Investors poured an annual record of $335.3 billion into the nation’s apartment market, an increase of 128.2% year-over-year. Investors in the U.S. hit the gas particularly hard in the last three months of 2021, investment volume increased to $148.9 billion, in the fourth quarter. That’s the highest quarterly total on record. In fact, it was heftier then the investment volume in all of 2020, a year racked by coronavirus disruptions. The U.S. average price per unit rose nearly 9% in 2021 to over $180,000. Cap rates have compressed as a result, with the national mean dropping to 4.93 percent. Best-in-class assets in the most sought after markets have changed hands at initial yields as tight as the mid- 2% range, with historically low interest rates assisting with deal flow. Rates are expected to rise to some degree this year, which may restrain the downward pressure on multifamily yields. Paired with competition from other parties, this trend will likely drive investors to widen criteria this year, bolstered by a generally recovered economy. Supply and demand was responsible for driving the record breaking 2021 investment. Developers delivered 274,500 multifamily units nationwide in 2021. Another 400,000-plus in the process of being developed although supply chain difficulties may delay full development until 2024. However demand remains so strong that these top markets are absorbing the new supply as it comes on. Almost all markets across the U.S. saw positive rent growth in 2021. Many saw rents jump by double-digit percentages during the year. National asking rents rose 13.5 percent on average in 2021. Anticipated rent growth for 2022 is optimistic but will likely not repeat the record breaking growth seen in 2021. A record number of units were absorbed in 2021, driving the national multifamily vacancy rate down to the lowest year-end level in more than two decades. Fundamentals are projected to improve vacancy even further in 2022.

National Investment Volume

Migration

Economic shifts and remote work are driving massive waves of migration in the U.S.

Nation-leading rates of job creation and household formation characterize the markets that lead this year’s U.S. Multifamily Index. Orlando and Las Vegas claim the top spots by surpassing all other ranked metros in these two categories, in turn fostering outsized jumps in effective rent. Many residents fled expensive, densely populated, coastal urban city centers for less expensive and less dense suburban locations. This demand for lower-cost living continues to reshape the demand seen in markets across the nation. In 2021, many of these large coastal markets have rebounded and we’re seeing that these urban cores are being populated by renters who are 10 years younger on average than those who left. Among the top 10 markets, the pandemic emphasized trends that were already emerging prior to 2020, namely that the strongest rent growth occurred in less expensive, Sun Belt and tech-hub markets. The growth in these markets during the pandemic has been explosive, with YoY rent growth of 21% or more. The shift away from parts of the Northeast, Midwest and West Coast to regions of the Sunbelt and Rocky Mountains have drastically disrupted all sectors of the commercial real estate market. The lower cost of living in these areas appeals to retirees on fixed incomes and growing families seeking larger accommodations. Businesses that enter or expand in these lower-cost areas in turn create jobs that drive more migration. Favorable climate and tax policies have also been a major driver towards these markets. States that have grown the most over the past five years include Nevada and Arizona at 10.4% and 10.3%, respectively. The influx of new residents has had a clear impact on apartment demand. Vacancy in both Las Vegas and Phoenix began this year at multi-decade lows, which will help drive rents up by some of the largest margins in the country by the end of 2022. Even in states with flat to declining populations, apartments in major commerce centers continue to report improving property fundamentals. Rents in New York City, Philadelphia, Detroit and Cleveland will all rise this year as the frequent turn-over of residents in these settings continues to drive leasing activity. Migration patterns are also being impacted by one of the most significant societal shifts brought about by the COVID pandemic—remote work. Working from home has loosened the link between home and work limiting the cultural advantages of large cities. That led to a migration from high-cost coastal centers starting in the spring of 2020. Over 60% of all multifamily investment was made in the southeast and southwest regions of the U.S. in 2021.

Migration to the Sun Belt has been happening slowly and steadily for over a decade. From 2010 to 2019 the southern states of South Carolina, Texas, Florida, North Carolina, Georgia, and Arizona have seen a minimum of 10% population increase. One of the biggest trends has been the acceleration of migration out of the major international gateway cities. Secondary markets, outside of the top six or seven international gateway cities, is where the bulk of the absorption has occurred, mostly in the Southeast and Southwest. Migration trends are showing movement from the gateway markets to secondary tech hub markets, gateway markets to smaller cities within the same metros, and urban cores to the suburbs. There have already had been a set of issues for the demand moving out of gateway cities that accelerated with pandemic related shutdowns: affordability, demographic and family formation trends to move to the suburbs, political risk pressures, and congestion. Cities like Austin, Dallas, Houston, Charlotte, North Carolina, Tampa, Phoenix and Atlanta saw the greatest number of inward migration over the past year. Having the ability to work remotely gave a number of residents the motivation they needed to seek more affordable housing in southern states. Unemployment skyrocketed during the pandemic across the country. However, certain job markets have maintained steady growth despite the challenging economic times. Austin, Texas, added 11,600 jobs in 2020 and regained 71% of March and April's 2020 pandemic-related job losses and only lost roughly 1% of its jobs from 2019 to 2021. It currently sits as the second- highest city for employment opportunities in 2021 behind Seattle. From 2016 to 2021, southwestern states Arizona, New Mexico, Texas, and Oklahoma, manufacturing output increased more than any other region in the U.S. according to data from Bureau of Economic Analysis. Eight out of the ten biggest development markets in the nation are located in the Sun Belt region. Cities like Jacksonville, Florida; Charlotte, North Carolina; San Jose, California; Tempe, Arizona; and several other major Sun Belt region markets are experiencing steady and significant employment growth, which is driving people and dollars to these areas. Many of the Sun Belt markets have a diverse range of economic industries, meaning there's a long-term need for jobs in a wide variety of employment categories and salary ranges. One of the major drivers to the sunbelt is affordability. Northern cities are driving out people because of high prices. Major metro markets like New York City, Chicago, Seattle, and San Francisco, are home to some of the most expensive real estate in the country. Warmer weather is also a driver for many people that have the flexibility of remote work and job relocation. 

A record 1.6 million households will form in 2022, fueled by new job opportunities and household de-bundling. An on- going housing shortage has swept the nation driving home prices to all time highs. As mortgage rates rise, the demand for multifamily housing will been reinforced. Increased home prices are driving more and more of the population toward renting. In 2021 households that rented totaled to nearly 35% of the all households in the U.S, a figure that has increased over 8% in the past 5 years. The millennial cohort continues to drive multifamily demand because much of that generation is still in the age group most likely to rent, although it’s not the sole cohort impacting the multifamily market, millennials are the largest living generation by population size. Last year, Millennials headed 18.4 million of the estimated 45.9 million households that rent their home. By comparison, only 12.9 million Generation X and 10.4 million Boomer households were renters. 65.9% of citizens under the age of 35 live in rentals. This compares with, 42% of those ages 35 to 44, and less than a third (31.5%) of 45- to 54-year-olds. Compared to previous generations, Millennials are shifting the landscape of renting vs owning. In 1982, 41% of households headed by those younger than 35 (the approximate age of Boomers at the time) owned their homes. In 1999, 40% of households in this younger age bracket (then Gen Xers) owned their home. By 2016, the share had dropped to 35%. The Great Recession did lead to a widespread increase in renting across households of all ages, but homeownership declined most among younger households.

Gen Z is also becoming an increasingly important demographic in the rental market, although many in the Gen Z population are not at an age to be a head of household, trends in this generation will shape the landscape of the future rental market. Both Millennials and Gen Z have behaviors and lifestyles that are quite different from previous generations. Technology, sustainability, community and amenities are all increasingly important in a competitive rental market. Millennials and Gen Z generally look for rental properties that are close to their jobs, shopping and entertainment, so city centers and close-by suburbs will see a continued spike in investment. We have seen many properties developing family-friendly amenities and renovaion strategies geared towards young renters who are more acceptable to rent longer into their adulthood. Covid has delayed many Gen Z’s from entering into the rental market as 14% of the generation reported that they moved back in with their parents this last year.

Recent data shows that 5.3 million of the nearly 17 million U.S. households living in poverty were headed by a Millennial, compared with 4.2 million headed by a Gen Xer and 5.0 million headed by a Baby Boomer. This is due primarily to increasing debt amongst this generation. The relatively high number of Millennial households in poverty partly reflects the fact that the poverty rate among households headed bty a young adult has been rising over the past half century while dramatically declining among households headed by those 65 and older. With drastically rising home prices this will drive more millennials to rent longer. Business Insider recently reported that only 13% of millennial renters across the US will be able to afford a traditional 20% down payment within the next five years. This will show in the future growth of renting popularity. If student debt obligations were dismissed, these numbers would shift. We see this trend continuing as two years of delayed college graduates will leave home for the first time.
 

Historic Inflation

While the economy is growing, inflation has become a heightened concern, averaging more than 5% year over year each month since late spring. 2021 saw the highest inflation rate in nearly 40 years.

The main concern of long-term high inflation is that incomes will not keep pace and consumer purchasing power will erode, leading to a decreased standard of living for wage earners. If we exclude the historically volatile categories of food and energy, we have seen an increase of 7.5% in the Consumer Price Index (CPI) which is the highest level since 1981. While the Federal Reserve considers many of the factors driving this trend to be transitory, several components will likely persist through 2022. This implies inflation will likely continue to exceed historical norms through a large portion of this year, eroding the real value of savings. This can be both an asset and liability for the multifamily market. Real estate remains one of the best ways to hedge against inflation. Although many analyst express concerns about a multifamily bubble, as demand for this asset class has continuously driven cap rates down and valuations high to protect capital against high inflation rates.Despite the high inflation seen throughout 2021, rent growth was more than sufficient to eclipse the high inflation rate and higher expenses.Rent growth clearly outpaced inflation in the years leading up to the pandemic. In 2020, as rents declined, inflation dipped to 1.2%. When layering on expense growth during that time, we see that rents and expenses grew in tandem leading up to 2020. As is typical in a recession, expense growth dipped but outpaced rent growth. During 2021, rent growth rebounded while expense growth increased, but was just 60 bps higher than in 2020. Looking forward to 2022, both inflation and rent growth are expected to moderate, but rent growth is expected to increase and outpace inflation for most metros. Overall, the tremendous rent growth seen in 2021 would provide a cushion if expenses rise significantly in 2022. 

The rapid pickup in inflation boils down in large part to the mismatch between supply and demand. With the help of massive government stimulus, a surge in household purchases strained factories and global supply chains. Capacity constraints of U.S. producers trying to ramp up production were made worse by a smaller pool of available labor. Housing prices similar to wage increases, are often considered a stricter component of inflation, meaning once prices rise, they’re less likely to come back down. A sustained acceleration in structural categories like shelter, surges in volatile CPI components rather than energy, which presents a more serious threat to the central bank’s inflation target.

The CPI data reinforce the Fed’s intentions to begin raising rates this year to combat broad-based inflationary pressures and could lead markets to expect even more aggressive action from the central bank. The steady run-up in prices has eroded recent wage gains and diminished American families’ purchasing power, sucking much of the air out of what has been an exceptional bounce back in the U.S. economy. 

As inflation continues, apartment asset valuations have the potential to rise even further in the coming years. Seeking out multifamily properties in markets and categories where competition is diminished can significantly reduce the impact of sharp inflation. By understanding how supply and demand, the labor market, and supply chain issues could affect these prices, stakeholders can mitigate the impact of inflation on their multifamily portfolios. According to Freddie Mac, the housing market shortage will continue despite the increased multifamily construction. Demand continues to outweigh supply, putting upward pressure on replacement costs for the foreseeable future. Secondary and tertiary markets, where there tends to be less competition and asking prices are usually lower than in many of the primary markets, allow investors to take advantage of dislocations and inefficiencies that are inherent in present real estate investing. Construction of multifamily properties is likely to continue to be hampered for some time to come. Slower construction means slower delivery of supply, which leads to higher prices in areas where demand is great. A decreased labor market also drives up the cost of labor, which results in higher prices for apartment communities. The cost increases exponentially in expensive primary markets, again making the case for seeking out assets in more affordable secondary and tertiary markets more attractive. Acquiring existing multifamily assets helps stakeholders circumvent the supply chain issues inherent in new construction. We see a large opportunity in lower-middle-market assets, targeting deals in between the institutional and individual investor categories. Even as inflation rises, the worries are highlighting the assets potential as a hedge. Appreciating property values and the ability to adjust rents position apartments as one of the best options to outperform most asset classes against the negative affects of inflation.