The U.S. Multifamily Market Is Recovering, But It's Not Returning To Normalcy

Multifamily real estate in the U.S. took an unambiguously positive step in the first quarter, but it gave indicators that a path to recovery won’t be the same as a return to normalcy.

The national average rent increased 0.6% year-over-year in March, Yardi Matrix found in its monthly report. This is the last month of relatively “normal” year-over-year statistics for a while since rents were only marginally affected by the coronavirus pandemic in March 2020 but then hit a cliff in April. The new national average, $1,407 per month, is $6 higher than February’s number. U.S. rents in the first quarter showed a 0.8% increase over Q4. Apartment List’s national rent index improved by 1.1% from February to March while remaining flat from March 2020.

For the most expensive markets, that rent growth was a sign of recovery after steep declines in the second and third quarters, but in 114 out of the 134 metropolitan areas Yardi Matrix tracks, March rent was higher than it had been pre-pandemic. For what is normally considered the slowest quarter in multifamily leasing, this year’s first “was the best we’ve seen in a decade or so,” RealPage Market Analytics Senior Manager Carl Whitaker told Bisnow.

“We weren’t overly surprised by the data because we knew demand would probably strengthen to normal levels, but the rent growth in Q1 was a little bit stronger than we tend to see,” Whitaker said.

For many metropolitan areas considered secondary or tertiary, rent never declined by all that much to begin with. As those markets continue to gain at rates comparable to gateway cities that felt the sharpest declines, the gap in price between those two groups is narrowing, perhaps for good.

“As vaccine distribution continues to gain momentum, rental markets may be beginning to reflect the preferences of a post-Covid future,” Apartment List’s monthly report reads.

Within markets, demand and occupancy have remained stronger in Class-B and Class-C apartments than in Class-A and trophy buildings. Taken together with geographical trends, it paints a picture of a tenant pool driven more by pure monetary factors than by amenities, whether offered by a landlord or provided by local culture and commerce in a city.

“That relationship of living close to the office and to downtown amenities has changed, and until we see that come back, renters have had a harder time justifying the extra couple hundred dollars a month in rent,” Whitaker said.

What recovery there has been in the most expensive markets continues to be buoyed by significant concessions, which have been offered most commonly by owners of new construction who feel pressure to hit lease-up targets. Because of the multiyear construction timeline in commercial real estate, the impact of the coronavirus was a couple of weeks in delays rather than a dropoff in apartment deliveries; there were about 611,000 units under construction in the U.S. at the end of March, which was only slightly lower than in previous years, according to RealPage.

The most common form of Class-B and C apartment buildings is the garden-style apartment complex, which has been the strongest subtype within the multifamily sector over the past 12 months. Whether because of a lower price point, lower density or a combination of both, garden apartments have held or gained in value all over the U.S. despite housing a sizable portion of those whose jobs were interrupted or erased during the first lockdown.

“It’s surprising that the economic impact hasn’t been as bad as it could have been [on garden apartments],” Greystone Managing Director Alicia Cotton, who manages loan origination and advisory services, told Bisnow. “Workforce housing has continued to be strong, and you could say that eviction moratoriums and stimulus-based rental assistance programs have helped, because owners have been motivated to help their tenants apply. And that’s in addition to the assistance offered to landlords themselves.”

Whenever moratoriums are finally lifted — the Centers for Disease Control and Prevention’s federal one is slated to end June 30, but that has been changed many times — owners of such properties stand to benefit from being able to evict tenants who have built up unpaid rent, Cotton said. The high occupancy rate of and demand for such properties will allow landlords to push rents when units turn over.

As economic conditions continue to improve, they will eventually progress beyond recovering from the pandemic recession and into a more fully positive environment. What remains to be seen is how long renters will operate from a position of guarding against renewed uncertainty. In the past few months, some tenants have negotiated for concessions by offering to sign leases with longer terms, Whitaker and Yardi Matrix Business Intelligence Manager Doug Ressler agreed.

“People are trying to go for larger square footages and things like that, and at the same time they’re trying to take the savings they’re getting for larger spaces and extend them past 12 months to lock in those lease rates,” Ressler said.

Like all concessions, longer lease terms have been more common in the priciest markets and in urban cores of all metropolitan areas, where ensuring occupancy now can potentially come at the cost of benefiting first from the return of a more favorable market for landlords. 

“The cliched question [landlords are asking] is, ‘Are we back? Is this the new normal?’” Ressler said. “And it really comes back to supply and demand.”

Even if the gap in price between Class-A and Class-B apartments narrows, it likely won’t close enough to meaningfully grow the pool of potential tenants — Class-A units average 20% to 25% higher rents than Class-B, Whitaker said.

“Historically, that gap between Class-A and Class-B was a little bit tighter than it is now,” Whitaker said. “In 2008 or 2009, a Class-A landlord could theoretically offer a concession to allow a Class-B renter to move up. Now, it’s really harder to get a Class-B renter with a concession, which I think would help to explain Class-A’s underperformance.”

Demand may take a while to recover and absorb the consistent stream of deliveries in Class-A multifamily, but the opposite dynamic is playing out in lower classes. Because of the high costs of materials and land, very little workforce housing is being built. Only 3.6% of all apartments in the current pipeline are garden-style units, though that class makes up 49% of existing inventory, according to CoStar data reported by Bendix Anderson.

If the supply side is unlikely to change much, then changes in demand will determine the trajectory of multifamily real estate. While it seems unlikely that demand dynamics will simply return to what they were in 2019, their real effect won’t be known until they are staring landlords in the face.

“We’ll need to be at least on the very cusp of the fully positive period to understand what will be different about it,” Whitaker said. “In my view, we’ll need to get through the summer months, which is traditionally the peak leasing season, to see what will be a long-term shift vs. a one-year blip on the radar.”