Multifamily performance varies based on market. Apartments in large primary metros have been more impaired by the health crisis than properties in smaller cities. Vacancy across all primary markets increased 80 basis points over the past four quarters, while the average effective rent declined 3.4 percent. Secondary and tertiary markets have fared better, with a 10-basis-point vacancy decline and rent growth of 2.2 percent over the same span. Migration trends driven both by the pandemic as well as the aging of the millennial generation are affecting performance. More than half of millennials are 30 years of age or older, common family formation years, spurring demand for larger, more affordable living spaces outside the urban core.
Apartment pricing surpasses pre-pandemic levels. In numerous markets, well-performing properties have achieved pricing above early 2020 levels. Though some submarkets in some metros continue to contend with weakened fundamentals that are suppressing values, optimistic investors in many cases are underwriting a strong recovery in 2021. Non-premier housing will likely enjoy the most robust renter demand, but Class A properties will also see a leasing recovery as workplaces reopen. Lifted investor optimism is spurring acquisition demand, but current trends have also persuaded some prospective sellers to hold onto assets longer. Strong buyer interest has aligned with hesitant seller activity to bolster price appreciation and apply downward pressure to cap rates, with a current national average in the low-5 percent range.
Private Buyers Emerge as Driving Force of Investment Sales During Peak Periods of Pandemic-Related Uncertainty
During elevated uncertainty, private investors continued forward. Private investors have been a driving force behind commercial property sales since the onset of the health crisis. Large institutional investors took a step back in 2020 as the health crisis clouded the near-term outlook and created barriers to completing sales, including travel. During the early stages of the pandemic, some private buyers took advantage of the limited institutional competition to acquire assets with favorable pricing, but as the market has moved back to normal, private investors have frequently pushed pricing aggressively. Overall, 55 percent of the dollars invested during the 12-month period ended in March of this year came from private buyers. That ratio is 300 basis points above where it was in 2019 before the health crisis. That behavior is represented across property types, including industrial and multifamily assets. The ratio of private investment into industrial assets roughly doubled between the first quarter of this year and the same period in 2020. For apartment buildings, the share of private investor capital has been slightly higher, representing 66 percent of 2020 dollar volume. The measure rose as high as 76 percent during the second quarter of 2020 when uncertainty was at its peak, and while trailing down in recent months, it remains above the historical average.
Health crisis underscores private investment demand for retail and office assets. The uptick in private investor sales activity is apparent for retail and office properties. Approximately 67 percent of 2020 retail sales volume was from private buyers, led by an active third quarter where private capital represented roughly four out of every five investment dollars. During the first quarter of 2021, private buyers were most involved in acquisitions of retail properties with grocery tenants. Private investors generally make up a smaller pool of sales dollars in office properties, but their share of activity has been increasing in recent years nonetheless. During the second and third quarters of 2020, private investment represented over 40 percent of total dollar volume for office transactions. Moving into 2021, private buyers have been especially active with medical office properties, comprising 55 percent of investment dollars. Institutional grade investors, meanwhile, represented a preponderance of the transaction volume for offices in central business districts in the opening period of this year.
Multiyear trend fosters more diverse capital investment pool. Moving forward, engagement among larger investor organizations may slightly temper private buyer dollar volume compared with pandemic-period peaks. Private capital often captures a larger share of the market during periods of upheaval, such as last decade’s financial crisis or the current pandemic. The long-term trend, however continues to illustrate greater private investor engagement across all major property types. This includes assets in the typical private buyer price range of $1 million to $10 million, but also in transactions priced above that threshold. This dynamic benefits the larger investment landscape by fostering an overall more diverse buyer pool.
Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Federal Reserve; MNet; NICMap; Office of Financial Research; Real Capital Analytics; RealPage, Inc.