These Are the Concerns the Office of Financial Research Has About Multifamily

The risk for certain commercial real estate sectors remains elevated, thanks to what the US Office of Financial Research calls a “divergence” of demand, rents, and market values in its annual report to Congress—and that includes (no doubt to the shock of some) components of the multifamily asset class. 

“Multifamily properties have performed relatively well due to extensive federal government relief, such as expanded unemployment insurance and, most recently, direct federal aid for renters in financial difficulty,” the agency’s annual report notes. “However, there is long-term uncertainty over the direction of future employment rates and personal income.”

The sector most at risk within the multifamily space/? Low-rent workforce housing, “where tenants are vulnerable to layoffs and, as a result, have less income to pay rent,” the report notes. 

On the other end of the spectrum, high-end urban housing in expensive metros may also be at risk. Rents on such properties plummeted by the double digits in many cities following the initial COVID-19 outbreak in March 2020, while rents went up for suburban apartments in both major metro and rapidly growing, mid-size urban areas. Interest in urban housing has rebounded as of late, however, particularly in cities like Manhattan. 

As that’s happened, some analysts have noted cooling interest in regions that benefited most from pandemic-driven in-migration patterns: headwinds are beginning to form for the Sunbelt, for example, according to a recent analysts from BTIG Research, a region that’s been the target of considerable investor dollars of late. Lease spreads appear to be near their peak in several markets, BTIG’s James Sullivan and Ami Probandt noted in that report, and affordability “could become an issue” next year.

Urban areas, as well, remain at risk, according to analysts from Fitch Ratings, which predict that a full recovery in these cities to 2019 levels could take longer than in prior recoveries. The ratings agency says that key renter cohort and outmigration trends will delay a full recovery to prior cash flows for urban landlords, noting that population growth in the age 35-55 demographic will tilt the balance in favor of suburban apartments. Fitch notes that these renters could also choose single-family homes for purchase and rent. 

Meanwhile, across the western United States, apartment rents are up and vacancy rates are down, while cap rates have continued to compress to the mid-4% range, particularly in suburban markets buoyed by strong inward migration and investment demand.