most notably in the North Cary/Morrisville submarket, where 1,784 units averaging over 1,000 square feet per unit are currently underway.
Steven Peden, Avison Young
As ongoing work-from-home arrangements prompt more tenants to consider living further from the Triangle’s primary employment centers, developers are increasingly willing to look at sites in outlying communities such as Wendell and Clayton. Demand is expected to return to the Triangle’s urban submarkets as employees return to the office and retailers and restaurants fully reopen, but the recovery in these areas is likely to be protracted.
Solid footing
The Triangle’s multifamily sector ended 2020 on relatively firm footing despite a tumultuous year. Both leasing activity and sales volume crawled to a near halt in the second quarter in the face of pandemic-driven logistical challenges, stay-at-home directives and economic disruption.
Craig Cadwallader, Avison Young
The Triangle experienced a resurgence in absorption in the third and fourth quarters, keeping demand in line with new deliveries. Net absorption totaled 5,163 units in 2020, down just 4.5 percent over 2019 despite unprecedented challenges. More than 8,000 units were under construction in the Triangle at the end of 2020, and 5,872 units have delivered in the last 12 months, bumping inventory by 3.5 percent.
Triangle multifamily occupancy and rent collections held up remarkably well through 2020 as a result of the region’s strong population growth, a tight single-family housing market and a large base of knowledge workers with the ability to work remotely. Occupancy stood at 95.1 percent in the fourth quarter, down just 20 basis points versus the same period in 2019.
Enhanced unemployment benefits and other supportive measures contributed to better-than-expected rent collections. Payments for market-rate apartments were received from 89.5 percent of renters in December, down a modest 3.1 percent year-over-year. Throughout the pandemic, rent collections have been strongest in the Triangle’s upper-tier and mid-range apartments. Workforce housing has been more negatively impacted.
Effective rent growth was essentially flat-lined in 2020, with the average rate across all asset classes ending the year at $1.22 per square foot. The average concession rate as a percentage of asking rent stood at 4.4 percent in the fourth quarter, up from 2.9 percent from fourth-quarter 2019.
After a sharp decline in the second quarter, Triangle multifamily investment volume rebounded in the back half of the year. Volume totaled $2.4 billion in 2020, down 25 percent year-over-year. Investors remain bullish on the region, with private and institutional buyers dominating activity.
Private capital sources represented roughly 63 percent of the total buyer composition in 2020, while institutional investors accounted for 28 percent. Soft leasing fundamentals in large urban markets have shifted capital more heavily toward the Southeast, and the Triangle will continue to benefit from this trend in 2021.
Favorable outlook
The region’s strong demographics, dynamic economy and quality of life were attracting both residents and capital to the area before the pandemic and have only been enhanced by the crisis. Sellers have largely held firm on pre-pandemic pricing, and strong demand for product in the Southeast has led to further compression of capitalization rates on existing properties. The average Triangle multifamily cap rate was 4.9 percent in the fourth quarter, down 20 basis points year-over-year.
In the Triangle, job growth in the region’s life science sector accelerated notably in 2020, with many firms tied directly to addressing COVID-19.
In their most recent Emerging Trends in Real Estate report, the Urban Land Institute and PricewaterhouseCoopers named the region the No. 1 U.S. market to watch for overall real estate prospects in 2021 thanks in parts to the Triangle’s employment base and talent pool.
Moving forward, multifamily demand is expected to remain resilient as the Triangle’s economy recovers and the region capitalizes on the anticipated accelerated migration of residents and businesses to more affordable, less dense markets.
— By Emily Bostic, Research Analyst; Steven Peden, Principal, Capital Markets; Craig Cadwallader, Vice President, Capital Markets of Avison Young. This article originally appeared in the January 2021 issue of Southeast Real Estate Business.