What’s Behind Freddie Mac’s Upbeat Forecast?

The organization's Midyear Outlook foresees record-setting origination volume as demand for multifamily continues to rise.

Rising rents and falling vacancies are helping fuel strong investor demand in the multifamily sector and should lead to record-setting origination volume between $385 billion and $410 billion for the year, according to the Freddie Mac Multifamily Midyear Outlook.

Those projections are even stronger than those in the report released in late January which expected overall multifamily origination volume to reach $340 billion by year-end.

Freddie Mac Multifamily notes rapidly improving economic conditions and loosening of restrictions throughout the country have improved the outlook for the multifamily market. The report notes that a year after the pandemic caused the economy to bottom out in the second quarter of 2020, GDP, total employment, unemployment rates and jobless claims have all improved significantly. While there are concerns about more virulent strains of COVID-19 impacting areas with lower vaccination rates, the general consensus is the growth in the U.S. economy is expected to continue this year and likely into 2022.

Gateway Rents Market Levels. Chart and data courtesy of Freddie Mac

The investor activity comes as demand for multifamily housing exceeds pre-pandemic levels with nearly 90 percent of metros expecting to see positive rent growth in 2021, compared to 50 percent of all markets in 2020. Freddie Mac expects positive rent growth across the majority of metros this year except in the six largest gateway markets—New York City, Boston, Miami, San Francisco, Washington, D.C., and San Jose, Calif.

Rent declines are expected to continue in some of these gateway markets but at more moderate levels. Markets with the highest projected rent growth for 2021 include Phoenix; Las Vegas; Memphis, Tenn.; and Fort Worth, Texas. Overall, rents are expected to rise 2.5 percent for 2021. For the first half of 2021, most of the rent increases occurred during the second quarter with Yardi reporting overall rents up 5.1 percent in 2Q over the previous year.

Vacancy Rate Outlined

The vacancy rate is expected to decrease to 5.0 percent. Freddie Mac noted it expects the vacancy rate to improve in about two-thirds of the markets it covers and remain unchanged or increase in the remaining one-third of the markets. The smaller, less expensive markets and Sun Belt markets are expected to perform well for the rest of the year. The largest projected drops in vacancy are projected to occur in the Northeast, with Fairfield County, Conn., and Buffalo, N.Y., expected to show the largest decline in vacancy rates of 120 bps each.

Freddie Mac also looked at the top and bottom 10 metros by gross income growth for 2021 and found the top 10 are primarily stable Midwest markets and higher-growth Sun Belt areas: Memphis, Tenn.; Albuquerque, N.M.; Las Vegas; Cleveland, Ohio; Tampa, Fla.; Phoenix; Sacramento, Calif.; Oklahoma City, OK;  Greensboro/Winston-Salem, N.C.; and Indianapolis.

The bottom 10 metro areas for gross income growth this year are Washington, D.C.; New York; San Francisco; Miami; Boston; San Jose, Calif.; Orlando, Fla.; Minneapolis; Los Angeles and Portland, Ore. Projected vacancy rates range from 6.1 percent in Oklahoma City to 2.4 percent in Albuquerque for the top 10 metro areas and 9.9 percent in Washington, D.C., to 3.9 percent in New York for the bottom 10 metros.

Rent Occupancy and Lease Renewal. Chart and data courtesy of Freddie Mac

Investment Volume Detailed

Freddie Mac noted multifamily investments volume reached an all-time high quarterly high of $63 billion in the fourth quarter of 2020 after severe declines during the early months of the pandemic in 2Q and 3Q of 2020. During the first quarter of 2021, investment volume was about $39 billion, about 4 percent below Q1 2020 and about equal to Q1 2019.

The report attributed the rebound in volume to extremely low interest rates, confidence in multifamily market fundamentals and expectations for the economy to continue improving. Cap rates were reported at 5.0 percent, down 20 bps from Q1 2020, according to Real Capital Analytics. Freddie Mac expects cap rates to remain steady for the rest of 2021 because of the continued low interest rates and recent strength of the multifamily market.