Apartment Market Expected to Slow in 2022 After 'Blowout' Year

After an “absolute record, blowout” 2021, the multifamily market will likely slow down, according to Kevin Fagan, head of CRE Analytics at Moody’s Investor Services, who spoke Wednesday at the GlobeSt. MULTIFAMILY SPRING event.

While last year featured a 4.7% vacancy rate and 12.5% effective rent growth, Fagan pointed to the fourth quarter’s “paltry” 2.9% effective rent growth.

“We do expect a slowdown, but that slowdown is still quite healthy,” said Fagan.

And though there’s always an outside chance of COVID-19 resurgence, Fagan said that’s seeming less and less likely.

 Sunbelt regions dominated market growth in 2021, with three Florida cities topping the national chart. Jacksonville was No. 1, followed by Tampa and Palm Beach. Other notable states included New Mexico, Tennessee and Arizona. Northern states and areas such as San Francisco and San Jose in California, on the other hand, lagged behind – in tandem with national migration patterns. 

Southern states are likely to continue benefiting from that trend in 2022, according to Fagan.

“The Sunbelt continues to shine,” said Fagan.

Interestingly, Seattle has “snuck in” to the top four markets for rent growth in 2022 – something Fagan said was down to its high income and high-skill employment growth, despite its lack of population growth.

University and senior housing have made strong recoveries nationally, according to Fagan, who noted vacancies are expected to remain tight with substantial rent growth. He also highlighted a study analyzing loan defaults, which found that housing next to universities struggling with declining enrollment are more likely to encounter issues. That’s a widespread problem for many universities struggling to attract international students.

One rather “macabre” finding, Fagan said, is that vacancy rates in senior housing have risen during the COVID-19 pandemic, but there was “a solid, consistent improvement” in 2021.

Jobs are almost back, according to Fagan, who contrasted the “deep but short” pandemic-induced recession with the long-lasting economic downturn of 2008. That’s likely because working from home meant most high-skilled jobs remained in place this time, as they’re the toughest to replace.

Office Still ‘Integral’ 

Unlike Class A office space, Class B and C are experiencing low supply growth. That means there are much tighter vacancies for those classes, which Fagan said reinforces the need for affordable housing as conversations around rent regulations begin to swirl.

“Our position has been that offices are going to continue to be an integral part of the workforce and we’re probably not going to see a mass migration out of those and a crash in rents and values,” Fagan said. “One way we’re tracking that right now is looking at office leasing and what happens as office leases expired over the last couple of years. … Large tenants are still up at that eight-to-12-year range of leasing commitments. So, we’re talking about very large companies making very long commitments to the same office space.”

Small tenants are a different story, however, as they’re typically signing leases for less than a year.

‘Banner Year’ For ESG

It was also a “banner year” for ESG and climate issues, as Fagan said plenty of money went to sustainable assets. He pointed to Nuveen, one of the largest real estate investment managers in the world, which is decarbonizing its portfolio.

Fagan conceded that the U.S. is falling behind on climate initiatives on a global scale, but stressed that the regulations and fines already affecting New York are likely to serve as a precedent for other jurisdictions.

 “This is real now. … It’s something to be aware of. These types of regulations are percolating right now,” Fagan said. “The message here is that it’s on the way. It’s not going to kill you, but it should incentivize you to renovate your properties. And for the developers here, it should be an opportunity.”