SitusAMC Insights speaks up on the US multi-family market

Senior director and head of SitusAMC Insights Peter Muoio and svp Jennifer Rasmussen give their views on the multi-family scene and CMBS market heading into 2022 

Q. What is the current picture in the multi-family MBS market and how do you expect it to look in 2022?

PM: The apartment market is in good shape fundamentally with strong investor interest. Investors see this and think this is a market with solid fundamentals. This will keep transaction levels high and suggests a high level of CMBS issuance for the multi-family side. In terms of volumes within the CMBS market, it may not be as strong as 2021 but it should still be a strong year in terms of transaction volumes.

JR: Investors are still sitting on a lot of dry powder and actively looking to deploy funds, which also bodes well for CMBS originations in 2022.

Q. What impact is Covid-19 having on the market?

PM: The initial impact of the pandemic was evident on areas such as New York City and San Francisco as there was a large outflow of individuals from those markets during the pandemic. They fit into two categories – young people who went back to their parents’ homes and people in wealthy urban areas who could go to their “vacation homes.” As we move out of the intense stage of the pandemic, we are seeing a reverse of this. In the third quarter, we have seen places such as New York improving too.

JR: The multi-family market has proven to be resilient in the face of Covid-19. Vacancy rates and rent growth dipped during the onset of the pandemic, but vacancy rates returned to pre-COVID levels in the third quarter of 2021 – effective rent growth and returns were at record levels. Garden apartments have performed exceptionally well during the pandemic.

Q. What challenges do you foresee for this space in 2022 and how can they be overcome?

PM: Investors need to assess the possible problems that could occur – the inflation question is one. Some inflation issues could prove problematic for the apartment segment – such as rising labor costs, which could have an adverse impact.

Rising interest rates, related to the higher inflation issue, could be an issue as they rise over the course over this year, but there is always the chance that events that weren’t expected at the start of the year could affect investment flows. Interest rates hikes could impact investment flows as we have seen in the past. We are running into a midterm election year in the U.S., and this reflects back to apartment affordability.

JR: Affordability is a popping up as one of the biggest concerns for borrowers and lenders. Luckily, there has been wage growth to offset some of the rise in rents. There are several challenges, but these headwinds are unlikely to stop growth in the sector in 2022.

Q. Geographically, where are you expecting strong returns for this market?

PM: The strongest returns have been in the Sun Belt States, which are benefitting from strong population growth and apartment demand arising from domestic migration trends. This is also true of the Mountain West.

JR: Rent growth was stellar in all regions in the third quarter, but particularly strong in the South.

Q. How does multi-family compare to other property segments in the US?

PM: The real king of the hill for a while has been the industrial sector. Shifts in retail spending from brick-and-mortar stores to more online shopping, which were well underway prior to the pandemic, have accelerated. This has spurred a massive increase in demand in industrial space for e-commerce logistics. The second element is the rise in data centers, and the combination of those has driven strong demand for industrial properties. This has led to strong fundamentals and robust returns. The jump in apartment fundamentals and returns places it closer to industrial in terms of strength.

The other two major property segments are less robust. While there are some moderate signs of improvement for retail, the reality is retail is facing many issues that even once the pandemic ends, people have gotten used to alternative shopping modes – for example, getting their groceries delivered. This will continue to inhibit retail conditions and returns. Office space is still an open question – we are all still working from home and the question of when people return to work there will likely be some hybrid office/remote model in action. This raises the question of what this means for space demand. Investors are all looking at the same thing – return metrics and what the future looks like for this segment.

Angela Sharda