Multifamily Draws Global Capital As Fundamentals Break Records

The multifamily sector has captured the attention of a “global wall of capital” as fundamentals continue to shatter records, a pair of experts told CBRE’s Spencer Levy this week. 

“The flame is white hot. Every metric you look at in multifamily seems to be breaking a new record,” Matt Vance, CBRE’s Americas Head of Multifamily Research and Senior Economist, told Levy on his podcast this week. CBRE data shows that the sector posted 14% rent growth nationally last year and had sub-3% vacancy last year. 

Cap rates have also compressed faster than they ever have, according to Vance. CBRE’s quarterly underwriting survey for prime multifamily assets notes that Texas has the lowest going-in underwritten cap rates, while most markets are squarely within the 3% range.  He says that’s sustainable – with a few caveats.

But “these incredibly tight cap rates tell us a lot about investor appetite and demand, but they also tell us something about the underwritten rent growth assumptions going into this,” he notes. In short: the fundamentals were excellent in 2021 and will likely continue to be so this year—and because rent growth remains high it will likely counterbalance any inflationary pressure on the capital markets. 

It’s a sentiment echoed by Ric Campo, Chairman and CEO of multifamily REIT Camden Property Trust, which owns more than 60,000 multifamily units across 10 southern states. 

“I think the cap rates will stay low until you do have a deceleration of rent growth when people can’t make their math work,” he says.

Vance predicts the momentum for the Sun Belt and “smile states” will continue in the near future, with Texas leading job growth and creation between now and 2030.

“There are absolutely incredible demand drivers pushing multifamily fundamentals in those states,” he said. But don’t count the coasts and gateway cities out just yet—Vance notes that CBRE’s estimates look for those regions to be favored for value growth in multifamily assets over the next five years, rivaling their strong Sun Belt counterparts.

“They were hit the hardest during the pandemic—so there’s more to recover from,” Vance said.  “And number two, they have recovered in many ways…Demand has flooded back into these urban, dense, expensive coastal markets and the rent growth is to follow.”

Campo said Camden is growing rents faster than the national average “thanks to where we are” in the Sun Belt.

“Those are just some of the hottest markets in America,” Campo said, adding that 2022 is poised to be one of Camden’s best years yet in terms of net operating income as well as revenue.

Vance and Campo are also seeing that same urban-versus-suburban dynamic play out across classes of assets.  Those assets in the best locations with live-work-play elements are expected to perform well in the near term, according to Vance.

And long term, “we think there’s absolutely a compelling story for both suburban and urban multifamily across all asset classes,” he says. “We know there is tremendous demand for lower cost living not just geographically in the country but also lower on the quality spectrum for quality workforce type housing.”

For Camden, “both are on fire,” says Campo, adding by way of example that the REIT leased a 22-story tower in downtown Houston at a time when gateway market urbanites were decamping to the suburbs.

“We didn’t see the same kind of urban weakness during the pandemic,” he told Levy. “People were actually moving into the urban core in the Sun Belts cities when they were leaving the urban core in New York and San Francisco.”

Retail has also become an adjacent amenity for multifamily developers and property owners, the pair told Levy.

“We know that retail, especially walkable retail, is absolutely an amenity from the perspective of the renter,” Vance said.” When we think about suburban we aren’t really talking about greenfield developments…we’re really talking about developments that do have some mixed use component to them.”

Campo agreed, noting that Camden “definitely looks” for the live, work and play component in its properties.

“We’re looking for where’s the retail, is it walkable, what’s the transportation situation, where do people work and how that all interplays with the whole concept of location, location, location,” he says. “It doesn’t necessarily mean in CBDs…people do want to be able to live, work and play in the same place or within close proximity. They definitely don’t want to drive.”

Campo says he doesn’t consider the white-hot BFR market a competitor to multifamily, noting that the single family rental market is around the same size as the multifamily rental market. The difference? Multifamily is more institutionalized, he says, whereas single-family is markedly less so.