The fourth quarter of 2020 was the strongest quarter on record for the U.S. multifamily market, which saw investment sales volumes totaling $56.7 billion, up 115.2 percent quarter-over-quarter. Most of that volume came in December, when pent-up demand helped fuel nearly $25 billion in sales.
Despite the record fourth-quarter results and a strong third quarter, the multifamily market ended 2020 at $138.7 billion, down 27.6 percent from 2019 due to the market slowdown earlier in the year because of the COVID-19 crisis, according to the 4Q20 United States Multifamily Capital Markets Report from Newmark.
Mike Wolfson, director of capital markets research at Newmark, said some of that capital was coming from investors who weren’t trading in hotel, urban office or retail properties during the pandemic and turned to multifamily, possibly for the first time, because of the sector’s resilience. The report noted allocation to multifamily rose to an all-time high of 34.2 percent in 2020, 8.1 percent higher than the long-term average of 26.1 percent.
“The level of capital is extremely high. The amount of people playing in this space for the first time as well as longtime, regular players is high,” he said.
Wolfson said he expects 2021 may follow a similar course, with more multifamily investments coming in the second half of the year as we see how the economy recovers and more Americans are vaccinated.
“The story is there is going to be deal flow, it just may not be immediate,” Wolfson told Multi-Housing News.
Suburbs, Smaller Markets Prevail
Garden-style, or suburban product, accounted for 66.8 percent of all trades in 2020 and much of that volume was occurring in non-major markets. Wolfson said it wasn’t surprising that investors continued to allocate a greater percentage of capital toward non-major markets in the fourth quarter as the migration out of denser, typically urban areas, continued amidst the pandemic. By year-end, 2020 saw the highest share of capital allocation to non-major markets on record, reaching 75.8 percent of capital allocation, up from nearly 74 percent year-to-date at the end of the third quarter. COVID-19 accelerated a trend that has been occurring for about five years. What was surprising, he said, was that in previous recessions investors sought investments in urban markets like New York, Los Angeles and Chicago which were considered relatively safe haven markets.
“In 2009-2010 we saw a much higher percentage of multifamily allocations going toward the biggest markets. Now we are seeing the complete opposite,” Wolfson said.
Dallas saw the most investments in 2020 at $10.3 billion but smaller non-major markets like Indianapolis with $1.1 billion in sales, a 72 percent increase year-over-year, achieved record high annual trading volumes and saw some of the strongest full-year increases in volume. Jacksonville, Fla., had $1.7 billion in trading volumes, up 22 percent, and Kansas City, Mo., had $1.2 billion in trading volumes, up 8 percent, according to the Newmark report. Other markets benefiting from capital allocation to non-major markets included Sacramento, Calif., with $1.5 billion in trading volumes, up 23 percent, and Salt Lake City with $1.2 billion in trading volumes, up 10 percent year-over-year.
“Some of these smaller markets have really emerged with a lot of investors. Indianapolis, which had never been a prominent multifamily market, had over $1 billion in sales,” Wolfson said.
Wolfson noted that regional markets that have urban cores with strong suburban submarkets, such as in New York City and Philadelphia, had more stable occupancy rates than those with a higher urban concentration like San Francisco as renters continued to leave urban markets for the suburbs. He said they may be leaving the city but “a lot of times they are moving within the same MSA.”
Other Key Takeways
Total Returns—Total returns also accelerated in the second half of 2020, with 4Q20 returns increasing by 162 basis points from second quarter low of -0.6 percent. The report states multifamily values were negatively impacted by the pandemic but income generation remained strong and kept the total returns up in 2020. There were differences market by market, however, with urban markets most disrupted by COVID-19 seeing negative total returns including San Francisco (-3.1 percent), New York (-2.3 percent) and Chicago (-2.3 percent). But some markets experienced high total returns due to strong fundamentals and favorable demographic trends such as Salt Lake City (12.7 percent); Phoenix, (10.4 percent); Inland Empire (8.9 percent); Denver (6.3 percent); and Raleigh, N.C., (6.2 percent).
Price Per Unit—Newmark notes multifamily price per unit dropped off significantly in the first half of 2020 due to the pandemic-induced market disruptions. But the report stated average pricing nationally exceeded pre-COVID levels by the fourth quarter. Non-major markets led the way with a 15.9 percent quarter-over-quarter gain and a 4.3 percent year-over-year increase.