In the spring 2021 edition of Yardi Matrix’s Multifamily National Outlook, vice president Jeff Adler and Jack Kern, director of institutional research, took a look at current market conditions as they affect multifamily and how they could play out in the near future—particularly with the ongoing vaccine rollout as a flashpoint for renter movements and preferences.
As of April, the economy is heating up, with 916,000 jobs added to the market in March and unemployment down to 6%. Gateway markets and urban cores are still struggling, but appear to be turning a corner, while tech hubs continue to grow. Yardi owes the strength there is to the ongoing approval and distribution of COVID-19 vaccines. Inflation is a concern to watch, as asset and input prices are on the rise.
According to Adler, a year of office closures has created a “general spreading of the population” as residents who no longer need to commute move farther from gateway cities. This has sparked discussions about whether, and which, work-from-home arrangements may be temporary or permanent. Demand for single-family rentals is also surging, and with it a spike in single-family build-to-rent projects and players.
Stirring beneath these factors are the market’s still-extant pre-COVID issues. These include affordability, environmental risk, infrastructure considerations, and key technologies.
Financial Markets and Employment Trends
The GDP is on its way to recovery, and with it a rise in the Consumer Confidence Index. The Evercore ISI U.S. Outlook projects 9% real GDP growth in 2021, up from -2.5% last year, and followed by 3% real GDP growth in 2022—a return to “trend line,” Adler says, over the next 18 months.
Once the market “returns to trend,” when will we see the long-lasting consequences of what was done to “get to trend,” in particular the stimulus packages? Adler anticipates an 18-month burst of strong rent growth and “money to be made” in the near term, before a “tapering off” is expected in 2023.
At present, the average asking rent is rising faster than the rate of consumer inflation at the national level. Both unemployment and underemployment are falling, but remain elevated from their levels before the pandemic. Hawaii, California, and New York have the highest unemployment rates, but those may lessen as vaccination rates rise.
Overall, economic indicators are pointing to a generalized recovery, with knowledge-based sectors leading the way. Key indicators Yardi Matrix plans to follow closely include migration flows out of gateway markets, rising interest rates, and rising consumer inflation rates.
Multifamily Fundamentals
Gateway markets experienced a mass exodus during COVID-19, with California residents moving east and New Yorkers moving south—or within the metropolitan area itself, out of the city center and into the suburbs. Rent growth and net absorption as a percentage of stock have grown fastest in emerging tech hub markets, including Denver and California’s Inland Empire and Sacramento.
These same markets are expected to have the highest number of deliveries on both an absolute and a percentage of stock basis from 2021 to 2025, led by Dallas in terms of absolutes and Miami as a percentage of stock. Despite these large pipelines, high absorption is expected to keep markets in balance.
Yardi anticipates that Las Vegas will have the highest YOY rent growth in 2021, with 5.2% by year’s end and 3.5% by the end of 2022. Boise, Idaho, is expected to have the second highest at 4.5% YOY by the end of 2021, followed by Phoenix at 4.3% and Atlanta at 3.9%. “These are very healthy markets, driven by great domestic migration,” Adler says.
Of seven cities identified as gateway markets, Boston is expected to have the highest YOY rent growth at 2.8%, while San Francisco is expected to have the lowest at -0.8%. Overall, urban cores have hit a “bottom,” and the recovery has begun. Year-over-year occupancy changes bottomed in October 2020, but have been steadily rising since, while YOY rent growth in urban centers is on the rise from a low of -1.5% in February 2021.
In most markets, suburban rent growth outperforms urban rent growth by a significant amount. Seattle has the widest spread at well over 8%, followed by Chicago at just under 8% and Washington, D.C., at 7%.
For the time being, new supply remains concentrated in urban cores. While Adler anticipates an increase in suburban construction by 2023, he notes that construction financing is not very loose and rising lumber prices have made construction difficult.
Pandemic Impacts on Multifamily Investments
The biggest issue, Adler says, as it relates to investment-grade multifamily—Class A and Class B—is “the nature of the future of work,” and its effects on migration and displacement patterns.
“Working from anywhere has fueled migration all over the place,” Adler says. “The notion of work—not somewhere you go, but something you do—is a big thing. Most office-using employment has seen that; from a pure task orientation, they can get their work done. That notion that you have to be in an office for five days a week to get work done has been busted up. But some work—training, bonding—is hard to do over Zoom. Fully remote isn’t going to happen, but five days a week probably isn’t going to be happening.”
At present, as much as 25% of the labor force is expected to continue to work remotely full time in the long term, up from 10% before the pandemic. Some industries will be better equipped to handle this than others, such as finance or government, which work with sensitive information.
The pandemic has accelerated a number of existing demographic trends, including virtualization, e-commerce, more young people living at home longer, and movement from gateway into tech hub markets. At the same time, densification, globalization, and the idea of experiences over things have all been reversed by the circumstances surrounding COVID.
The majority of persons who moved due to the COVID-19 pandemic are younger, ages 18 to 29. This, Adler says, makes them more likely to one day return to urban areas. Already the share of young adults living with their parents is beginning to fall.
The biggest risk to multifamily is the chance that full-time remote workers may choose to move out of a metro area entirely. In an effort to determine the most “at-risk” metros in terms of the implications of work-from-home, Yardi Matrix assumes that 20% to 25% of office workers will work remotely full time, 40% to 50% will work on a hybrid schedule, and 30% to 35% will work in an office full time.
Based on these numbers, as well as the number of full-time remote employees who are renters, Yardi anticipates that Los Angeles, San Francisco, New York, and Chicago have the “greatest” potential to be impacted by remote work long term. Unsurprisingly, the top seven markets on this list match up with the seven “gateway cities” as defined by Yardi. In-migration of college graduates may offset this slightly, but not completely. The distribution of office workers is also set to “reverberate” through the service jobs that catered to them, including restaurants, bars, shops, and other services.
It will take some number of months—18 to 24—for the urban cores to recover, according to Adler. Further than that, rents in urban cores may not return to pre-pandemic levels for another two to three years. “Something fundamental has changed, and it won’t go back entirely to where it was,” he says. “Certainly not for another five or seven years, if at all.”
However, one significant upside to the shift to remote work is that movement to smaller cities and communities gives these locations the opportunity to compete with gateway markets for residents and labor. These include where the single-family rental construction and investment is surging—including Las Vegas, Sacramento, and Phoenix—creating opportunities in smaller markets with an influx of remote workers.