Fannie Mae Offers Sober Assessment of Apartment Fundamentals

There are a lot of mixed signals in the apartment industry right now. While valuations continue to rise, a lot of renters are still having trouble making their monthly payments.

In a recent report, Fannie Mae identifies another concern—increasing supply. Most of the new supply will consist of expensive Class A properties concentrated in about 15 urban core neighborhoods. It expects supply to continue outpacing demand in some places this year. This should drive the vacancy rate to between 6.0% and 6.5% in 2021. Still, it notes that this range is well below the most recent estimated vacancy peak of 8.25% in Q4 2009.

Another pressure on the asset class: last year rent growth turned negative for the first time since 2009, ending the year at negative 0.75%, after eight straight years of growth above historical averages. In 2019 estimated rent growth was 2.5%.

While rent growth slowed, demand stayed stable in 2020. CoStar Portfolio Strategy estimates that net absorption totaled 326,874 units last year, after about 320,976 units were absorbed in 2019. In 2021, CoStar projects only 113,178 units of net absorption.

Fannie Mae expects the negative rent growth trend to continue at the beginning of the year, but it also anticipates it will turn positive in the second half of the year. Overall, it projects rent growth will end 2021 at 0.0% to 0.5%, assuming widespread COVID-19 vaccinations and a sustained economic recovery.

And while the fresh supply coming online won’t hit until the end of the year, the sluggish economy is unlikely to produce enough demand for all the new Class A units expected to deliver in 2021, according to Fannie Mae. Its latest economic forecast predicts year-over-year job growth to be 5.5% by the end of 2021, which would result in an estimated 7.9 million jobs.

But annualized job losses of negative 6.2% in 2020 mean there has been a net loss of 9.3 million jobs. “As a result, we believe it will take until 2022 at the earliest to replace the jobs that were lost in 2020, as well as to begin seeing any possible new demand – instead of mostly replacement demand – for multifamily rental housing,” according to Fannie Mae.

That said, real estate is a local industry and apartments in some sections of the country will outperform.

American Landmark CEO Joe Lubeck, for example, notes that rents have gone up 4% across his Southeastern portfolio, though he has had to work with some residents on payment plans.

“I think it [the movement of people to the Southeast] is absolutely long-term,” Lubeck says. “In particular, the movement of jobs and population to the South will continue. Once somebody moves here, they’re not likely to leave, particularly given the favorable business climate tax and climate weather.”