Multifamily investment sales volume has risen, with quarter-over-quarter transaction volume in the third quarter of this year growing by the highest percentage in nearly a decade. In keeping with a trend over the past half decade, investors have allocated greater amounts of capital toward faster-growing, non-major multifamily markets.
These are among several insights gleaned from Newmark’s Q3 2020 U.S. Multifamily Capital Markets Report. Transaction activity slowed considerably as a result of the uncertainty surrounding the COVID-19 pandemic. But multifamily investment sales volume trended upwards. Quarter-over-quarter transaction volume increased 55.9 percent in Q3, the strongest sequential quarter-over-quarter gain since 2011.
“The most surprising takeaway is the accelerating trend towards investors choosing non-major markets,” Mike Wolfson, Newmark director of capital markets research, told Multi-Housing News.
“Year-to-date 74 percent of volume to multifamily has gone to non-major markets compared with supply-constrained major markets such as New York and San Francisco, which have been significantly impacted by COVID-19 . . . The 74 percent allocation to non-major markets represents the highest total since 2001.”
In terms of supply and demand, 250,656 units were delivered in 2020 through the end of the third quarter. That number outpaced demand by 31,569 units. Dallas, Atlanta and Houston saw the strongest demand in the 12 months concluding with the end of Q3. Meantime, Sacramento witnessed demand outpacing supply.
Multifamily total returns fell to 0.8 percent year-to-date, representing the lowest annual rate of return in 11 years. This drop notwithstanding, multifamily assets’ historical annualized returns have displayed ability to rebound sharply in the wake of economic downturns.
With 94.4 percent of rent payments collected in third quarter 2020, rent collections in the multifamily sector continue to outperform other major property types. Due to the nature of the virus, pandemic-era collections during the health and economic crisis have varied by geography. Densely populated markets have suffered more than others.
Mortgage debt outstanding remained flat quarter-over-quarter at $1.6 trillion. Almost half of outstanding debt came from the GSEs, with Fannie Mae and Freddie Mac originating a combined $97.4 billion through the end of the third quarter. During the 12 months ending September 30, annual effective rent growth dropped to 1.0 percent, the lowest annual rate since fourth quarter of 2010.
A number of markets displayed tepid growth as a result of the economic decline. But several markets continue outperforming. Six of the top 10 markets for rent growth are found in the Sunbelt.
“The most important takeaway is the intensified appetite from capital sources to acquire multifamily,” Wolfson said. “With approximately $200 billion of dry powder earmarked for investment into commercial real estate, multifamily should be the principal beneficiary. This is due to hospitality and retail being severely impacted by COVID-19, while office still faces fundamental challenges ahead. While demand for industrial is strong, product available for sale tends to be limited. Deal activity for multifamily is more readily available and the pipeline is more robust . . . We believe this positive momentum will continue going into year-end and 2021.”
Last month, Newmark arranged financing for the acquisition of the St. Johns Plantation apartment community in Jacksonville, Fla.