While the multifamily property sector fared better in 2020 than many economists anticipated at the beginning of the pandemic, there’s no question that apartment investors and owners were negatively impacted along with the rest of the world by COVID-19. Vacancy rates climbed, rents declined, and concessions increased in reaction to widespread unemployment, shifting migration patterns and new supply. However, the pandemic’s impact varied widely by location and investors became increasingly confident in the multifamily sector as the year progressed.
Nationally, vacancy rates are expected to peak in 2021 at 6.5%, according to Fannie Mae’s January 2021 Multifamily Economic and Market Commentary. Vacancy rates are anticipated to begin trending down in 2022 and continue that downward trajectory to 4.75% by 2026.
However, it’s important to recognize that much of that rise in vacancy rates is driven by prime properties in high-cost urban locations such as New York, Washington, San Francisco and Boston. Vacancy rates remained steady in many suburban markets and in Class B and Class C buildings.
Why vacancy rates are expected to rise in 2021
- New supply delivering. More than 396,000 apartment units were delivered in 2020, a peak year for deliveries, according to Dodge Data & Analytics Supply Track. Another 506,637 are anticipated to deliver in 2021. However, it is possible given labor and material shortages that not all of those apartments will be completed this year. The cities with the highest levels of apartment construction underway now include New York, Washington, Dallas, Houston, Los Angeles and Seattle, according to Dodge.
- Demand down. Demand, particularly for Class A apartments in prime urban locations, dropped precipitously early in the pandemic as young adults left to move in with their parents and tenants moved to the suburbs in search of more living space, less density and lower rent. Working remotely and the lack of availability of urban amenities during the pandemic meant renters were more likely to move away from expensive downtown locations. Those renters are not anticipated to return to their offices – at least not full-time – until later in 2021 or perhaps 2022.
- Disconnect between demand and supply. While demand is expected to remain strong for Class B and Class C apartments, especially in markets with relatively steady employment, new supply is primarily Class A apartments in already saturated markets where demand is down.
- Uneven performance by market. Vacancy rates also vary by market. Class A apartments in prime urban markets, particularly in gateway cities, are not expected to recover until 2022, according to market analysis by CBRE. But markets in the Midwest and South, which didn’t deteriorate as much in 2020, are anticipated to have lower vacancy rates in 2021.
- Job growth won’t replace 2020 job losses. Fannie Mae’s economic forecast expects job growth of 5.5% by the end of 2021, but even that estimated 7.9 million new jobs won’t make up for the estimated 9.3 million jobs lost in 2020. Fannie Mae expects it will be 2022 before those jobs are replaced and before demand will increase substantially for apartments.
Why vacancy rates will improve in 2022
The U.S. economy will begin rebounding in 2021, particularly as vaccinations become more widespread. That rebound is anticipated to accelerate in 2022. By late 2021 and into 2022, job growth is anticipated by Moody’s Analytics to increase in Austin, Dallas and Phoenix, which should increase multifamily demand. All three cities have a significant amount of supply, but demand is strong enough to absorb that supply. Other cities where employment recovery levels by the fourth quarter of 2021 are expected to be strong include Salt Lake City, Indianapolis, Houston, Denver, Atlanta, San Antonio and Jacksonville. Cities with lower expected employment recovery include Pittsburgh, Chicago, Los Angeles, New York, Orlando, Providence, San Francisco, Cleveland, Detroit and Las Vegas.
Demand for apartments, which is closely tied to job growth, is also connected to household formations. As the pandemic’s impact fades and consumers feel they have more job stability, young adults are more likely to move out of their parents’ homes and begin to establish their own households again.