What Q4 Tells Us About the Multifamily Market: CBRE

CBRE’s Q4 U.S. Multifamily Figures report shows a sector still impacted by the COVID-19 crisis with average rent declining 1.6 percent for the quarter and 4.2 percent from the fourth quarter of 2019. But there were some bright spots, like Q4 net absorption coming in much higher than anticipated at 55,600 units, and investment volume marking a new quarterly high that indicates overall multifamily fundamentals should stabilize by the second quarter, with steady market recovery expected later in 2021.

CBRE Research expects strong multifamily volume this year, particularly in the second half of 2021, with increased activity coming from institutional investors, public REITs and international buyers.

Market Demand Stays Strong Despite Recession. Chart and data courtesy of CBRE

While the Q4 net absorption at 55,600 units was lower than the Q3 net absorption, which totaled 90,300 units, CBRE noted it was “far better than expected given normally weak leasing in fourth quarters and during recessions.” Annual net absorption totaled 190,600 units, which the report stated was a “very respectable level given the economic recession.” However, it was still 39 percent below 2019’s annual net absorption.

The fourth-quarter vacancy rate was up 10 basis points from 4.4 percent in Q3 to 4.5 percent but CBRE noted the “rise of only 10 bps was good news for the market” because it’s usually impacted by seasonal weakness. Year-over-year, vacancy was up 50 basis points. The pandemic has hurt Class A properties more than Class B and Class C so it was not surprising that the overall 2020 vacancy rate for Class A was 5.4 percent compared to 4.3 percent for Class B and 3.7 percent for Class C assets.

The average rent was $1,666 per month in Q4, down 1.6 percent from Q3. CBRE expects further rent decline in the first half of 2021 with rents beginning to increase in the third quarter and reaching pre-COVID levels by the first quarter of 2022. Three gateway markets with significant rent declines—San Francisco (-18 percent); New York (-9.7 percent) and San Jose, Calif., (-14.6 percent)— skewed the U.S. average rent downward. If those cities were removed, CBRE notes the year-over-year decline would have been 1.3 percent rather than 4.2 percent.

Market Differences

The report states some segments performed better than average in the fourth quarter, citing suburban submarkets, smaller markets, Midwest, Mount West and Southeast regions and Class B and C assets. CBRE stated Mountain West had the highest percentage of year-over-year rent growth in Q4, followed by the Midwest and Southeast. Five of the seven Mountain West metros had rent growth of more than 3 percent in 2020.

In the Midwest, most markets other than Minneapolis and Chicago had rent increases and in the Southeast, rents declined in only four of the 18 markets tracked—Nashville, Tenn., and Miami, Orlando and Fort Lauderdale in Florida. Two California markets—the Inland Empire (8.2 percent) and Sacramento (6.4 percent)—had the highest rent increases. Four Mountain West markets saw strong rent growth – Albuquerque, N.M., (6.3 percent); Tucson, Ariz., (6.3 percent); Phoenix (4.5 percent); and Colorado Springs, Colo., (4.1 percent). In the Southeast, Norfolk, Va., and Memphis, Tenn., both saw rent growth of 5.1 percent and Richmond, Va., jumped 4.9 percent while Greensboro, N.C., increased by 4.5 percent.

Starts, Completions & Investments

Construction starts in 2020 totaled 427,100 units year-to-date through November, a 13.8 percent increase from November 2019. October and November construction starts averaged 36,400 units, 13.5 percent lower than Q3’s monthly average of 42,100, but the report states that decline was probably due more to seasonal changes.

Perhaps in a sign of future market confidence, CBRE said the under-construction total reached an 18-year high in October with 702,400 units. While it moderated slightly to 675,600 units in November, the year-over-year total for the month was up 11.9 percent. The number of construction permits issued in Q4 was 110,700 units – the highest quarter of 2020 and a 4.9 percent jump from the third quarter. While the year ended on a better note, COVID-19 likely impacted the year-end figure with 429,400 multifamily units getting permit approval, down nearly 11 percent from 2019.

Investment Volume Reaches New Quarterly High in Q4. Chart and data courtesy of CBRE

Annual investment volume totaled nearly $139 billion, down 27.6 percent year-over-year, but CBRE noted the Q4 investment total reached $56.7 million, which was more than double the third-quarter volume and even slightly more than Q4 2019. That marked a new quarterly record high in the 20 years that Real Capital Analytics has been collecting data, according to CBRE.

CBRE said multifamily was once again the top commercial real estate investment sector for the year with 34.2 percent of market share in 2020 compared to industrial with 24.4 percent and office with 21.3 percent. Top investment locations were Dallas/Fort Worth with $10.3 billion; New York (including Northern New Jersey and Long Island), $9.5 billion; Atlanta, $7.9 billion; Greater Los Angeles, $7.6 billion, and Washington, D.C., with $6.5 billion.