Unless an 11th-hour agreement is reached, an impasse will trigger the first U.S. government shutdown since 2019. Starting December 21, 2024, many non-essential federal government operations will be limited or suspended, but most multifamily financing activities will not be disrupted.
With home prices nearing all-time highs, single-family rental (SFR) housing is uniquely positioned to capture an even larger slice of the for-sale market. As structured capital markets rebound, SFR will benefit from a set of tailwinds that include robust levels of new construction and favorable trends in cap rates and debt yields. Arbor’s Single-Family Rental Investment Trends Report, developed in partnership with Chandan Economics, shows why this sector’s prospects are so strong.
Building on an organizational commitment to the inclusion of individuals from all backgrounds, Arbor — in partnership with the Real Estate Pride Council and Dr. Sam Chandan, Founder of Chandan Economics, Founding Director, NYU Stern School of Business C.H. Chen Institute for Global Real Estate Finance, and Co-Chair of the Real Estate Pride Council — hosted a speed networking event in Manhattan on November 20 for local LGBTQIA+ students and commercial real estate mentors.
Small multifamily continued to moderate through the midpoint of 2024, amid strong demand despite an elevated interest rate environment and rising property-level yields.
As the interest rate outlook brightens, unique opportunities for outsized returns abound, Dr. Sam Chandan, Founding Director of the C.H. Chen Institute for Global Real Estate Finance at the NYU Stern School of Business and the Non-Executive Chairman of Chandan Economics, explains in this top-level overview of Arbor’s latest Special Report.
Continually challenged by low inventory, affordable housing sits at a crossroads following the 2024 election. Incoming leadership plans to introduce market-based principles to an agenda that may also include an expanded Housing Choice Voucher program. Arbor’s Affordable Housing Trends Report Winter 2024/2025, developed in partnership with Chandan Economics, provides insight into a pivotal multifamily sector about to embark in a new direction.
The skies surrounding commercial real estate markets are clearing, suggest the Emerging Trends in Real Estate 2025 (ETRE 2025) findings. As pandemic-related structural changes settle into place, cyclical economic trends, such as interest rates, demand, and construction levels, are now the key drivers to watch.
As more single-family rental (SFR) operators rely on build-to-rent (BTR) development to supply new inventory, construction starts have steadily risen, reaching another record high in the third quarter of 2024. SFR/BTR construction has eclipsed 92,000 units in the last four quarters — an all-time high and an annual increase of 31.4%.
Table of Contents
The U.S. economy was gliding into 2020 along a path of consistent yet unspectacular growth. After more than a decade of expansion, multifamily asset pricing remained exceptionally tight, with investors searching for yield in secondary and tertiary markets. When the full magnitude of the COVID-19 pandemic hit the U.S. in March, it became readily apparent that the multifamily sector would see a recessionary reshuffling of fundamentals, in a pace unrivaled in recent history.
This report develops an analytical framework to predict where large multifamily investment opportunities will be most abundant in the year ahead. Through the use of an opportunity matrix, the top 50 U.S. metros are ranked based on a composite blend of performance metrics. The analysis pays specific attention to how local economies have fared during the pandemic and how multifamily investment activity performed. The top 50 metros are based on population estimates. All metros are reported at the Metropolitan Statistical Area (MSA) level.
Key Findings
The 2020 Arbor-Chandan Large Multifamily Opportunity Matrix features eight categorical criteria: levels of large multifamily loan volume, levels of multifamily construction, labor market size, labor market performance during COVID-19, mobility trends, renter performance and sentiment, renter preferences and an assessment of COVID-19 risk. These variables account for many of the considerations that investors would make before deploying capital.
All eight categories receive equal weighting. In categories with more than one data field, each indicator receives equal weight. (For a full breakout of the Opportunity Matrix, see Table 1.)
Other cities rising near the top of the matrix rankings include Phoenix and Austin. Both combine better than average COVID-19 risk assessments, robust pipelines of incoming multifamily supply and ample liquidity. According to a 2019 Apartment List Study, of the top 15 U.S. MSAs, Phoenix has the lowest share of millennials on track to transition into homeownership within the next five years – a market feature that should support demand for rental housing even as homeownership rates rise nationally.
Well before the great “work from home experiment” of 2020, household preferences were already rapidly shifting. Maturing millennial households have a growing desire for mixing the amenitization of Class A multifamily while also enjoying the space of the suburbs. Metros that are less space-constrained and can add ample, garden-style multifamily offerings with convenient access to urban job centers are well-positioned to capture transitioning demand. According to a recent report published by CREXi, Phoenix and Austin are two of the country’s best markets for suburban multifamily performance.
Excluding Phoenix, these metros were all among the earliest examples of community spread in the U.S. Nevertheless, all five have their first wave peaks solidly in the rearview and have managed to suppress a second wave to date. Birmingham sits on the other side of the COVID-19 risk spectrum, followed closely by Miami and Kansas City. At 33.3 cases per 100,000 people, Birmingham’s case density is more than 11 times higher than that of New York City.
COVID-19 went from a distant news item to an immediate threat to most American household finances at breakneck speed. To capture the pandemic’s effects in real time, the U.S. Census Bureau launched the Weekly Household Pulse Survey. While phase one of the measurement period concluded in mid-July, we use the last week of the survey to capture how well renters in different metro areas were weathering the storm and meeting their monthly rent obligations. The Census Bureau reports data nationally, statewide and for the top 15 metros. In metro areas where there is no data coverage, we substitute state-level data.
Apartment renters in Omaha were outperforming all other tracked metros, with the share of renters who reported making their previous month’s rent payments at 93.3%, well above the national average of 79.2% (Chart 3). The San Francisco Bay Area came in a close second with 92.6%. Birmingham counted the lowest share of renters meeting their payments with just 63.2% reporting in July.
Multifamily investment across U.S. markets is anything but uniform. Differences exist along the lines of urban density, labor composition, geography and economic fundamentals. Moreover, in 2020 there is the added layer of the pandemic risk. Investors are considering where the virus might move, the preparedness of localities, and the “stickiness” of demand in the event of an outbreak. We analyze a limited pool of loans originated year-to-date through August 2020, with original balances above $15 million and across the top 50 metros. Lending volumes include loans originated for both investment sales and refinancings. They are used here as a proxy for where market-level liquidity and total investment activity have held up amid the coronavirus turbulence.
Leading the way and accounting for 7.8% of all tracked lending volume is Dallas, Texas (Chart 4). Reportedly, rental collections in Dallas have held up better than expected, and the local multifamily market is already transitioning out of its “wait and see” mode as deal closings are once again on the uptick. When measuring by loan count instead of dollar volume, Dallas similarly leads our sample, picking up 7.9% of the total (Chart 5).
Measured both ways, Houston and Phoenix follow closely behind in second and third positions. While not unscathed, Houston has continued to enjoy well above average economic success compared to most other metros, with a critical dependence on industrial, logistics and healthcare occupations that have buoyed the city’s resiliency. Texas, led by Dallas, Houston and San Antonio, is the only state to have more than one metro reach the top ten. Taken together, these three Lone Star state metros account for 18.4% of the sample’s large loan lending volume and 19.0% of the loan count.
We also track lending volume per capita (or the total number of large multifamily lending dollars per person in each MSA). This measurement normalizes the results and accounts for population differences, allowing for an “apples to apples” comparison. Rising to the top of the rankings are Orlando and Denver. In our sample, these two metros capture $350.97 and $342.05 of lending volume per MSA resident, respectively. This is well above the average set across the top 50 of $103.36 per resident (Chart 6).
Seattle rises to the top spot in our 2020 rankings, driven by a diverse set of favorable macroeconomic conditions. As COVID-19 arrived in the U.S. earlier this year, the state of Washington immediately found itself in the spotlight. When a nursing home in Kirkland, an eastside suburb of Seattle, became the nation’s first known case of community spread, Seattle’s economic outlook dimmed.
Despite its dark spring, the Emerald City is already regaining its glisten. By September 1, Seattle charted as the fourth lowest-risk area in the top 50, according to the Harvard Global Health Institute’s COVID Risk Map. After establishing the most comprehensive statewide database in the country, Washington state bolstered its prowess in testing and tracing cases, helping its economy recover quicker and more sustainably than its fellow compatriots.
Before the recession, Seattle led all U.S. cities in local wage growth, registering a weighty 7.4% year-over-year increase, sustained in large part by the city’s tech industry. Seattle’s relative dominance in tech and other STEM-area job growth has attracted a wave of higher-earning renters, benefiting its multifamily sector. Through July 2020, the Seattle MSA was back to growth, with employment jumping 1.8% month-over-month, edging out the national average by more than half a percent. This was calculated using seasonally-adjusted metrics measured by the U.S. Bureau of Labor Statistics (Chart 7).
While no metro labor market was spared from the pandemic-provoked crisis, by June, Seattle’s employment base was down only 4.0% from the prior year. Similarly sized cities did not fare nearly as well. Detroit, comparable in size and growth to Seattle before to the recession, suffered the worse job losses nationwide. Its employment base shrank by an incredible -18.2% from a year ago (Chart 8). Meanwhile, Minneapolis and Phoenix, which ranked closely behind Seattle in the final rankings, saw more muted job losses of -5.8% and -6.3%, respectively.
Rental demand remains more resilient in Seattle compared to other cities, supported by a durable labor market in a housing landscape with relatively limited available supply. As cities from coast to coast experienced an uptick in vacancies from large outflows out of city centers, Seattle proper saw apartment inventory fall during the pandemic. According to Zillow research published in August, for-sale inventory in the urban center dropped by an annualized 20.0% from February to May.
While our metro-level analysis covers the impact on both the urban core and its surrounding areas, like other cities across the country, Seattle’s urban core is still facing concerns of an exodus. As pandemic-related fears have some renters eyeing a flee to the suburbs, Seattle residents are staying put in higher numbers compared to other large cities. According to metrics gathered by Apartment List, urban renters searched outside of their home-city at an average of 31.0% nationwide. Meanwhile, Seattle residents searched outside of the city just 20.7% of the time, placing it in the top quartile of inner-city searches among the metros in the study.
The impact of the virus will continue to ebb and flow as the situation evolves in each city. Even as the crisis wanes in certain regions of the country, it will still take some time for growth to return to pre-pandemic levels. Nevertheless, the state of Washington continues to have one of the more methodical approaches to handling the turbulence and the economics of the Seattle area were a supportive tailwind heading into COVID-19. Across the top 50 U.S. metros, Seattle is best positioned to attenuate the downside risks and offer upside.
The coronavirus will continue to create a unique set of challenges for multifamily operators and investors for the foreseeable future. Of course, where there are changes and disruption, there is also opportunity. Metropolitan areas with healthy labor markets and the development economics to support horizontal, well-styled apartment communities are strategically positioned to add supply that captures migrating demand. While headlines suggest that urban households are flocking to exurban alternatives, many highly urbanized metros, led by Seattle, are improving fundamentals and outcomes despite macro headwinds.
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