Apartments Have Stabilized Earlier Than Expected

In Q1 2021, the US multifamily market stabilized a quarter earlier than expected, according to a new report from CBRE.

While vacancy rose by 20 basis points to 4.7% in the quarter, the average rent rose 0.4%. That was the first quarterly rent increase since the pandemic began. Still, the average rent was down 4.2%, and vacancy was up 50 basis points compared to a year ago.

CBRE says Q1’s results provide a solid springboard for recovery. With widespread vaccinations, additional stimulus, an improving economy and the return of office workers, that recovery should accelerate as 2021 continues. Those tailwinds are likely to strengthen apartments in Class A, gateway markets and the urban core—all of which struggled during the pandemic.

While construction remains high, completions fell 39% from the previous quarter in Q1. Still, they were on par with Q1 2020. Completions of 50,600 far outpace absorption of 15,700 in Q1.

The 75,100 starts through February, marked a decline of 11% compared to the same period last year. In 2020, 460,100 units were delivered, which was 16.7% higher than 2019 and the largest amount in 18 years.

Judging from permitting activity, more apartments are on the way. Overall, 118,300 units were permitted in Q1, a 19.9% year-over-year jump and a 7.1% quarter-over-quarter increase.

Construction costs could thwart some of this activity. Lumber costs continue to rise as a result of competition from homebuilders and COVID-related disruptions. CBRE says this has caused the cancellation of some projects and a recalibration of proformas in others.

In Q1, major Texas markets, including Dallas, Houston, Austin and San Antonio, led the way in new deliveries, adding 54,800 units. These metros absorbed 40,500 units. While New York led the way with 24,500 units in the year completed in Q1, its construction volume has slowed recently.

Of the 24 top markets, only Austin has a completions-to-inventory ratio above 4%. Charlotte, San Antonio, Ft. Worth, Minneapolis, Portland, Orlando, Nashville and Kansas City had a ratio above 3%. CBRE says those markets may be at risk of overbuilding.

Forty-four of the 69 markets tracked by CBRE had positive net absorption in Q1.

While the signs look positive for apartments, the recovery may take longer in specific markets.

Yardi, for example, projects that it will take New York City more than five years to hit Q1 2020 rent levels. Though there are solid rent projections in the West Coast metros, it will still take a while for rent growth to hit pre-pandemic levels. Yardi projects that rents will beat February 2020 levels in 2025 in San Francisco and San Jose and in 2023 in Los Angeles and Seattle.