Inside Multifamily's Booming Year

Last year finished with record multifamily demand, with the sector setting an annual absorption record of 617,500 units nationally.

Absorption in the fourth quarter hit nearly 150,000 units, according to CBRE, a decline from Q3 numbers but still triple the quarterly average over the last decade.  The year’s absorption numbers were also up 238% from 2020 levels and up 97% over 2019 figures. It is also 58% higher than the prior record of 390,000, which was set in 2000.

Absorption was highest in New York, Los Angeles, Houston, Dallas, Chicago, and Washington, D.C.

CBRE analysts peg the rising demand on household formation, job and wage growth, strong consumer confidence and sharply rising home prices. Completions also totaled 81,000 in the fourth quarter, while annual completions fell just short of the prior high from 2020.

“With a pipeline of more than 400,000 units currently under construction, 2022 deliveries are expected to eclipse 2021,” the report notes. New York, Houston, and Dallas markets lead for new supply, followed by Washington, D.C., Los Angeles, and Austin.  Texas markets were collectively most active, with 54,600 units delivered across Houston, Dallas/Ft. Worth, Austin, and San Antonio in 2021.

“While supply headwinds are strong in some markets, overbuilding is not a concern, since vacancy rates remain persistently low,” the report notes, adding that of the 24 leading markets for new supply, only five (Austin, Nashville, Ft. Worth, Minneapolis and Orlando) had a completions-to-inventory ratio of more than 3.5%.

The overall vacancy rate also ended the year at a record low of 2.5% after falling by 40 basis points quarter-over-quarter. All told, 17 markets had vacancy rates of less than 2%, led by Orange County, Providence, and San Diego. Just one market, Corpus Christi, had vacancy rates above 4%, and Class A vacancy had the biggest decline in vacancy nationally, thanks in part to residents returning to urban cores.

Meanwhile, average net effective rent ticked up by 13.4% year-over-year and 2.5% quarter over quarter. Just three of the 69 markets tracked by the firm are below their pre-COVID rent levels: Oakland, San Francisco, and San Jose. And 49 of those markets posted double-digit year-over-year rent growth in 2021.  CBRE predicts that national rent growth will moderate to between 6% and 7% in 2022.

Investment volume in the asset class also increased by a whopping 128.2% year over year to $148.9 billion in the fourth quarter. The asset class accounted for 41.5% of total CRE investment volume last year.

“Strong investor appetite compressed the average multifamily cap rate to an all-time low 4.5%—a trend that most benefited the red-hot Sun Belt markets,” the report notes. CBRE’s quarterly loan underwriting survey also found stable loan-to-value ratios in the fourth quarter, an increase the firm said reflects “strong appetite” for multifamily mortgages and lender confidence in the market.