Multifamily Supply and Demand Gets Tricky After Pandemic Lockdowns

While multifamily was one of the “hardest hit sectors,” during the pandemic, according to DLA Piper Global Real Estate’s 2021 Annual State of the Market Survey, it’s coming back.

“Multifamily, affordable housing and hotels/lodging have gained significant momentum, with 49%, 32% and 22% of respondents, respectively, finding them attractive for investors,” the report says.

Like any data analysis, though, concepts as totals, averages, and medians can cloud views because they flatly treat everything as similar. But in the topography of commercial real estate, there are many bumps and dips.

“Over the course of the past year, the apartment market has shifted slightly in response to the pandemic,” Warren Berzack, president and national director of the multifamily advisory group at Lee & Associates, said to GlobeSt.com. “Big cities, which historically enjoy robust rental markets, have weakened. Many of these highly populated markets and sub-markets within large cities had benefited because of their proximity to jobs, but as offices closed, so did the need to live near [central business districts] or use mass transit, or the need for renters wanting shorter commutes. Renters have left these more densely populated areas in favor of more suburban options without elevators or tight communal spaces and affording cheaper rents and fewer amenities.”

Census Bureau data shows the change from 2010 to 2011 through from 2019 to 2020. (Note that because of a methodology change, no data is available for the difference between 2014 and 2015.)

Although the pandemic had a significant effect, there was already a trend moving from principal cities to other locations.

“Secondary markets across the Sun Belt, Midwest and Texas have seen a huge influx in population since the pandemic began, and those patterns are likely to continue even as some renters return to major gateway markets,” Les Menkes, founder and managing partner at real estate private equity firm ACRE, tells GlobeSt.com. “The result has been a lack of supply in many of these areas, which was exacerbated due to disruptions in ground-up development projects early in the pandemic and delays due to ongoing issues in the supply chain.”

An example is Bozeman, Montana. “The population of the city has doubled since 2001 and both housing and multifamily starts have struggled to keep pace,” Jonathan Lee, principal and managing director at George Smith Partners, tells GlobeSt.com. “We recently closed a loan for a 94-unit multifamily project in downtown Bozeman and will be closing the first phase of a 400-unit development immediately thereafter. Rents are up 12% year over year and absorption of new apartment stock has exceeded developer expectations by a factor of 1.5.”

SharpVue Capital focuses on the Southeast. “Market participants often overlook the fact that multifamily is a relatively new product type in many Southeastern markets, so we don’t have 40 to 50 years of absorption data in a market like Charlotte, Raleigh or Charleston the way we do in Atlanta or D.C.,” managing partner Lee Harriss Roberts tells GlobeSt.com. “We believe that the demographic growth is strong enough that units will stay occupied.” However, Roberts says that landlords may not be able to drive rents the way they might expect, showing that shifting demographics can be tough to read.

The big question now is gateway metro areas. “These rental markets have softened with vacancies on the rise,” Berzack says.

Complicating the picture is that “many of the new arrivals in these secondary cities are not just members of the professional class who are now newly mobile due to the rise of remote work,” Menkes says. “Instead, many lower-income earners have also fled to these markets during the pandemic in search of work, as restaurants or hospitality venues, et cetera, where they worked remained shut down for most of the year.”

“To date, San Francisco is down about 5 percent in occupancy year over year,” Sam Isaacson, president of Walker & Dunlop Investment Partners, tells GlobeSt.com. “Since companies are now even more flexible with work from home, many of the people who moved out of these urban centers aren’t planning to return.”

But even with people leaving, it may be that demand, which has been very heavy in major cities, will only feel slightly less pressure because room for new development can be tight. “By definition it’s unlikely a gateway market will ever run into absorption issues in any real estate asset class, especially so with multi-family properties,” Cyrus Vaghar, a real estate agent with Coldwell Banker in Boston, tells GlobeSt. “On the supply side, very few new multifamilies are built due to strict zoning laws and high cost of building. We are losing far more multifamilies to condo conversions, new construction townhouses and denser housing projects, like small buildings, than we create.”