Updated: Jan 9, 2021
Well, if you’ve been following my blog so far, you already know what I am about to tell you: there is no crystal ball when it comes to investing, especially real estate investing. When it comes to peering inside a crystal ball seeking predictions on how multifamily properties will perform in 2021, it’s mostly wishful thinking. However, there are other ways to gain a perspective on the way multifamily properties will fare in the coming year, including trends, market analytics, and experience.
While COVID is still raging across the country, the positive news is that a vaccine is now rolling out, helping to mitigate the devastation to our health and our economy. We’re still a long way from quashing the pandemic, with some predictions stating that “normalcy” won’t return to our country until late 2021 or mid-2022.
With a potential duration of eighteen months before the country stabilizes, there is a lot of speculation among high-net-worth individuals, seasoned investors, and family offices as to timing of multifamily investments. Observing and analyzing how the market and our properties perform since the onset of COVID, I’d like to suggest some predictions for 2021 that real estate investors might find helpful.
Prediction #1: Suburbs will Continue to Thrive
During the pandemic there was a flight to the suburbs by many city dwellers, and they took flight for several reasons. The main reason was to get away from highly dense areas in large cities such as Ney York City, San Francisco, and Los Angeles, as well as main cities in secondary markets such as Atlanta and Dallas. Interestingly enough, I’ve witnessed this trend taking place way before COVID started. The reason? Cost of living. It was a lot less expensive to live in the suburbs than in the city’s core; people found that they got a lot more for their money in suburban multifamily properties.
For example, a $1,500 one-bedroom unit in the city turned into a two- or three-bedroom unit in the suburbs, providing tenants with additional amenities as well. With all that the suburban properties have to offer, it’s going to be hard to get people to give that up and move back to the city in the near future.
Other factors contributing to increased suburban rental increases include working from home, which eliminates the need to live in a city’s core area near offices, a reluctance to use mass transit, and a desire for less dense living environments. Many companies have indicated that the trend of working from home will continue in 2021.
Because the pandemic has devastated many businesses and retail stores, it could take from 1- to 2 years before the city’s attractions, restaurants, and stores will draw residents back. Once they go back, they might find many of their favorite eating and shopping spots are gone. The vibe that brought people to the city will take time to rebuild, and during that time the rental markets in the suburbs, particularly in the secondary and tertiary markets like Dallas, Atlanta, and North and South Carolina will remain on fire.
Prediction #2: Demand for Multifamily Properties Will Continue in Full Force
During the pandemic, many institutional buyers and family offices were waiting on the sidelines waiting for multifamily property owners to rush to sell. They were also waiting for a wave of bankruptcies, expecting an opportunity to buy at “fire-sale” prices, with assets offered at 50-cents to 70-cents on the dollar. That never happened, and it became a frozen market.
There are several reasons as to why those expectations never materialized, but the key is that the fundamentals have been in place all along. I’m talking about well-financed, multifamily properties located in solid secondary markets in Texas, Georgia, Florida, Arizona and the Carolinas. There hasn’t been a wave of fire sale prices, and I don’t expect to see any in 2021 either.
One of the main reasons is that lenders and banks learned their lessons during the economic crisis of 2007. During that time, they foreclosed on numerous properties, and now they don’t want repeat that tactic, which will cause them to have those liabilities on their books. Instead, they’re working with property owners and syndicators, being quite flexible and willing to accept forbearance in lieu of foreclosures.
Another reason that there aren’t more bankruptcies is that lenders are a lot more careful now than they have been in the past. They’re simply not allowing owners to overleverage their loans, as LTVs are now at 75%, possibly as high as 80%. Many of the loans are agency loans, including Freddie Mac and Fannie Mae, so loans are far more conservative.
Today, institutional investors and family offices are not waiting for fire-sale pricing and there is a much higher demand for multifamily properties. I predict that trend will continue into 2021 as the multifamily market is still an excellent investment and there isn’t an abundance of properties available. Occupancy remains high, rent collections are also high, and many owners are claiming positive cash flow, even during the pandemic. There won’t be 10 different properties to choose from and there won’t be any “amazing” buying opportunities in the coming year.
According to CBRE, one of the largest commercial real estate brokerage, property management, research, and investment companies, multifamily investments next year will reach $148 billion, which represents a 33% gain over 2020’s numbers. The favorable mortgage rates will continue, contributing to increased investment activity next year.
Prediction #3: Rent Growth will be Strong
One of the reasons multifamily properties have been in high demand as an investment is that rent growth over the past 5 to 7 years has been growing, particularly in the suburban markets. While the pandemic has caused some negative rent growth in some markets during 2020, rent increases are still going strong.
The markets with the largest declines in rent during the 2020 pandemic were the coastal cities like San Francisco, New York, Boston and similar markets. According to Apartment List, those cities experienced a double-digit year-over-year rent decline.
2021 will continue to experience an increase in rents, mainly in suburban and secondary markets. While those increases might not be in the 3% to 4% that was seen pre-COVID, it will still show an increase. I’m predicting the growth will be in the 2% to 2.5% range. I’m basing that prediction on the fact that in many markets there hasn’t been a lot of new multifamily developments. Since there won’t be as much new competition, we’ll still see rent growth. 2021 will show a positive trend, but the growth will be slower than what we’ve seen from 2017 – 2019.
There is some concern that there might be increased rental regulations in 2021. Once the eviction moratorium ends, there are predictions that local agencies will put in their own rent control measures. Those measures are expected to stay in place for up to one year after the pandemic emergency passes. As an example, some counties in California, like Contra Costa County, have passed rent and eviction freezes that will last through January 2021. Other states and municipalities are considering similar actions.
The news media is focused on the COVID vaccine rollout, and for good reason. It is the beginning of the end for the pandemic that has decimated our country and those around the world. While it may take until mid 2021 to vaccinate the population, there is hope that the COVID virus will finally be destroyed.
While this is terrific news, it’s hard to interpolate that into predictions for multifamily housing in the coming year, but there is a positive feel going into to 2021 with the vaccine at hand. I have several predictions regarding multifamily properties that I’d like to share.
First, the suburban rental market will continue to thrive in 2021. Many factors contribute to this prediction, including renters leaving the city’s core and looking for more value for their monthly rent, less density in housing, reluctance to use mass transit, and the ability to work from home. In addition, the city’s shopping and restaurant scene will change dramatically, as many businesses are forced to close due to the pandemic. The “vibe” that kept people renting in the city is slowly dissipating.
A second prediction is that the high demand for multifamily properties will continue in 2021. It’s always been an excellent investment, particularly in secondary and suburban markets, and that won’t change next year. Despite the fact that investors thought there would be “fire sale” pricing on multifamily properties, it never materialized, and it won’t in 2021. Institutional investors and family offices are seeking properties to invest in, and they’re not looking for discounted pricing.
Finally, while rent growth will be slower, it will still continue on an upward trend, particularly in solid secondary and suburban markets. There won’t be much new competition coming into those markets, so I predict rent growth will be up by 2% - 2.5%. All in all, 2021 looks like a positive year for multifamily investments.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.