As featured in WMRE 2022 Midyear Outlook
Effectively located apartment homes in booming U.S. metros are more undervalued than most of us deep inside the real estate industry realize. Rising costs of living, coupled with rising replacement costs to build new housing, have resulted in a giant macro increase to multifamily values in most markets as 2021 closes.
An important market cycle has surfaced: rising single-family prices are causing more people to rent for longer, effecting demand for already near-full apartment inventory. Consequentially, multifamily in many metros is near-term lows for vacancy levels and naturally pushing rent rates upward in many of the largest 50 metros.
Let’s take recent reporting in the Las Vegas MSA—there, multifamily rents are up over 25 percent year-over-year as of the third quarter of 2021. Cap rates remain supported by enormous amounts of capital-chasing, with bidding wars leaving some out of the market. We’ve seen record-breaking transactions taking place across the country. And RealSource’s in-house market research based on 16 multifamily properties across three major markets are in concert with these findings: simply put, supply is shrinking, the demand is high, and rental rates are up significantly.
Investors are gearing up for continued anticipated profits in multifamily
For decades, U.S. equities and specifically, the multifamily and industrial commercial real estate sectors, have proven a wise allocation of wealth. Preqin reports that a record $379 billion of private equity capital are in funds intending to invest in commercial real estate. Because of the way the multifamily as an asset class has performed against others during the pandemic, the investment focus for deploying capital is now on US multifamily.
As investors consider the landscape, they will be reacting to the incredible levels of returns for multifamily in 2020 and 2021, which beat nearly all estimates for rent growth. Most experts believe it will take years for new supply to find an equilibrium for housing in most major metros. RealSource expects rental unit demand to continue to outpace supply for at least the next three years in most secondary metros as household formation bounces back.
Everyone needs a place to live—this adage has never rung truer than during the pandemic. We saw multifamily avoid some of the struggles facing other commercial real estate classes, including averting temporary retail and office shutdowns. So, given the historical strength of multifamily, the surge of performance in the last two years, and our research, it will be ever more necessary for due diligence and careful market-by-market watch as individual investors and institutions consider their allocations.
There are three factors to consider: first, we will be closely monitoring continued demographic changes and renter behavior to calculate the lifespan of this momentum. Secondly, we’ll be monitoring inflation fluctuation, which will remain above average until levels of employment are fulfilled and supply chain roadblocks resolve. Third, we will look to see if policies around interest rate remain accommodating. With this in mind, the RealSource market analytics team anticipates continued steady growth for multifamily rent rates in 2022.