Multifamily investment volume has experienced seven months of steep year-over-year declines.

COVID 19 and the weak economy moved many capital sources to the sidelines. It also has driven a wedge between the price that buyers are willing to pay and the price at which owners are willing to sell. According to CBRE’s U.S. Cap Rate Survey for Q3 2020, 61% of buyers expected discounts from pre-pandemic prices and 9% of sellers were willing to offer such price discounts.

While trading activity remains subdued compared to the last few years, investment has climbed steadily after bottoming out in May. September was the fourth consecutive month in which volumes recovered some ground.

Much of the September increase, as in previous months, was driven by investment in garden assets—defined as properties with three floors or fewer. Garden assets are typically older as well. The majority of multifamily assets built in the last decade are mid/high-rise. The preliminary Q3 data shows that investment in garden assets accounted for 59% of all multifamily volume.

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Mid/High-Rise Investment Share Up in Q3
Since the Great Financial Crisis (GFC), both garden and mid/high-rise investment rose steadily before COVID-19. Their market shares, however, changed little over the decade. On average, in the 2010s, garden investment averaged 58% of the total.

The fact that garden investment maintained market share, even as the product aged, is a testimony to its healthy performance in recent years (and very strong demand for more affordable housing).

In the COVID-19 period as well, garden assets have maintained higher rent growth and lower vacancy than the newer mid/high-rise product.

Despite the latter trend, investment in mid/high-rise product has continued through the COVID-19 period. It reflects some flight to quality assets by investors as well as investors taking advantage of buying opportunities not available pre-COVID-19. The share of investment in mid/high-rise assets increased from 35% in Q2 2020 to 41% in Q3 2020.

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Secondary Markets Have Strongest Growth Rates
By geography, the majority of markets experienced double-digit declines based on year-to-date figures.

The few that experienced year-over-year growth were secondary and tertiary markets, including Greensboro, Indianapolis, Sacramento and St. Louis.

Markets with the largest investment volumes in the COVID-19 period (Q2 and Q3) were Dallas/Ft. Worth ($2.4 billion), Washington ($2.1), Atlanta ($1.9), Phoenix ($1.8), Los Angeles ($1.8), New York ($1.7), Denver ($1.3) and Seattle ($1.2).

Private Buyers Drive Garden Investment
For both garden and mid/high-rise assets, private buyers account for the largest share of investment. However, private buyers play a greater role in garden apartment buying activity accounting for 70.5% of year-to-date investment vs. 58.5% for mid/high-rise. The category includes high net worth, family office and 1031 buyers.

Institutional capital accounted for nearly one-quarter of investment in both subtypes. During the COVID-19 period, institutional buyers became far less active. In Q2 and Q3 combined, for all multifamily assets, institutional investment was $7.8 billion. In pre-COVID Q1, the total was $12.8 billion.

International investors are drawn more to bigger-ticket core properties and accounted for 13.8% of mid/high-rise investment compared to garden's 3.5%.

REITs have also traditionally played a larger role in the mid/high-rise sector, favoring newer, higher-end communities. In the COVID-19 period, however, REITs have remained largely on the sidelines, with only $867 million investment in Q2 and Q3 combined, compared to the 2015-2019 annual average of $10 billion.

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