Apartment Forecast Q3 2020

Nov 13, 2020, 09:54 AM by Nathan Adkins

Multifamily fundamentals weakened in Q3 as COVID-19 continues to take a toll on the U.S. economy. The vacancy rate for our national sample of properties increased 80 bps year-over-year to 4.4%. Average monthly rents posted their largest Y-O-Y decline in 10 years, falling 3.3% to $1,693.71. The supply pipeline remains strong, with stock growing a healthy 1.2% Y-O-Y.

The U.S. economy grew at a record 33.1% annual rate in Q3, but GDP and employment remain well below pre-COVID levels and the recovery is slowing as coronavirus cases surge and government aid dries up. The Commerce Department estimates Q3 growth regained only about two-thirds of the output that was lost early this year when the outbreak of COVID closed businesses, threw tens of millions of people out of work, and caused the deepest recession since the Great Depression.

Due to outmigration, rents fell furthest in major metropolitan markets. With remote working allowing employees to live further from the office and many of the amenities in major metros still shuttered, rental demand has shifted toward secondary and tertiary metros where renters can find more space at a lower cost. We expect this trend to be temporary, with demand shifting back to major metros from H2 2021 through 2022, as workers return to the office and renters compete to lock in lower rents before they rise to pre-COVID levels.

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We expect national multifamily fundamentals to bottom out in early 2021 and to recover by mid-2022 with smaller markets leading the recovery in early 2022 followed by major metros. Vacancy is expected to hit its highest point in Q1 2021, rising to 5.5%. Rents are expected to hit bottom one quarter later, in Q2 2021, falling 5.1% Y-O-Y. The long-term outlook for multifamily remains strong, with both rent and vacancy expected to recover to pre-COVID levels by Q2 2022.

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Deconstructing CRE

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