U.S. multifamily has been highly sought-after by institutional real estate investors over the past several years, in large part due to its high historic risk-adjusted total returns, necessity-based nature, strong demographic tailwinds, and readily-available financing. It has become an integral part of real estate investment portfolios with a portfolio weighting of about 26 per cent in the open-end diversified core equity index (ODCE).1
After a brief downturn during the COVID-19 recession in 2020, multifamily fundamentals have shown clear signs of recovery into 2021 as leasing activities accelerated. Most markets still report a near historically-low vacancy rate at under 5.0 per cent. Going forward, Clarion Partners is optimistic about the outlook for U.S. multifamily in 2021 and beyond due to three main factors:
- The likelihood of achieving herd immunity by the fall and the subsequent re-opening of the U.S. economy;
- The impending and unprecedented job boom: 11.6 million new jobs are forecast for the 2021-2023 period;2 and,
- The recent surge in construction costs and the moderating supply pipeline. Rent growth is forecast to accelerate over the next few years.
Furthermore, for-sale housing inventory is near a two-decade low, and home prices are at an all-time high across many U.S. markets. The median U.S. home price accelerated by 12 per cent in 2020, the highest rate in nearly 15 years.3 While demand for all forms of housing has surged, the situation has been exacerbated by rising building costs and a slower pace of new development. Housing affordability is likely to remain a significant headwind for the 154 million Millennials and members of Gen Z, a huge positive for future rental housing demand. Furthermore, during COVID, millions of young adults moved in with family, which may indicate strong pent-up demand for rental housing.
Clarion Partners expects trends that were well-underway pre-COVID to endure in the coming years. During the pandemic, Sun Belt states, low-cost metros, most tech hubs, suburban submarkets, and garden-style formats outperformed. Work-from-home (WFH) may accelerate existing net migration patterns. Which will benefit some metros over the others. At the same time, coastal CBDs have shown clear signs of recovery, as many office buildings are reopening and young people are returning to cities. Looking ahead, we expect faster population and job growth in low-tax and business friendly states in the South and West regions in the U.S., and we believe that multifamily build-to-core investments in markets there may offer attractive return potential.
As more and more Americans are vaccinated, and the U.S. economy continues to reopen, multifamily fundamentals may continue to strengthen. Demand began to turn the corner in Q1, with rents improving each month from January through April 2021 and with well over half of all markets tracked reporting positive rent growth and net absorption.4 Backed by Government Sponsored Enterprises (GSEs), multifamily financing terms are already below pre-COVID levels, and more and more lenders are competing for high-quality multifamily deals. While the pandemic shifted some living arrangements in the short-term, which varied considerably by location, Clarion Partners believes that demand for institutional-quality multifamily will continue to be robust over the long term.
Last but not least, multifamily has historically tended to have superior investment performance after recessions because landlords can adjust rent more quickly than in other sectors. Therefore, multifamily investment can potentially serve as a hedge against rising inflation, a desirable characteristic in today’s reflationary environment.
1 NCREIF. Q1 2021.
2 Moody’s Analytics. Q1 2021.
4 CBRE Econometric Advisors. Q1 2021.