Multifamily Set to Continue as Ideal Inflationary Hedge

The multifamily market is expected to continue its upward rise over the next year as strong demand, limited construction, and rising rents make the asset class an inflationary hedge.

A new report from Walker & Dunlop says low interest rates should continue to support CRE buyers, owners, and tenants, noting that yields remain “highly attractive” as compared to both the public equity and debt markets.  And that’s particularly true for multifamily, where net absorption ended the year up 6.8% from 2019. In the first half of this year, net absorption reached record levels, double that of 2020 levels. Vacancy levels slipped by 80 basis points in Q2 to 5.7% and sent rents up by 6.3% over the quarter and by 9.4% YTD.

While the sector has been somewhat plagued by ongoing eviction moratoria, there’s good news: 95.6% of rents were paid as of June 2021, down just slightly from the past two years’ figures. And “the forward goal is that employment gains will offset a reduction in federal and state subsidies to households that were enacted to support households through the pandemic,” the report notes.

There is, of course, the risk that those gains won’t be realized: “Like the Valley of Ashes in the Great Gatsby, stress continues to be concentrated in lower-income households—those whose smaller spending levels are less likely to move national GDP and similar figures,” according to the report. “For the nearly one-third of the labor force with a high school degree or less, unemployment is high and rising, increasing from 7% in Q1 2021 to 7.7% in Q2 2021. However, this figure may be underestimating official unemployment numbers—because labor participation rates are down due to pandemic-related reasons, this could potentially add another 3–4% to this sector’s unemployment situation.”

Despite that, Walker & Dunlop predicts that “with corporate profits up strongly since the second half of 2020, the labor market should be able to further absorb new employees as stimulus efforts wear off.”

The Southeast and parts of the West are home to the strongest apartment markets this year: cities where vacancy was less than 5% as of June and rents increased at double-digit paces include Baltimore, Fort Lauderdale, Inland Empire, Las Vegas, Miami, Orange County, Phoenix, Sacramento, Salt Lake City, and Tampa.

And while new construction has been hampered by labor and materials shortages and soaring land costs, sales of multifamily assets picked up considerably this year. Sales volume of market-rate apartments hit $46 billion in the first half of the year, an increase of 35% from a year ago, and cap rates remain low, averaging 5.3% in the second quarter.