Multifamily investors, like everyone else, got a bit battered in 2020. Investment activity stalled during the first half of the year in response to the shock of the COVID-19 pandemic and economic shutdown. But during the second half of the year, investment in the multifamily sector rebounded, according to the Freddie Mac Multifamily 2021 Outlook released in January.
The combination of vaccine distributions and the expectation of another federal stimulus package is anticipated to contribute to an improving economy in 2021 that will build on investor confidence in the multifamily sector. While interest rates fell in 2020, cap rates remained stable, with cap rate spreads increasing along with property prices.
Overall, Freddie Mac predicts that multifamily originations will grow to $340 billion by the end of 2021, an increase of 18.5% over the estimated $287 billion in originations in 2020, which saw a 20% decline compared to 2019 originations.
Multifamily construction is anticipated to match 2019 levels in 2021 and nearly half of all metro areas will see positive rent growth in 2021, according to the report.
Freddie Mac anticipates sustained investor demand for projects, particularly in smaller secondary markets, because of the long-range view that occupancy rates and rent growth will strengthen along with the economy.
Nationally, vacancy rates are predicted to increase to 5.8% in 2021 and rents are predicted to fall -0.2%, which will lead to an estimated overall decline in gross income of -0.5%. However, those national averages are brought lower by anticipated negative performance in gateway markets such as New York, San Francisco, Washington, D.C. and Miami. Generally, smaller markets in the Northeast and secondary markets across the South and the West are expected to perform better than the national average.
Uneven expectations by market
While the pandemic hit lower-income households hardest and devastated the hospitality and retail industries, it also impacted various cities and regions in different ways. The ongoing migration pattern to secondary and tertiary cities accelerated, along with moves from urban to suburban locations.
Cities such as New York saw rents decline 10.2% in 2020, according to Freddie Mac, which predicts a further rent decline of 2.9% there in 2021. Similarly, rents in San Francisco declined 13.3% and are expected to decline 3.0% in 2021. Washington, D.C. rents dropped by 6.0% in 2020 and are anticipated to decline 4.9% in 2020. Miami rents dropped less significantly, but still declined 4.1% in 2020 and are expected to drop 2.4% in 2021.
Vacancy rates rose in New York in 2020 by 1.5%, in San Francisco (1.1%), in Washington, D.C. (0.8%) and in Miami (0.3%). In New York and Miami, vacancy rates are expected to decline in 2021 by 0.3% in each city. However, vacancy rates are expected to continue to rise in San Francisco by another 0.3% in 2021 and by 0.9% in Washington, D.C. in 2021.
Freddie Mac identified the 10 top and 10 bottom markets in terms of anticipated gross income growth in 2021. Generally, the bottom markets are gateway metro areas where above-average supply coming online in 2021 will be a drag on market performance, especially combined with a lack of demand. Not only will there be increased vacancy rates, but new supply also typically offers concessions that will put price pressure on the whole market. The bottom 10 markets are Washington, D.C., Richmond, San Francisco, New York, West Palm Beach, Miami, Raleigh/Durham, San Jose, Orlando and Portland, Oregon.
The top 10 metro areas with the highest predicted gross income growth in 2021 are typically more stable and smaller markets in the Northwest, Midwest and Sunbelt where vacancy rates are expected to decrease, and modest rent growth is anticipated. Freddie Mac says that many of these areas did not experience the multifamily development boom in recent years and had lower vacancy rates than their long-term average in 2020. (Baltimore is the one exception on the list, which had vacancy rates only slightly above their long-term average.) The 10 markets that are expected to perform best in 2021 include Hartford, Sacramento, Tampa, Cleveland, Memphis, Albuquerque, Buffalo, Baltimore, Pittsburgh and Greensboro/Winston-Salem.
Generally, despite the economic challenges of 2020, the multifamily market is anticipated to strengthen in 2021.