CRE Economists: Multifamily Markets to Watch

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The anticipated rebound of the U.S. economy in 2021 is expected to fuel a quick rally in every commercial real estate sector, according to economists at the Real Estate Forecast Summit: Commercial Update webinar recently hosted by the National Association of Realtors (NAR). Accelerating vaccination rates will push the reopening of the economy forward, driving GDP and job creation up, according to NAR’s chief economist Lawrence Yun, who predicts GDP growth of 4% in 2021 and 3 million new jobs by the end of the year.

Unlike previous recessions, the swift economic downturn followed by federal stimulus measures and increased unemployment compensation meant that the average personal income for Americans increased even as GDP declined in 2020. During the second quarter of 2020, GDP declined 8.5% while personal income rose 10.7% compared to the second quarter of 2019. During the fourth quarter of the year, GDP was down 1.2% and personal income rose 4.3% compared to the fourth quarter of 2019. The result of increased income and the lack of spending on commuting, travel, dining out and entertainment meant that the savings rate rose dramatically.

Yun predicts that the multifamily sector will benefit from increased savings because renters will be financially prepared to return to the market. In addition, double-digit increases in home prices and rising mortgage rates may keep more households renting longer. Renters have already begun to return to the market, with approximately 43 million renters in the fourth quarter of 2020, nearly back to the level during the first quarter of 2020. The number of renters dropped to less than 41 million during the second quarter of 2020 when COVID-19 first began to spread.

Top 10 CRE Markets in 2021

Remote work drove some of the changes in commercial real estate in 2020, particularly for the office, retail and multifamily sectors. The long-term outlook for working from home at least part-time is likely to be four times what it was in the past, according to NAR’s senior economist and director of housing and commercial research Gay Cororaton. In January 2019, 6% of the workforce worked at home part-time or full-time, while 23% of the workforce is anticipated to work from home part-time or full-time in January 2022. That trend may accelerate migration patterns to secondary cities with a lower cost of living.

NAR’s researchers predicted the top CRE markets for 2021, based on 25 economic, demographic, housing and commercial indicators such as GDP growth, median household income, net domestic migration, employment, consumer spending, homeownership rates, vacancy rates, inventory, building permits and the number of new business openings.  

“The top commercial real estate markets that are expected to outperform the rest of the nation are generally affordable and able to draw new residents with a greater flexibility to work from home,” said Yun. “These growing markets also offer much lower office and retail rents and are therefore able to attract new and expanding businesses.”

NAR’s predictions for the top ten markets for multifamily, office, industrial, retail and hotel property sectors in alphabetical order include:

  • Austin-Round Rock, Texas
  • Cape Coral-Fort Myers, Florida
  • Charleston-North Charleston, South Carolina
  • Las Vegas- Henderson-Paradise, Nevada
  • Nashville-Davidson-Murfreesboro-Franklin, Tennessee
  • Phoenix-Mesa-Scottsdale, Arizona
  • Raleigh, North Carolina
  • Salt Lake City, Utah
  • Seattle-Tacoma-Bellevue, Washington
  • Tucson, Arizona

Most of the markets are secondary cities in southern and sunbelt states, many of which have already seen significant CRE growth in recent years.

Multifamily Sector Poised for Growth

Prior to the pandemic, CRE fundamentals were strong with a good balance between supply and demand, said Calvin Schnure, senior vice president of research and economic analysis for Nareit (National Association of Real Estate Investment Trusts). Since this recession was caused by external shock rather than internal weakness such as an overheated or overleveraged market, Schnure anticipates a much faster recovery than the slow rebound from the financial crisis of 2008-09.

Overall, Schnure believes that the multifamily market will strengthen quickly as the longer-term issues of lack of supply and demographics re-emerge and the transitory impacts of the pandemic fade. Schnure also pointed out the dramatic difference between multifamily performance in gateway cities and secondary cities. Net absorption for multifamily properties was strong in secondary cities and weak in gateway cities. Vacancy rates were less impacted in secondary cities and apartment rents rose in those cities while they dropped in gateway cities.

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