Multifamily Demand in the COVID-19 Period

Understanding multifamily demand trends is fundamental to the industry. Demand fluctuates due to seasonality, economic cycles, secular changes in how people live and due to the cost and availability of alternative housing choices.

Geography and type of product come into the discussion as well since multifamily demand is uneven across the country and within any market.

With this in mind, I analyzed how demand levels have been impacted by COVID-19 and the 2020 recession, based on three measures in Q2 2020 and Q3 2020.

The results reveal that Greenville and Jacksonville are the best markets in the country as of Q3 2020, followed by Richmond and Omaha.

Greenville & Jacksonville Most Dynamic Markets

The net absorption-to-inventory ratios provide a clear view of market robustness—how dynamic a market is. The analysis found three broad themes.

First, despite the recession, multifamily demand remained robust in a large portion of markets.

Second, medium and smaller markets generally outperformed larger markets.

Third, the Southeast had the most lead performers, with South Central (largely Texas) and the Midwest among the better performers.

Greenville had the best net absorption-to-inventory ratio by far at 4.3%. Next highest were Jacksonville (2.7%), Omaha (2.5%), San Antonio (2.4%), Kansas City (2.4%) and Charlotte (2.4%).

Ft. Worth (2.2%), Baltimore (2.0%) and Atlanta (1.8%) were the best large markets. Most large and gateway markets had low ratios or negative demand.

Greenville & Richmond Have Best Y-o-Y Comparison

The year-over-year comparisons provide a sense of how the COVID-period net absorption compares with last year.

Comparing the same quarters, in theory, removes seasonal changes from the comparison since second and third quarters are typically very active for leasing and obtain higher than average net absorption totals (the first and fourth quarters are the opposite).

Net absorption for all markets in Q2 and Q3 2020 was only 38.5% of the prior year's total. This performance clearly reflects the weaker demand resulting from the 2020 recession.

The 14 metros in the "best" column had equal or better net absorption in Q2 and Q3 2020 than in the same period in 2019. Net absorption in Greenville and Richmond was nearly double last year. The next best markets were Sacramento (169.4%) and Baltimore (152.1%).

Omaha, Ft. Worth, Jacksonville, Providence, Louisville and Ft. Lauderdale achieved between 120% and 130% of last year's net absorption.

The remaining 52 metros experienced lower levels of net absorption this year than last year, reflecting the impact of the recession. Still, only eight metros turned in negative net absorption.

The core metros of the gateway markets were all in the "below average" or "worst" groups. However, some of their more suburban components scored higher. Examples of this include the Inland Empire, Oakland and Long Island.

The experience of the large and medium metros was fairly diverse across the different performance categories.

For the medium small and small metros, COVID-period net absorption generally held up well.

Inland Empire Ranks First for Demand vs. Supply

Demand must be considered relative to supply. A high-demand market may not achieve strong market performance if the addition of new inventory exceeds demand.

Hence, the analysis compared completions to net absorption over the past four quarters (using the four-quarter period picks up two quarters of pre-COVID activity but eliminates seasonality from the equation.)

The Inland Empire had the highest net absorption-to-completions ratio at 233%, based on a four-quarter net absorption total of 2,198 units compared to only 942 units delivered. Five small markets (El Paso, Tulsa, Norfolk, Lexington and Tucson) and Las Vegas experienced demand significantly outpacing completions over the past year (146% to 197%).

The "above average" markets were not too far off equilibrium, but the ratios in "average" markets raise caution flags including for Austin (57.7%), Houston (55.3%) and Dallas (53.8%). "Below average" markets are at greater risk of tepid recovery in 2021.

Nationally, net absorption reached only 49% of total units delivered: 134,200 vs. 274,100. This imbalance needs to be corrected for the pace of recovery to gain momentum in 2021. Q4 2020 and Q1 2021 are likely to have an even lower net absorption-to-supply ratio due to seasonality, and while demand could turn negative for the country as a whole, a rebound is expected beginning in Q2 2021.