CBRE’s Q1 2021 U.S. Multifamily Figures report shows the national multifamily market stabilized in the first quarter of the year after three quarters of softening and one quarter earlier than expected.
The overall vacancy rate rose by 20 basis points to 4.7 percent and average rent rose 0.4 percent—the first quarterly rent increase since the first quarter of 2020.
While the pandemic is still impacting the multifamily industry with overall Q1 market conditions weaker than they were a year ago, CBRE notes the stabilization “provides a solid foundation for recovery, especially in Q2 and Q3.” CBRE also expects there will be further improvement over the next two quarters due to “seasonality, widespread vaccinations, an improving economy, additional fiscal stimulus and a return of office workers.”
Markets with the lowest vacancy rates were: the Inland Empire (1.8 percent); Ventura, Calif. (2.1 percent); Providence, R.I. (2.2 percent); Norfolk, Va. (2.5 percent); Sacramento, Calif. (2.6 percent); Madison, Wisc. (2.7 percent); Long Island, N.Y. (2.8 percent); Detroit (2.9 percent) and Honolulu (2.9 percent).
Class A vacancy remained the highest at 5.5 percent but was unchanged for the third consecutive quarter. The report found vacancy rates for Class B (4.4 percent) and Class C (4.0 percent) were up quarter-over-quarter but on par with levels from the first quarter of 2020. Class A assets faced the most competition from new supply and renters in Class B and C properties were helped by eviction moratoriums and those tenants tend to move less due to fewer housing options and less work flexibility.
CBRE found urban migration during the pandemic continued to impact vacancy rates in urban submarkets, particularly in gateway metros. But the trend has stabilized or improved in most markets. “CBRE Research forecasts strong recovery of urban submarkets once most office workers can return to their offices and urban amenities are restored,” the report stated.
There was also some improvement in rent. While average rent was down 4.2 percent year-over-year, there was a clear directional change with a slight increase of 0.4 percent to $1,674 per month. Overall, rents are expected to reach pre-COVID levels by Q1 2022. In 36 of the hardest-hit urban core submarkets, 25 percent saw rent growth in Q1; 50 percent saw rent stabilization and 25 percent had rent declines. The report notes that three gateway markets are skewing the U.S. average rent. If San Francisco, New York and San Jose, Calif., were taken out of the national average, the year-over-year decline would be a modest 1.1 percent.
The regions seeing the highest percentage of rent increases were led by Mountain West, where six out of seven markets had year-over-year increases in Q1 and all seven were up from the fourth quarter of 2020. The Southeast saw 15 of 18 markets record year-over-year rent growth and 17 of 18 up from Q4 2020. Six of the nine South Central markets had year-over-year rent increases and eight of nine were up from the fourth quarter of 2020.
Investment Volumes Down
Multifamily investment was down 12 percent year-over-year in the first quarter of 2021, totaling $35.5 billion. Q1 2021 investment dropped by 43.2 percent in Q1 from the fourth quarter, which saw a total of $62.5 billion invested. But CBRE said investment volume picked up significantly in the second half of the first quarter as more product hit the market. Overall, investor appetite was strong, especially in suburban markets, pushing cap rates down.
The report notes CBRE investment activity suggests there will be greater cap rate compression especially in many of the hot markets like Phoenix, Dallas/Fort Worth and Austin, Texas. Dallas/Fort Worth led all metros with $2.8 billion for multifamily investment in the first quarter with $2.8 billion in total sales and 7.8 percent of all U.S. multifamily investment. Phoenix ($2.4 million) was followed by Los Angeles and Atlanta, both with $2.3 billion. The four Texas metros combined had $5.8 billion in investment volume during the first quarter.
In all, multifamily accounted for 36.7 percent of Q1’s total commercial real estate volume, followed by office at 21.1 percent and industrial at 20.3 percent.