Market Trends



November 22, 2021

State of the economy: Fall Multifamily Outlook

State of the economy: Fall Multifamily Outlook

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(1) , 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(2), and fewer people traveled by plane(3) or returned to the office(4) that month. While economic growth remains positive, the Delta variant, now accounting for almost all new COVID cases(5), 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.

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 5.3 percent by June. The good news is that monthly inflationary pressures began subsiding after June, and markets generally expect inflationary pressures to be short-lived. However, higher than expected food and energy prices in September reflected continued supply chain disruptions and concerns that higher inflation expectations could stick longer-than expected.

Growth ahead

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.(9)

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 4.8 percent September unemployment rate is somewhat misleading as the employment to population ratio remains 2.5 percent below pre-pandemic levels, indicating a longer-term disruption in the job market. This time around, disruption is more likely to be caused by employees quitting rather than being laid off, particularly in weary customer-facing industries such as hospitality, entertainment, and food services.

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 some areas such as New York, California, and Seattle, which have extended moratoriums past October. There is some risk that the transition may not go as smoothly as hoped, as the Census Household Pulse survey indicated that 13 percent of renters are behind in rent payments as of the end of September, with the rate particularly high (24 percent) for renters without a high school degree. Adding further concern, following economic trends, 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 September when 92.9 percent of rents were paid. However, the market appears to be improving, and conditions vary significantly.

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(10). 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(11), 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.

Top 10 Multifamily Markets chart 2021 Q3

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(12). 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(13). 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 Q3 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 a recently published 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 though 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.

To learn more, download our latest Multifamily Outlook report.

(2) As measured by inflation adjusted personal consumption expenditures from April 2021 to August 2021.
(6) Philadelphia Federal Reserve Bank Survey of Professional Forecasters 
(7) U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price for New Houses Sold in the United States [MSPNHSUS], retrieved from FRED, Federal Reserve Bank of St. Louis
(8) Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters, 3rd Quarter 2021
(9) Mortgage Banker’s Association, Commercial / Multifamily Quarterly Data Book, Q2 2021
(10) Costar Multifamily National Report, October 7, 2021
(11) Apartment data from Costar
(13) Costar Multifamily National Report, October 7, 2021
(14) Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters, 3rd Quarter 2021, 2022 Payroll expected to increase as compared to 2021

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