2021 Multifamily Housing Market Outlook Shaped by Growth Trends, Housing Prices
COVID Disrupts Markets Again
The country began breathing a sigh of relief in the second quarter of 2021 as U.S. GDP returned to pre-pandemic levels. With a substantial part of the U.S. population vaccinated, the unemployment rate plummeted, schools began preparing for in-person instruction and restaurants were back in business, again surpassing grocery sales in volume.
But just as things seemed to be returning to “normal,” the delta variant of COVID began to spread. New COVID cases turned into rising COVID deaths by August, disrupting supply and demand chains. Consumer confidence, which had been rising since hitting a low in April 2020, dipped to a new low point in August; consumer spending stalled, and fewer people traveled by plane or returned to the office that month.
While economic growth remains positive, the delta variant, now accounting for almost all new COVID cases, again introduced market uncertainty, resulting in a 4 percent drop in stock market pricing in September. However, as COVID cases began declining in mid-September, stock prices began to rise, erasing the September drop in October, and resulting in a 22.6 percent gain for the year. Overall, economists maintain strong economic growth expectations of 6.1 percent GDP growth for 2021. The effects of the omicron COVID variant (and how it may impact health and markets) are largely still unknown at this time.
On the supply side, slower manufacturing and transportation chains resulted in higher prices both for producers and consumers. Single-family home construction permits have generally slowed throughout the year despite strong housing demand as builders faced rising costs and shortages of materials and labor. The median sale price of a new home rose by 19 percent year over year to $408,800 in September, with existing home prices following a similar trend.
Price increases were not limited to real estate, though. Inflation, driven by COVID-related disruptions, began spiking after the first of the year, rising to 6.8 percent in November. Higher than expected food and energy prices reflect continued supply chain disruptions and concerns that higher inflation expectations could stick around longer than expected.
Going forward, the economy is expected to continue on a more normalized path of growth, supported by significant fiscal and monetary policies. Ten-year Treasury yields, at 1.5 percent in November, remain low, although up by 100 basis points from extreme lows a year ago. The rise in interest rates reflects more of a healthy return to sustainable levels than a significant rise in interest rates.
Lending markets remain strong as commercial and multifamily mortgage originations doubled in the second quarter from levels of a year ago — and, more importantly, were up by 1 percent from 2019 pre-COVID levels. Some sectors of the economy have yet to fully recover from the pandemic, e.g., 3.6 million jobs have yet to return, particularly in the leisure and hospitality sector. The November unemployment rate was 4.2 percent, a 0.4 percentage point drop from October of this year.
Housing Markets Remain Strong Even as Eviction Moratoriums Wind Down
Some preliminary data is starting to indicate that the economy is now moving beyond the delta variant disruption. For example, the Zelman & Associates Apartment Operators Survey indicated high retention rates and record-breaking leasing results during September, with rents across most urban assets exceeding March 2020 levels for the first time.
This is good news, given that the expired federal eviction moratorium is now only supported in a few areas. There is some risk that the transition may not go as smoothly as hoped, as the National Multifamily Housing Council Rent Payment Tracker started showing some weakness this summer as rent payments had fallen slightly below the year-ago levels for each of the past five months ending in November when 93.1 percent of rents were paid.
Regionally, markets such as the Inland Empire, Orange County, San Diego, New York, and Long Island have vacancy rates below 3 percent as of the third quarter of 2021. Rents have increased by more than 20 percent year over year in a number of markets, particularly in the south.
Overall, the U.S. rental market remains extremely strong as effective rents increased by 13.9 percent year over year in the third quarter, driven by strong demand and low vacancy rates. Net absorption for the first three quarters of 2021 was nearly double the pace of the past two years. Supply, meanwhile, has been hindered by both rising costs and COVID-induced labor shortages. New completions as of the third quarter were down by 20 percent from the average pace of the previous four years. Supply is expected to remain subdued in the near term as the number of projects under construction peaked in the first quarter of 2020 and has since continued to fall, ending the third quarter down 22 percent from peak levels. With supply lagging demand, vacancy rates plummeted over the past year. At 4.7 percent in the third quarter, vacancy is down by 70 basis points over the quarter and by 260 basis points from a year ago.
It is yet to be seen how many and how quickly employees return to office environments, particularly on a five-day-a week basis. As of October, tenant traffic into office buildings remained at only 37 percent of pre-pandemic levels. Thus, home locations that provide amenable workspace continue to be in favor; two and three-bedroom vacancy rates are approximately 100 basis points lower than studios.
Prices for multifamily projects are up by 11 percent year over year. Southeast markets that have exhibited strong demographic growth trends are posting the fastest growth, with the new entrance of out-of-state and institutional buyers. Overall, market cap rates remain steady and near 5.2 percent on average for the third quarter, similar to the previous quarter and down by ten basis points from a year ago. Central business district cap rates at 4.6 percent are 60 basis points lower than suburban cap rates and little changed from a year ago. Disrupted by COVID in mid-2020, property sales returned to more normalized levels by the fourth quarter of 2020. Thus, year-to-date sales volumes as of the third quarter 2021 are 81 percent higher than a year ago, but more importantly, 3 percent higher than the same time period in 2019. While the rental market is becoming more institutionalized, small owners continue to dominate the market. Private buyers continue to account for nearly two-thirds of the transaction market, as compared to REITs (4 percent of transactions) and institutional buyers at just over 20 percent of the market.
Longer term, some industry research experts, such as Zelman & Associates, predict a less optimistic macro-outlook for the multifamily market. In research report titled “Cradle to Grave,” Zelman notes that they expect that aging demographics will slow U.S. household growth over the next decade, contributing to a strain in housing demand and a possibly over-supplied housing market. Overall, Zelman forecasts household growth of 7.9 percent from 2020 to 2030, down from 8.7 percent from 2010 to 2020, with housing growth favoring single-family and large multifamily properties with five or more units. Thus, despite recent headlines, housing supply may not in fact be running too far behind demand, although affordability continues to be a significant factor.
The current outlook for the multifamily rental market remains positive as continued employment growth is expected to support demand and the volume of projects under construction remains lower than the pace of the past few years. In addition, the Mortgage Bankers Association is projecting that the multifamily financing market will be $421 billion in 2022, up from $409 billion in 2021, and the FHFA’s recently announced expanded government sponsored entity (GSE) lending caps will ensure that there is ample liquidity going into the market. Investors should continue to be diligent in analysis of both supply and local demographic trends as they analyze the strength of the housing market in the future. For now, the “golden age” of multifamily remains.
 As measured by inflation adjusted personal consumption expenditures from April 2021 to August 2021.
 Mortgage Banker’s Association, Commercial / Multifamily Quarterly Data Book, Q2 2021
 Costar Multifamily National Report, October 7, 2021
 Apartment data from Costar
 Costar Multifamily National Report, October 7, 2021