Investors Follow Apartment Dwellers to the Suburbs

It’s not just residents moving to the suburbs in 2020. Multifamily deal flow is also shifting out of urban areas.

A new report from Yardi Matrix notes that multifamily activity has fallen sharply in 2020—but that the impact has been uneven across metros, regions and property types. 

Namely, investors are moving from urban cores to inner-ring suburbs, from primary to secondary metros and from secondary to tertiary metros. “This phenomenon results from several factors, including owners putting fewer properties on the market, disagreement between buyers and sellers about prices, the composition of buyers, and the competition for assets,” according to Yardi.

The Northeast (-54.6%) and West (-51.0%) had the most significant declines, while the Midwest (-32.6%) and Southeast (-34.1%) fell the least, according to Yardi. But there were differences between the performance of suburban and urban apartments in these areas. In the Northeast, sales of urban apartments fell 63.2%, but suburban only dropped 47.0%.  In the Midwest, urban sales fell 41.0%, while suburban only dropped 25.7%.

The movement of people out of urban areas might also have been reflected in transaction volume by market. While transactions in gateway markets were down 46.4% and secondary markets dropped 44.5%, tertiary metros markets only fell 29.2%. However, secondary markets claimed 55.6% of all property sales with $28 billion of transactions. 

In times of economic turmoil, investors often turn to Washington, DC, with its stable government employment base. The COVID-19 recession is no different. Washington claimed $3.5 billion in sales. It was followed by Denver ($2.9 billion), Atlanta ($2.8 billion), Phoenix ($2.8 billion) and Dallas ($2.6 billion). Yardi says these were “all growing secondary markets that are poaching jobs and population from coastal centers.”

Still, only Austin at 1.6% saw an increase in year-over-year sales through nine months. Some of the largest drops in transactions were in San Diego (76.0%), Philadelphia (-74.9%), the Inland Empire (-71.3%), Boston (-70.1%), Seattle (-69.0%) and Los Angeles (-65.8%). 

Overall, multifamily transaction activity has fallen sharply in 2020 due to the fallout from COVID-19. Through three quarters in 2020, transactions dropped 41.7% to $50.6 billion, according to Yardi Matrix. 

Yardi pointed to many reasons for the sales drop off, including the difficulty making site visits and inspections, the closure of government offices, pullbacks from debt and equity and the uncertainty about underwriting future cash flows and appraising values with the massive job losses. 

While transaction volume fell sharply, rents only dropped moderately. In the first eight months of the pandemic, apartment rents fell 0.5%, according to Yardi Matrix. As people left major cities, more than 100 secondary and tertiary markets did better than the national average. Declines in rent growth and demand were confined to large, high-cost coastal markets. 

Other recent reports have shown similar findings. Overall, rents decreased in all top 10 most expensive cities for renters in 2020, according to RENTCafé. San Francisco saw the largest decline, with average rent plummeting to $3,055 after a 17.3% yearly drop. Manhattan, New York ($3,761) was second with a 10.8% rent decrease. That pushed its average rate below the $4,000 mark for the first time in years. Coming in third was Seattle, which saw prices drop 8.5%.