Commercial Magazine

Multifamily Maintains Its Momentum

The apartment sector is poised to thrive for the foreseeable future

By Peter Muoio

Despite the ongoing COVID-19 pandemic and more recent inflationary worries, the overall U.S. commercial real estate landscape is strong. Property valuations are expected to strengthen across all regions throughout this year, which is music to the ears of commercial mortgage lenders, brokers and borrowers.

These are some of the findings in the SitusAMC Insights outlook for 2022. The report also notes that population growth and domestic in-migration patterns are expected to continue in the West and the South, while there is a longer road to recovery for states with large population centers, such as New York, California and Illinois.
When drilling down on specific commercial real estate assets, the multifamily housing and warehousing sectors lead the way in the South, Midwest and East regions, and they’re among the top three categories in the West. Valuations are expected to remain strong for apartments and warehouses, with the Midwest states offering the strongest markets for these sectors.
The commercial-property sector identified by SitusAMC as struggling the most is retail — more specifically, regional malls. Despite earning the lowest rating of all property types on the company’s survey, however, regional malls are still expected to rebound this year and grow modestly.

Newfound prowess

The industrial-property segment has clearly been one the darlings of the commercial real estate world during the pandemic, buoyed by the growth of cold-storage facilities, data centers, light manufacturing, warehouses and just-in-time delivery facilities. According to preliminary research from the Mortgage Bankers Association (MBA), loan origination volume for the industrial sector jumped by 140% from 2020 to 2021.
In recent years, however, multifamily housing has emerged as a star in its own right. In fact, the multifamily market weathered the pandemic-induced recession better than many other property segments and produced record-setting transaction levels. Driven by strong fundamentals, multifamily investment returns shot up during the past year and resulted in stellar price appreciation. Indeed, investors are flocking to multifamily investments as evidenced by last year’s record deal volume.

Commercial properties in general — and the apartment sector, specifically — may serve as a partial inflation hedge because of the low vacancy rates.

A SitusAMC Insights proprietary forecast shows continued strength in apartment fundamentals. The national vacancy rate is expected to inch up by 10 basis points this year but will remain low at 4.8% before dropping by 40 basis points in 2023. Annualized rent growth is expected to moderate from 2021’s banner year of 13.5% yet remain strong at 5.5% by the end of 2022 and 4.8% in 2023.
With net operating income increases over the course of this year, overall multifamily returns should continue to be strong in 2022. The Florida cities of Jacksonville, Tampa and Palm Beach, along with Memphis, Orlando and Phoenix, had the largest year-over-year rent growth of the top 50 markets in fourth-quarter 2021. Each of these metro areas experienced effective rent growth of more than 20%. SitusAMC expects the Sun Belt markets to continue to perform well in 2022, albeit at a slower pace.
MBA reported that multifamily lending in 2021 reached a record $470 billion and accounted for more than half of the $900 billion in commercial real estate lending that took place during the year. Even with lingering questions about whether the apartment market is becoming too pricey, the investor community reports that, in general, the values of properties are worth the prices. That’s been shown by the record-setting transaction volumes that continue to hold strong while vacancies have dropped to pre-pandemic levels.

Obstacles remain

Of course, success often comes with challenges. The multifamily segment has had its share, such as the loss of rental income due to deferred rents and delinquencies brought on by the pandemic. As demand continues to grow, headwinds include rising construction costs and labor challenges.
Inflation and rising interest rates are just two of the challenges facing multifamily housing and the overall commercial real estate market. But commercial properties in general — and the apartment sector, specifically — may serve as a partial inflation hedge because of the low vacancy rates.
Historically, markets rebound when such events are known and expected. Apartment affordability, however, is deteriorating due to rapid rent increases, which could lead to rent controls on the local and state levels, thus posing additional risk for investors and owners. Meanwhile, the Federal Reserve has indicated that interest rates are primed to increase over the course of 2022, which also increases risks for investors and could impact cash flow, especially if the Fed surprises the markets with more frequent or more aggressive increases than expected.
Other risk factors for investors are increases to insurance costs and limited coverage options. Higher insurance premiums have become a problem across the board for both conventional- and affordable-housing providers. There are a variety of causes for the rate increases that property owners have little to no control over, including financial insolvency in the insurance marketplace, which has led to fewer providers. Double-digit premium increases have become common in recent years.

Room for optimism

Even with these challenges, the economic recovery and rebounding markets of 2021 resulted in a bountiful year for multifamily properties. While demand has skyrocketed, additions to stock have remained low and have driven down vacancies.
As COVID-19 variants surged, fourth-quarter 2021 data demonstrated the resilience of apartment housing through strong occupancy rates and rental income. These factors are fueling a significant shift in investor focus from other property types — such as office and retail — into the multifamily market.
Overall multifamily returns should continue to be strong in 2022, with increasing net operating income over the course of the year. The Sun Belt markets are expected to perform better than smaller markets in the Northeast and Midwest regions, which also will increase albeit at a slower pace.
Even with inflation and the pandemic’s ongoing challenges, the strong multifamily fundamentals that drove the market to a record-breaking year in 2021 are expected to help the market continue to grow in 2022. The multifamily sector should provide opportunities for commercial real estate investors, as well as mortgage lenders and brokers, in an uncertain economy that is facing higher inflation. ●


  • Peter Muoio

    Peter Muoio, Ph.D., serves as head of SitusAMC Insights. Muoio has more than 30 years of commercial real estate research and analytics experience. Previously, he served as chief economist and head of data insights at Ten-X Commercial, and he headed up CW Capital’s research group. He founded and ran Maximus Advisors, a leading independent real estate research firm. He was global head of real estate research at Deutsche Bank, and he started and ran real estate research at Bankers Trust Co. 

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