Multifamily

COVID-19 has done little to dampen investor appetite for multifamily globally. The sector’s sharp growth, especially outside of the U.S., is expected to continue and potentially make multifamily the leading global investment asset class.

Summary

Top of Mind

Multifamily real estate was relatively resilient during the 2020 recession, with a smaller drop in investment volumes than most other mainstream asset types. The sector’s investment appeal was characterized by its solid market performance, with low vacancy rates and high rental collection rates. Despite the negative impact of lockdown measures and remote working arrangements on many urban/CBD properties, investment volumes remained strong in H1 2021, with increased pricing in many regions.

Outlook

We expect declining vacancy rates over the next 12 months, which will lead to solid rent growth. The urban core submarkets that were most affected by COVID likely will recover steadily as more workers return to the office. We also expect further cap rate/yield compression as the appetite for multifamily investment rises globally.

Making Its Way To Mainstream

Multifamily properties are purpose-built apartment rental communities that can be either privately or publicly owned. They are nearly always professionally managed, and some include shared amenities like fitness centers and clubhouses.

The multifamily sector is most established in the U.S., where it has been the largest investment asset class for the past six years. While the multifamily/residential sector is still emerging in many other parts of the world, it has been growing rapidly. Both EMEA and APAC investment volumes have increased by 50% over the past five years. COVID has done little to dampen investor appetite for multifamily assets. We expect the continued sharp rise of investment and development outside the U.S. will make multifamily one of the leading global investment asset classes in the near future.

Global multifamily investment volumes fell by 20% in 2020—significantly less than most other commercial real estate asset classes. Relatively resilient property fundamentals continue to attract capital to the sector.

Investor optimism is stronger in 2021, with 60% of investors expecting to increase their acquisitions of commercial real estate, according to CBRE’s 2021 Global Investor Intentions Survey. Multifamily will be a prime beneficiary, as global investors ranked this sector the second most preferred investment asset class for 2021; for 25% of investors it is the most preferred property type.

With investors confident in performance, we expect pricing to remain firm at a minimum. Many markets will experience increased pricing and compressed cap rates/yields. Half of the respondents to the CBRE’s 2021 Global Investor Intentions Survey expect no price discounts in 2021, while 25% expect price increases.

Property fundamentals held up reasonably well through the COVID period. Vacancy rates remained low and rental collection rates high. Suburban locations and garden properties were most resilient, as renters looked for larger units to accommodate work from home. In contrast, urban/CBD properties were hardest hit by lockdown measures and work-from-home polices. However, in nearly all markets, rents either stabilized or increased in the H1 2021. In H2, we expect further declines in vacancy rates and increases in rent.

U.S. Urban Cores Rebound

More than half of the major U.S. markets experienced very little deterioration in renter demand or rents during the COVID pandemic. Yet in some markets, especially gateway and coastal metros, rents fell significantly. San Francisco, San Jose and New York all saw rents fall by between 10% and 20%. But by midyear 2021, vacancy rates were falling and rents rising in nearly all markets. We expect solid rent growth of 5.6% over the next 12 months. As a result, nearly all markets will exceed their pre-COVID rent levels by Q2 2022.

The hard-hit urban core submarkets will have the biggest gains, as demand rises in line with more workers returning to the office in H2 2021. As vacancies tighten through H1 2022, owners will reduce rental concessions, leading to significant effective rent increases. CBRE forecasts double-digit rent growth in many urban submarkets for this period.

Investment capital has an insatiable appetite for U.S. multifamily assets. The sector held up well through the COVID period, with $146 billion in total sales last year. Cap rates began to compress in late 2020 and have tightened to historically low levels in H1 2021 (typically under 4%). Investment in suburban multifamily assets will remain strong over the next year, and we expect renewed interest in urban assets as market fundamentals improve and suburban asset pricing increases.

Multifamily investment activity will stay robust over the coming year and the sector will remain unchallenged as the leading property sector in the U.S. Key target cities for the coming year include Atlanta, Austin, Inland Empire, Miami, Orlando, Phoenix and Tampa.

European Multifamily Investment Volumes Jump

Multifamily investment in Europe increased by 24% last year, compared with a 17% decrease in total commercial real estate investment. This was boosted by several large entity-level deals as investors are intent on gaining scale in the market. A record Q4 was partly due to a particularly active market in the Netherlands, as many investors sought to avoid a higher transfer tax beginning in January 2021.

Nearly one-third of respondents to the CBRE’s 2021 EMEA Investor Intentions Survey indicated that residential is their preferred investment sector. Key target cities include London, Berlin, Munich and Amsterdam.

The European multifamily market is maturing rapidly and the continued densification in and around major European cities sets the stage for long-term growth. While many of Europe’s emerging markets suffer from a lack of multifamily inventory, the sector has been bolstered by resilient fundamentals and rent collections. Coupled with renewed interest by investors in assets with defensive fundamentals and an evolution of living trends in major European cities, this means the multifamily sector will continue outperforming the overall market going into 2022.

Investor Interest High In Japan, Improves In Australia

Japan is the major multifamily market in the APAC region given the Japanese preference for renting. It is the only APAC country with listed residential REITs.

Multifamily investment volume in Japan increased to US$6.8 billion in 2020 from US$2.4 billion in 2018. International capital accounted for more than 70% of this investment, with many portfolio deals. Japan’s low cost of financing provides an attractive cash-on-cash yield for multifamily investors, who are also encouraged by the sector’s resilient rental performance and high occupancy rate.

Figure 15: Multifamily Investment Volume In Japan By Investor Origin

Source: CBRE Research, Real Capital Analytics, February 2021.

We expect interest to remain high over the coming year, with investors keen to acquire stabilized assets. Some investors are also willing to partner with developers to access newly built multifamily properties in Japan.

Multifamily as an asset class is also gaining ground in Australia, predominantly in Melbourne and Sydney and now spreading to Brisbane, Perth and Canberra. At a state level, the New South Wales government has reduced land tax by 50% subject to several conditions, while Victoria plans a similar reduction. At a federal level, there are tax challenges for both investors and developers. A potential change for multifamily assets to a “Commercial Residential Premises” classification—similar to serviced apartments, purpose-built student housing and hotels—will allow for a more favorable treatment of Goods & Services Tax (GST) for developers and Managed Investment Trust (MIT) withholding tax for foreign investors.

International investors have been active, providing project financing for or taking an equity stake in multifamily developers, particularly those with international exposure and experience. It is expected that providing credit rather than direct investment could be a major route for foreign investors as the provision of credit by foreign capital sources is not subject to GST and withholding tax.