Before COVID-19 infections accelerated in April, the U.S. multifamily market was on a strong trajectory. Vacancy rates had reached near 20-year lows, with construction booming but unable to meet growing demand. The remainder of 2020 will be difficult for the U.S. economy and the multifamily market. We expect multifamily fundamentals to bottom out in Q3 2020, but rebound quickly, buoyed by pent-up demand and sustained preferences for urban apartment living, returning to its pre-COVID trajectory by Q1 2022.
Q1 2020 data, collected before the impact of COVID-19, confirms the trend of continuing strong multifamily demand. Vacancy, at 4.2%, was down 40 bps compared to Q1 2019, and the lowest first quarter vacancy recorded in over 25 years. Year-over-year rent growth increased to 2.7%, 10 bps above last quarter. Stock growth remained healthy at 1.7% Y-O-Y.
Employment is an important driver of multifamily demand. Though it has been hit hard by COVID-19—according to a preliminary report by the Dept of Labor, the U.S. shed 20 million jobs in April and the unemployment rate surged to 15%—we expect employment to bounce back quickly. Under the assumption that there is no second wave of the virus, we expect job losses to bottom-out in Q2 2020, after which the economy is expected to start reopening. Employment should then improve, quarter-over-quarter, over the next two years, returning to pre-COVID levels in Q2 2022.
Multifamily fundamentals are projected to follow a similar shape over the next two years: a sharp downturn followed by a quick recovery. Rents are expected to hit bottom in Q3 2020, falling 8.4% from Q1. Vacancy also hits its highest point in Q3 2020, rising to 7.2%, 300 bps above Q1. Though apartment fundamentals are expected to hit their weakest points one quarter later than employment, they are also projected to return to pre-COVID levels more quickly, hitting Q1 2020 levels one quarter earlier, in Q1 2022.