According to the CBRE United States Commercial Real Estate Services, the year 2021 has been a huge success for the multifamily industry. The overall vacancy rate has dropped by 4% while the net absorption has raised up to over 350,000 units – which rose almost 180,000 since the last quarter, which broke records.
Q2 Net Absorption
The second quarter of 2021 has proven to have the highest amount of absorption in over 15 years. What this means is that there is a high demand for vacant apartments that people would like to rent. As the year moves forward, more absorption is expected to occur, making the multifamily market a promising venue for investors.
COVID played a huge role in the depreciation of multifamily in the year 2020, but as restrictions have been lifted and the general confidence of the communities has risen, more people have been seeking places to live. They have been moving out of family homes that were available to them during the pandemic, but are now ready to get back into their own homes.
Construction Starts and Completions
With such a high absorption rate, investors have taken advantage of the spike and moved forward with building more units to have available for the demand. In fact, the year to date shows that there has been a 19% rise in constitution starts. Over the last three years between 2019 and 2021, there has been a steady increase in the number of construction starts. As it stands right now there is a 48.2% rise in construction starts than there was at the beginning of 2019.
Record Demand Brings Heavy Interest for Investors
The state of Florida has had an extraordinary increase of construction completions with over 34 thousand newly added using units and net absorption of over 50 thousand units. Savvy investors know an opportunity when they see one, so it is not surprising that there is so much new building and growth in that state.
For the second quarter of 2021 New York takes the lead in completions with 5,600 newly built units. The net absorption rate more than doubled that amount with a total of 14,900. The last four quarters up until the second quarter of 2021 for New York have a total of 25,300 completions with a total of 2,900 in net absorption. This is a fine example of how explosive the second quarter has been.
The entire sum of the markets in the second quarter of 2021 has been 65,500 total completions with net absorption of 179,400 and a rate of 352,800 units for the entire year.
Vacancy Rates Continue to Drop Across the Country
The overall vacancy rate fell by over 70 basis points (BPS) throughout the quarters and 60 basis points throughout the year. This quarter, the second quarter in 2021 the vacancy rate has dropped to 4.0%, which is lower than it has been in two years. What this means is that the available units that are ready for tenants are being filled at a relatively quick rate and that the potential for huge gains is present.
Several markets have had vacancy rates under 3.0% in this quarter:
- Inland Empire 1.6%
- Ventura, CA 1.7%
- Providence 1.8%
- Norfolk 2.0%
- Honolulu 2.2%
- Sacramento 2.3%
- Madison, WI 2.4%
- Orange County 2.4%
- Long Island 2.6%
- Detroit 2.6%
- San Diego 2.6%
- Hartford 2.7%
- Salt Lake City 2.8%
- Colorado Springs 2.9%
As the vacancy rates continue to dwindle down, the market will demand more construction to facilitate the growing multifamily industry.
The Class A Vacancy Drop
The class A market, being the most lucrative class in the industry, has dropped tremendously as well. The class A vacancy rate has dropped a whole percent within the last quarter alone. Class A vacancy rate is standing at a solid 4.5% where class B vacancy is at 3.7% and class C is down to 3.5 %.
A Rise in the Cost of Rent
The average rent in the United States has risen to 3.5% quarter over quarter. The current average cost of rent per month is $1,737.
Since the larger markets such as San Francisco, San Jose, and New York tend to skew the entire average of the United States, they have been taken out of the equation. These areas tend to have much higher rent rates than other parts of the country. If they would have been included in the math, the cost of rent would have increased to a whopping 4.2%.
Most of the Mountain West Metros have experienced double-digit rent growth. Phoenix, Tucson, Las Vegas, Albuquerque, Colorado Springs, and Salt Lake City have all experienced double-digit increases. Inland Empire in California has gotten a 14.8% increase, followed by Sacramento and Ventura California.
With rising costs of rent, the market is becoming stronger and people are showing that people can afford to pay higher costs.
Outstanding Q2 Investment Volume
In the second quarter, the multifamily investment volume increased by 34% throughout the quarters. The volume was raised to $52.7 billion in Q2.
This quarter has been the highest quarterly level in the last 15 years.
Investors have been aggressively working to take advantage of these numbers especially in the hot markets such as Phoenix, Dallas, and Austin.
Dallas/ FT Worth Areas Lead for H1 Investment
In the first half of the year, Dallas/Ft Worth has taken the lead in sales with $7.7 billion. Atlanta closely follows behind with $6 billion. The total for the United States was $92.14 billion.
Here were the top 20 H1 investments for 2021:
- Dallas/Ft Worth $ 7.73 billion
- Atlanta $ 6.00 billion
- Phoenix $ 5.70 billion
- Los Angeles $ 5.39 billion
- New York Metro $ 4.04 billion
- Denver $ 3.42billion
- Houston $ 3.40 billion
- Miami $ 3.25 billion
- Washington DC $ 2.90 billion
- Austin $ 2.86 billion
- Orlando $ 2.16 billion
- Baltimore $ 2.10 billion
- San Francisco $ 1.60 billion
- Boston $ 1.55 billion
- Chicago $ 1.50 billion
- San Antonio $ 1.50 billion
- Tampa $ 1.44 billion
- Charlotte $ 1.44 billion
- Las Vegas $ 1.44 billion
- Nashville $ 1.42 billion
It is not difficult to see that multifamily is making a comeback and on the rise.
Loan to Value Ratios Continue to Improve
Evidence shows that there is a slightly higher loan to value ratio present in the second quarter. As these numbers continue to increase, so will the confidence among lenders and investors alike.
Since long-term interest rates have started to decline, the 10-year treasury rate fell from 1.74% to 1.45% in Q2.
Short-term interest rates have remained near historical lows throughout the second quarter which has caused more short-term and floating rate lending than prior years.
The giants Fannie Mae and Freddie Mac did not dominate the multifamily market in 2021 their volumes fell by 6.7% throughout the year.
The multifamily financing activity has remained increasingly active throughout the H1. As the conditions for the multifamily industry continue to become brighter, the future looks amazing for any potential investor that may want to participate in the large earnings that lurk just ahead.