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Fundamentals Underpin Demand

Nearly 90 percent of respondents expect rents at apartments to rise in the next 12 months.

Nationally, vacancies remain at relatively healthy levels. Reis reported that first quarter vacancies remained unchanged at 5.3 percent, and respondents have greater confidence in rising occupancies ahead. Nearly three-fourths (78 percent) predict that occupancy rates on multifamily properties will increase in the next 12 months compared to just 47 percent who thought occupancies would likely rise a year ago. However, the average improvement expected is a slight 27 basis points.

“Market fundamentals have changed rapidly as occupancy and rent growth for assets, especially in suburban markets, have rebounded quickly,” says Casas. JLL is generally seeing lease trade out increases of anywhere from five to 20 percent, depending on the property, while assets in lease-up are seeing weekly double-digit lease absorption rates. Thus, investors are optimistically underwriting rent growth for well-located assets on forward looking rents, he adds.

Although research firm Moody’s Analytics Reis reported a slight decline in effective rents of 0.2 percent in the first quarter, survey respondents are very optimistic on the near-term outlook for rent growth. A majority, 88 percent, expect rents to increase in the next 12 months, with an average increase of 4.4 percent anticipated. That is a big change from the 2020 survey where views were split between 45 percent of respondents who predicted increases and 40 percent a decline in rents.

There has been a fundamental shift in the market in the last 90 days where investors are being much more aggressive in their underwriting on rent growth, notes Brian McAuliffe, president of capital markets and lead of the multifamily investment sales business at CBRE. Investors are underwriting annual rent growth anywhere from 3 percent to 7 percent during the first few years. “What has happened is that investors are seeing the rent growth in existing portfolios, which gives them more confidence to go into investor committees with aggressive underwriting that mirrors what’s happening in their portfolios,” he says.

However, respondents have a more positive outlook for class-A and class-B multifamily properties as compared to class-C properties. Nearly two-thirds of respondents rated the outlook for class-A and class-B apartments as excellent or very good over the next 12 months, whereas 42 percent held a similar view for class-C.

The response is a little surprising given the strong investor interest in workforce housing in recent years. However, class-C assets are typically a little more difficult to manage, and many were more negatively impacted by the pandemic in terms of rent collections, notes Lebenhart. “That also speaks to the fact that investors are looking for, not necessarily passive investments, but properties that are easier to manage,” he says. Class-C properties also may require more capital improvements, such as a new roof or parking lot, that don’t generate any additional income, he adds. “We have also seen a lot of the class-B space become more true workforce housing, in part because of increasing wages in many markets,” he adds.