By Meghan Hall
The multifamily sector continues to grow by leaps and bounds as the nation’s demand for rental housing remains unabated. The stability of the asset class has been the focus of investors more than ever, with the nation recording $78.7 billion in sales volume during the third quarter of 2021, according to a recent analysis by Newmark. The figure is the largest quarterly sales volume on record, marking a significant milestone in the multifamily industry’s history.
“From a capital markets perspective, multifamily has been the biggest recipient of capital for all property types,” explained Newmark’s Director of Capital Markets Research, Mike Wolfson. “It represents 38.6 percent of all commercial real estate volume year to date. That’s a really big chunk of the market, and seemingly increases each quarter.”
Third quarter sales volume represented a 31.4 percent increase over the previous quarter, and an impressive 192.1 percent increase year-over-year. Trailing 12 month volume totaled $241.9 billion and is also considered an all-time high. In all, multifamily deals accounted for a significant share of all U.S. commercial real estate investment sales: 40.8 percent.
To put investor demand into perspective, long-term average volume is about $10.2 billion. In August and September of 2021 alone, multifamily sales volume hit $28.1 and $27.8 billion, respectively. The two months only trail December of 2020 as the biggest month for investment sales of all-time. Newmark notes as well that multifamily monthly volume over the past year is nearly double pre-pandemic levels.
According to Wolfson, the viability of the sector–and of commercial real estate–has lured investors of all shapes and sizes into the market.
“Investors are attracted to multifamily, as it’s been resilient in good and bad times. I think what you’re seeing is the pandemic, while it really caused a lot of disruption in the office, retail, and hotel market, two clear winners were multifamily and industrial,” said Wolfson. “The difference is industrial typically trades in large portfolios, while multifamily has a robust market for one-off deals, as well as portfolios.”
West Coast markets saw high levels of multifamily investment, as well. The Los Angeles metro saw $13 billion in multifamily sales volume over the past twelve months. Seattle, a rapidly growing tech and life sciences market that has seen its housing market spurred on by new employers, has seen $6.1 billion in multifamily sales over the course of the past year. San Diego saw $4.2 billion in multifamily sales, while Portland saw $3.3 billion multifamily deals close. Notably, the San Francisco Bay Area lagged behind; San Francisco saw $3 billion worth of sales, while the Sacramento market recorded $1.6 billion in multifamily deals.
There are a number of reasons why demand for multifamily product has increased. As for-sale homes have become more expensive, especially in gateway markets, tenants are renting longer before buying a home. Additionally, due to economic expansion and job creation in key gateway markets, local populations are often growing quicker than available housing stock.
“Rental housing, particularly multifamily product has seen record demand recently…Nearly every metro area in the country is experiencing record single-family home prices,” said Wolfson.”…It is very hard to build new housing stock in a lot of places and it’s causing would-be buyers to remain renters.”
Investors are also interested in the sector due to the fast appreciation of assets and potential ROI. According to Newmark, the national multifamily market has seen strong appreciation, with the value of assets rising 9.3 percent year-to-date. Multifamily returns have risen 12.3 percent through the first three quarters of the year.
Several markets in particular have seen outsized levels of returns. California’s Inland Empire recorded that returns in the market increased by 26.5 percent, nearly double the national average. San Diego and Orange County saw returns rise by 17.2 percent and 16.9 percent, respectively. Of the major West Coast markets, Seattle and Portland sat in the middle of the pack. Seattle realized returns that increased by 11.4 percent, while Portland’s returns rose by 9.5 percent. Los Angeles, Oakland, San Jose and San Francisco rounded out the cities studied. Los Angeles’ returns increased by 8.1 percent, Oakland’s grew by 7.9 percent, and San Jose’s increased by 6.7 percent. San Francisco lagged behind, with its total return average rising just 1.7 percent, year-over-year.
In the coming months, the multifamily sector’s resiliency is expected to improve. As workers return to the office, increasing demand for rental units, and as the cost to own-single family homes reaches “historic” levels, multifamily product will continue to be desired. Dry powder has also risen to another record high, reaching $237 billion. $78 billion has been set aside for residential investment, with 75.7 percent allocated toward opportunistic and value-add strategies in the coming months.