ULI Panel: Inflation Good for Multifamily Sector

November 16, 2021

The U.S. economy is on track to rebound from the devastating impact of the pandemic and grow at a pace well above the recovery from the great recession, according to a survey of nearly 50 economists presented at the Fall 2021 ULI Real Estate Economic Forecast. The economic retraction was far worse in 2020, with GDP down 3.4% compared to a decline of 2.6% in 2009. In 2010, GDP rose just 2.7%. In 2021, the ULI forecast is for GDP growth of 5.7%, followed by two years of continued but moderating growth of 4.0% in 2022 and 2.5% in 2023.

Other predictions from the ULI forecast include recovering the 9.42 million jobs lost in 2020 with 6.0 million new jobs predicted for 2021, 3.7 million in 2022 and 2.2 million in 2023. Annual unemployment, which has a 20-year average of 6.0%, is anticipated to drop from 6.7% in 2020 to 4.9% in 2021, 4.0% in 2022 and 3.8% in 2023, an indication of a continued tight labor market.

In addition, the forecast found that even though 10-year Treasury rates are anticipated to rise, they’re expected to stay below the 20-year average of 3.07%. The predicted rates are 1.6% in 2021, 2.0% in 2022 and 2.25% in 2023. Cap rates are also expected to stay well below the 20-year average of 6.0% at 4.3% in 2021 and 2022 and 4.4% in 2023.

Commercial real estate transactions in 2020 stayed well above the great recession volume of just $73 billion in 2009 but have yet to recover to 2019 levels. In 2019, CRE volume reached $617 billion, followed by $453 billion in 2020. The forecast calls for $515 billion in 2021 and $600 billion in 2022 and 2023, all higher than the 20-year average of $347 billion annually.

Potential inflation headwind could benefit multifamily sector

Panelists at the forecast agreed that the current inflationary pressure is likely to be temporary and is primarily tied to supply chain issues. The ULI forecast suggests that inflation will be double the 20-year average of 2.1%. However, inflation is anticipated to decline over the following two years to 3.0% in 2022 and 2.4% in 2023.

Globalization, technology, and demographics including an aging population are all likely to keep long-term inflation rates low, says Tim Wang, head of investment research for Clarion Partners, a commercial real estate investment firm. Still, his firm is locking in long-term financing as a hedge against inflation and a potential interest rate hike.

“Inflation is good for the multifamily sector because higher home prices and the shortage in the housing market force would-be buyers to rent longer,” says Suzanne Mulvee, senior vice president of research and strategy at GID, a privately held real estate developer, owner and operator of multifamily, industrial and mixed-use properties.

Multifamily sector strengthening

While the industrial property sector has been the strongest throughout the pandemic, total annual returns in the multifamily sector come in second among property types. Annual returns on apartments dipped from 5.5% in 2019 to 1.8% in 2020 but are anticipated to rebound beyond 2019 to 7.5% in 2021, 7.8% in 2022 and 7.0% in 2023.

Rental rates are also anticipated to rebound from a decline of 4.2% in 2020 to an increase of 5.0% in 2021, 4.0% in 2022 and 3.0% in 2023, all well above the 20-year average rental rate change of 1.6%. Vacancy rates are expected to dip below the 20-year average of 5.19% to 4.2% in 2021 and 4.1% in 2022 and 2023.

“I think the multifamily sector will appreciate even faster than the forecast because of the fundamentals in this property sector,” says Wang.

Both suburban and urban core markets are predicted to provide opportunities for multifamily investors.

“The suburbs are growing but so are cities,” says Mulvee. “Only two cities lost renters during the pandemic – San Francisco and New York – but they lost pricing power because there was too much supply. But if you think about some of the urban coastal areas, they’re still attracting the top grads and value-add employees who want to be there, including New York and San Francisco.”

Employment in growing cities such as Austin continues to drive demand for multifamily development, says Mulvee. Empty nesters who sell their home and downsize, along with high income earners, are still drawn to cities, she says, but there are also opportunities in suburban areas for renters who want more space. The long-term migration pattern from high tax states to lower cost, business-friendly secondary cities that began before the pandemic is expected to continue and will also provide additional opportunities for multifamily investors.