With ‘Dry Powder’ Aplenty, Investors Ready to Buy

Debt and equity should be in decent supply this year, says columnist Lew Sichelman.
Lew Sichelman

Although multifamily sales declined by 35 percent last year, many potential investors remain in the hunt for acquisitions. But the available of debt remains strong, according to a levelheaded analysis of the current year.

All in all, this will be a better year for the sector than 2020, despite the fact that many challenges remain, according to the Winter 2021 outlook from Yardi Matrix.

“Gateway markets will continue to struggle,” the report says, “and the industry will have to deal with weak rent collections, eviction bans, forbearance requests, lobbying for renter aid and a new federal mortgage oversight regime.”

Even so, the report is optimistic. “There does appear to be light at the end of the tunnel,” it proclaims.

Developers, investors and landlords may have to be patient, however. “It will take some months to get most of the country vaccinated and get businesses operating as normal,” according to “Pandemic Delivers More Pain Before Recovery Begins.”

The best news seems to be that acquirers are interested in the market and lenders are in good shape to finance them.

“Despite the myriad issues the industry is facing, capital flow remains strong,” according to the analysis. “Sales activity dropped about 35 percent in 2020, but there’s no shortage of dry powder looking to buy apartments. Agency lenders have had their allocations clipped slightly, but debt availability is strong, as well.”

Rent growth was basically flat year-over-year in 2020. Despite the drama, though, the overall decline was just 80 basis points. Nevertheless, that national average doesn’t evoke the ride owners took in a seesaw year where gateway markets dropped sharply as workers cleared out of cities but tech hubs stayed strong.

California Was Bifurcated Market

Analysts pointed to California as an example of this “bifurcated” performance in 2020. Big metros like San Francisco (down 9.4 percent), San Jose (down 13.7 percent) and Los Angeles (down three percent) took it on their respective chins, while less expensive metros like Sacramento (up 6.1 percent) and the Inland Empire (up 7.3 percent) showed healthy growth.

How will those metros do this year? Yardi Matrix is projecting they will be more steady going forward. Los Angeles will see a small increase in rent this year, at 30 basis points, while declines in San Francisco and San Jose should be less severe, at 1.7 percent and 1.4 percent, respectively. Meanwhile, growth in Sacramento should moderate to 3.4 percent, and 2.4 percent for the Inland Empire.

Tech hubs performing well in 2020 included Phoenix (up 4.6 percent), Tampa (up 3.9 percent) and Las Vegas (up 3.8 percent). These markets “have benefited from having a lower population density during the pandemic,” according to the report. Tertiary markets that did well include Boise (up 9.5 percent) and Scranton/Wilkes-Barre (up 7.8 percent).

Looking at their crystal ball for this year, Yardi’s market analysts think several markets are poised to outperform. These include Reno, Nev. (Matrix forecast: 5.4 percent), Huntsville, Ala. (4.9 percent) and Las Vegas (4.8 percent). “The growth of these metros can be attributed to positive migration trends, lower-cost housing and an influx of high-paying tech jobs that can be performed remotely.”

The outlook for rent collections depends in large part on what the federal government decides to do.

But the good news is last year’s anticipated collapse in collections never materialized. And buttressed by December’s $900 billion stimulus package and another, probably larger this year, the report says collections should remain fairly strong.

Meanwhile, the supply of new multifamily housing was dented by the pandemic last year, but not excessively. The decline, to 285,000 units, was just 7 percent below the 2019 figure. And Yardi analysts suspect new construction should rebound 5.4 percent to a robust 765,000 units.

That pipeline should yield about 328,000 units this year, which would be up 15 percent from 2020. As a percentage of stock, metros with the most forecast new supply are White Plains, N.Y., (4,464 units, or 6.5 percent of existing stock), the Southwest Florida Coast (4,108 units, or 5.9 percent) and Louisville (4,484 units, or 5.8 percent), the outlook predicts.

Dallas, Miami Look Strong

Which markets will do the best? Yardi Matrix thinks Dallas (22,909 units to be delivered, or 3 percent of existing stock), Miami (16,262 units, 5.4 percent) and Washington, D.C. (14,541 units, 2.7 percent) will be the top gainers.

Two more Texas metros should be in the top 10, with Houston (11,500) in fourth place and Austin (10,301 units) in seventh place. “Some metros, especially in Texas, that had large increases in supply in recent years have moderated a little, but long-term growth is high in Sun Belt and Western Markets,” the report says.

On the other hand, gateway markets should continue to lag. Besides D.C., Boston has the most forecast deliveries in 2021, at 3.7 percent of the existing stock, followed by San Francisco (2.8 percent), Los Angeles (2.6 percent), Chicago (2.2 percent) and New York City (1.3 percent).

The new units may take a little longer to lease up, but should still perform reasonably well, according to the report.

“Most projects should find tenants in the long term. Occupancy has declined somewhat during the pandemic, especially among high-end properties, but at year-end the average occupancy in the U.S. was 94.7 percent. Demographic trends are still positive, with the prime renter-age population (20-34 years old) set to continue growing through the middle of the decade.”

Despite transactions declining by more than a third last year, capital market interest in multifamily looks strong this year, the report forecasts.

“With a national long-term shortage of reasonably priced housing, demand for multifamily is projected to remain strong, especially in the Renter-by-Necessity and affordable segments. Investors see multifamily as a highly appealing investment product.”

Support from the big GSEs may actually fall this year, the report warns, but other lenders, including commercial banks, life companies, CMBS and private equity outfits “all want to increase multifamily business.”

“Demand for multifamily investments is high among both equity and debt providers and should remain so in 2021, barring a sharp and unexpected economic downturn or a health crisis that would create another shutdown.”


—Associate writer Mark Fogarty contributed to this report.