Multifamily Newsletter | Q4 2021

Multifamily Newsletter | Q4 2021

Residential Reset and Supply Chain Chaos, more on these topics and others in Sunstone’s Multifamily Review

Residential Reset:  The pandemic redefined the relationship between home and work and refocused priorities on affordability, health and lifestyle.  Secondary markets, particularly in the Southeast and Southwest, out-performed Gateway metros as individuals and families migrated out of densely populated urban areas seeking more space and less expensive housing. A portion of the movement to the suburbs was expected to be transitory but, in most cases, the pandemic accelerated migration already planned or in process.  The majority of the domestic relocations consist of older millennials looking for family-friendly neighborhoods, better school districts and a perceived higher quality of life.

The domestic migration has been reinforced by significant job growth in secondary markets with lesser tax burdens and lower barriers to entry. This trend is not likely to change given the lack of outreach to business by many Gateway cities, whether due to fiscal constraints or political will, and a growing labor pool of highly educated and tech savvy workers moving to secondary metros newly established as tech hubs. While the future of remote work is still being debated, the questions center around “how much” rather than “if” suggesting that the 2020-2021 residential reset is here to stay,

















A New Paradigm:   The flexibility of working remotely provided a tailwind to accelerate the rate of migration and continues to be a dominate factor in renter relocations. The long-term feasibility of WFH may be untested but many employers and staff members who operated effectively on a virtual basis during Covid are planning to continue the arrangement on a full or part-time basis.



According to a study performed by Brivo, over 60% of those surveyed preferred a WFH or hybrid working arrangement and 40% of renters on the move questioned by Apartment List during 1H21 claim their employers had signed off on hybrid or fully-remote work arrangements going forward.


While not the only industry showing flexibility to promote extended WFH, tech employers started the practice pre-Covid in conjunction with establishing new tech hubs away from Gateway Metros in more affordable secondary markets.

Source: Brivo, Apartment List









This deployment of the tech labor force around the country and substantial increase in WFH has fueled a redistribution of the population accelerated during the pandemic. The established and emerging tech hubs shown in the chart below are experiencing significant in-migration and rent growth.

Source:  Yardi Matrix


Multifamily Market Update:  Demand for multifamily in the US continues to be on an upward trajectory due to new household formation, a recovering economy and the sharp rise in for-sale housing keeping many would be first-time homebuyers out of the market. Tampa, pictured on the front page, and Phoenix top the list of US cities that have experienced double digit rent growth since last year. While markets in the Sunbelt have benefited from rapid domestic migration and job growth, rents nationally have increased YTD by 13.6% and occupancy has climbed to over 96% at the end of the 3rd quarter fueled by robust demand and supply shortages. Effective rent for multifamily properties increased 7.9% during the third quarter, the highest quarterly growth in 25 years. Phoenix, Orlando and Tampa showed the largest increases in rent Y/Y while Charleston, Raleigh-Durham and Orlando posted the largest drop in vacancy quarter over quarter during the same period. The third quarter was also record setting in net absorption of 273,700 apartments following on the heels of the second largest quarter of 219,000 units absorbed in 2Q21. An estimated 400,000 new units are expected to be delivered nationally this year.




Rental rates in Gateway markets dropped an average of 7.2% during 2020 while vacancies reached a 20-year high of 6.8% at year-end.  Even though these primary markets still rank near the bottom of the top 30 markets for rent growth, they are beginning to show momentum with Y/Y growth in San Francisco, New York, LA, Boston, Chicago and Washington DC ranging from 5% to 10%.








Transitory Inflation?  Assurances from the Fed over the last few months that inflation would subside quickly were based on lower month over month price increases between June, July and August and a belief that the causes of inflation – supply chain logjams and labor shortages –  were transitory. September ended the downward trend with a higher incremental increase in prices which doubled in October posting the largest monthly increase in three decades to bring the headline CPI to 6.2%.


Missing from the Fed’s analysis is the inflationary effect of their monetary policy and the government’s massive stimulus (with more to come) along with surging commodity prices.  Many economists, as with the Fed, typically focus on core inflation which does not include increases in food and energy prices because of their volatility. The dramatic rise in the cost of these items, critical to most households, and the persistent inflation of core goods and services is testing current monetary policy and the Fed’s reluctance to raise rates. It is important to note that the lag in the government’s data on shelter (rent and owner-occupied monthly expense) can run as long as 20 months which may suggest that the increase in core inflation is higher than stated.


If interest rates go up, will cap rates follow?  While 10-year treasury yields, federal fund rates and cap rates generally move in the same direction, they do not move in lockstep due to timing and risk perceptions. Lenders use floors to maintain spreads consistent with their perception of risk when rates drop, and cap rates also factor in risk but over a much shorter period. The current spread between cap rates and the 10-year treasury yield is only marginally lower than the average over the last 20 years and investors appear to be satisfied that rent growth, accommodative capital and inflation appreciation will absorb some level of increase in interest rates. Economic growth going forward as the Fed begins to taper purchases of US debt will likely determine how cap rates move. Up until now the market has not known how to react to a monetary policy based on a whole new set of rules.



Sources: Yardi Matrix, Bloomberg, Capital Economics


Supply Chain Chaos:  Escalating construction material prices, supply chain backlogs and labor shortages are weighing down construction starts worsening the imbalance in the supply/demand dynamics of residential real estate. While lumber prices have moderated somewhat from the highs experienced in the spring, the price of raw materials and other finished products have increased 30%-35% since January.


Production capacity in the US has not increased in 20 years and is now operating well above optimal utilization, unable to keep up with demand and pushing manufacturing product costs up 40%-50% Y/Y. Meanwhile, according to The Marine Exchange, the number of container ships sitting outside of Los Angeles and Long Beach Ports waiting to unload products from Asia reached a high of 110 on November 11 and is currently just under 100.


Transportation logjams both in trucking and shipping have also created time delays as well as increased costs as ships wait for docking space to unload. Shipping costs increased as much as 450% of pre-Covid levels and now sit at 300% of pre-Covid costs. There is a significant shortage of yard space for cargo that can be unloaded as well as labor to do so. According to the American Truckers Association, 80,000 additional drivers are needed currently to handle the workload of transporting goods across the country.

The length of time it takes to ease the current supply constraints will have a significant impact on inflation, new construction starts and the supply/demand dynamics of residential housing in the US.

Sources: WSJ, Bloomberg, Capital Economics








LOS ANGELES, CA – OCTOBER 16: Aerial view of containers waiting at Port of Long Beach to be loaded onto trains and trucks on October 16, 2021 in Long Beach, California. (Photo by Qian Weizhong/VCG via Getty Images)


Multifamily Sales Activity:  Property sales of existing apartments hit record-breaking levels during the 3rd quarter. Prices in all asset classes increased by 18% while multifamily prices rose 28% over the last 12 months. Significant private equity capital flow into the multifamily sector, low bond yields and accommodative debt markets contributed to the high level of transactions. Investors are also responding to the likelihood of continued inflation, assuming that higher prices are inevitable and looking toward multifamily as an inflationary hedge. In addition to the sector’s proven resiliency during Covid-19, multifamily is the most favorable real estate vehicle to hedge inflation due to short-term leases that allow for annual adjustments.







Driven by migration, high occupancy rates and record rent growth, some of the markets that experienced the greatest number of multifamily transactions during the first half of the year are unique to prior years. The top twelve are outlined in the chart below.














Sources: Yardi Matrix, Green Street


Cap rates have hit record lows dropping from 4% to 3% and now are often moving toward a 2% cap rate. The average price per unit is up 12% from 3rd quarter 2019 but revenues are also up 12.6% with vacancies falling to less than 3% nationwide. For the significant amount of capital looking for an appreciating, alternative asset, multifamily real estate still provides an attractive yield in a market with foreseeable demand tailwinds.


Foreign investment in US multifamily is on track to exceed the 2018 record of $5B in multifamily acquisitions by non-US buyers. Led by Canada, Saudi Arabia and Bahrain, foreign investors are shifting their focus from Class A luxury apartments in Gateway cities to Class A and B properties in secondary markets to take advantage of the growth potential in the Southeast and Southwest markets.










Capital Markets:  Fund raising in 2021 is weaker than anticipated and may not reach the $65B total capital raised in 2020. Existing relationships have garnered the vast majority of funds raised with Blackstone and Brookfield leading the way. Transaction volume has been driven by record levels of dry powder accumulated in 2019 and under-deployed as well as funds raised for the purpose of investing in distressed assets which did not materialize.


Sources: Green Street, Preqin, Marcus & Millichap, CBRE


Multifamily Financing:  While the pandemic impacted various property types and capital sources in different ways, multifamily lending activity held steady due to the continued extension of credit by the GSEs. More non-agency lenders pivoted their portfolios toward the multifamily market in 2021 leading to a 192% increase in multifamily loan volume. The increase in O/S multifamily loans of $29B reported in the first quarter constituted two-thirds of the total increase in outstanding commercial and multifamily debt while second quarter totals dropped to 50% of the $60.7B increase. The even split between commercial and multifamily properties reflects renewed interest in other property types.


Third quarter loan production jumped 32% from second quarter. Debt funds and other alternative lenders originated nearly 40% of all non-agency loans, with bridge loans accounting for 80% of alternative loan deals. Loans carrying partial or full interest-only terms exceeded 60% of loan originations.


Multifamily Loan Debt

Agency and GSE – $871B (50%)

Banks & Thrifts – $491B (28%)

Life Insurance – $174B (10%)

State and local – $106B (6%)

Other – $75B (6%)


The Outlook:  After some reports that rent growth was moderating in September, October’s increase rose by 34%. US demand for apartments continued to soar in the third quarter and the factors driving both demand and rent growth nationwide are not expected to ease in the foreseeable future.


Migration to the Sunbelt started long before the Covid pandemic creating a supply/demand housing imbalance that will not be resolved quickly, particularly with the increase in construction costs and supply chain impediments restraining new supply. The continuation of domestic migration, relocation of businesses to more affordable regions and the ultimate scale of WFH are critical factors in rental housing demand and rent growth.


While double-digit rent growth is not sustainable, we believe the supply/demand dynamics in most markets will continue to fuel revenue growth.


By S. Morehead

Managing Director, Capital Markets