The national multifamily market has stabilized in the first quarter, after three quarters of softening and one quarter earlier than expected, according to new data from CBRE Research.
“Q1 market conditions remain weaker than a year ago, with average rent down by 4.2% and vacancy up by 50 basis points. Nevertheless, Q1’s stabilization provides a solid foundation for recovery, especially for Q2 and Q3,” cited CBRE Research. “Seasonality, widespread vaccinations, an improving economy, additional fiscal stimulus, and a return of office workers will all contribute to further multifamily market improvement over the next two quarters.”
The overall vacancy rate increased by 20 basis points quarter over quarter and 50 basis points year over year in the first quarter to 4.7%. The lowest vacancy rates were found in California’s Inland Empire; Ventura, California; Providence, Rhode Island; Norfolk, Virginia; and Sacramento, California.
Class A vacancy remained stable for a third consecutive quarter at 5.5%. Class B and Class vacancy rates edged up 4.4% and 4%, respectively, quarter over quarter and on par with the first quarter of 2020. CBRE Research also showed that suburban submarkets continue to outperform urban submarkets in the first quarter.
“Urban submarkets have been impacted by outmigration, especially in gateway markets,” said CBRE Research. “However, Q1 data shows that the trend has stabilized or improved in most markets.”
Rents in the first quarter inched higher. The average rent rose 0.4% to $1,674, the first quarterly increase since the first quarter of 2020. Year over year, the average rent was down 4.2%. If gateway markets San Francisco, San Jose, and New York were taken out of the national average, the year-over-year decrease would be at 1.1%. CBRE Research said rents are expected to reach pre-COVID levels in the first quarter of 2022.
First quarter completions held up to the prior year but were down 39.4% from the fourth quarter of 2020. The completion of 50,600 units outpaced net absorption of 15,700 in the first quarter.
Construction starts through February—75,100 units—were down by 11% year over year, but CBRE Research said an 18-year high of 726,200 units under construction in February will ensure deliveries will remain high well into next year. In addition, multifamily permit activity was at 118,300 units in the first quarter, a 19.9% increase year over year and 7.1% from the fourth quarter of 2020.
Construction costs continue to increase significantly for developers in the first quarter and early second quarter, especially for lumber, due to COVID-related production issues and competition from single-family home builders. CBRE Research said this is causing some developments to be postponed and pro formas of others to be recalibrated.
According to CBRE Research, multifamily investment volume reached $35.5 billion in the first quarter, down 12% year over year and down 43.2% from the record $62.5 billion in the fourth quarter of 2020. Investment volume did pick up in the second half of the first quarter with more product coming to the market. Dallas/Fort Worth led all metros for first quarter multifamily investment, with $2.8 billion in sales and 7.8% of all U.S. multifamily investment, followed by Phoenix, Los Angeles, and Atlanta.
“Investor appetite for multifamily assets, especially suburban product, was very strong and pushed cap rates down,” cited the CBRE Research report. “We expect multifamily investment volume to rise later this year due to strengthening market performance, sustained robust investor appetite, and new buyers coming into the sector.”
