Multifamily Webcast hosted by Institutional Property Advisors (IPA): Apartment Fundamentals Healthy, Likely to Get Boost from Surging Job Growth

With their outlays historically under-allocated to commercial real estate generally, institutional investors’ focus on the apartment sector will, if anything, only increase from current levels. That’s among the top-level themes sounded during Marcus & Millichap’s April 13 webcast, “Institutional Multifamily Outlook and Post-Pandemic Investment Strategy.” As Marcus & Millichap CEO Hessam Nadji observed during introductory remarks, “Apartments continue to outperform at a macro level and do so extremely well.”

Moderated by Nadji, the hour-plus discussion presented insights from Steven DeFrancis, CEO of Cortland; Swarup Katuri, managing director, investments at Brookfield Asset Management; and Jessica Levin, senior director, investments at Intercontinental Real Estate Corporation.

One factor driving investment in the apartment sector has been the pandemic’s dramatic impact on fundamentals in other sectors, including hospitality, retail and to a lesser extent office. “You have seen a sector rotation to multifamily, industrial and many niche sectors such as life science, self-storage, etc.,” Katuri said.

Based on current trends, expect to see institutions’ investment strategies evolving. Levin thinks we’ll be seeing a shift in the trend of buying in secondary and tertiary markets: less activity on the tertiary side, in favor of properties in secondary and “outer ring” locations.

There’s likely to be a difference of opinion on the relative attractiveness of urban core properties versus their suburban counterparts. During the 2009 recession, panelists recalled, there was an investment flight to safety that favored CBDs. In 2021 and beyond, it’s a question of whether the migration of renters by choice to suburban properties—away from densely-populated center-city neighborhoods—will be permanent.

DeFrancis noted that suburban rent growth has outpaced urban rent growth for the past decade. “That is why we have looked to invest in the suburbs,” he said. “It just seems for us that there’s less downside than there is in some of these urban markets.” That said, he made it clear that “the cities will come back, just as they always have.”

At Brookfield, Katuri said, “We believe in the urban recovery. We believe in cities and the infrastructure in cities.” Although Brookfield’s multifamily portfolio—60% urban—got hit “exponentially” during the peak of the pandemic, “since the beginning of this year, the recovery has been pretty great in every market but one.” That exception, he later said, was San Francisco, which has been lagging compared to New York City and other hard-hit markets.

“The urban markets have been historically the high-beta markets, and if I had to guess, will be the high-beta markets in the future,” said Katuri.

During the height of the pandemic, Levin noted, there was a “flight” to the suburbs, which led to vacancy drops and rate increases in these submarkets. However, she said that while some renters who relocated to the suburbs will remain there, historically most of the jobs have been in urban centers.

Millennials and Gen Z want to be located convenient to where their jobs are, where the amenities are and where the nightlife is, said Levin. “Over the next year to two years, we’re going to see movement back to urban centers.”

A residential subsector that gained traction during the pandemic, single-family rentals—and particularly build-to-rent—has gotten mixed assessments of its long-term viability. DeFrancis questioned whether, from a development standpoint, build-to rent is as scalable as institutional multifamily.

“That being said, I do think it’s a good opportunity for traditional multifamily owners as it gets legs and becomes more of an institutional asset class,” he said.

Conversely, Katuri sees secular trends favoring SFR. As Millennials age and form families, they’re going to gravitate toward renting single-family homes rather than buying them, because of the cost, said Katuri. Levin concurred, but noted that as jobs return to cities, the time and expense of commuting from SFR properties in the suburbs will become a factor.

A nationwide moratorium on pandemic-related evictions was implemented by the Centers for Disease Control last fall and was recently extended until June 30. Nadji asked his panelists whether the moratorium’s expiration could potentially trigger any shocks.

Partly because “I don’t think our infrastructure can afford a massive, wide eviction all at once,” Levin predicted that any increase in evictions would be “trickle-down. I know from our company’s perspective, if a tenant is trying to work with us, then we’re going to work with them and not evict.”

Similar takes came from DeFrancis and Katuri. DeFrancis expressed that the potential for widespread evictions is smaller than some have made it out to be. “We and many others just like us are working with residents who couldn’t pay their rent before the moratoriums went into effect,” he said. “The vast majority of people who were struggling are already in some sort of program or have left—moved home, doubled up or dealt with their situation in some other way.”

Katuri said, “I think we worked through the majority of the issues within our own operations, but you will see some increase on the margins.”

On the capital markets side, the movement in short-term interest rates and its potential impact on cap rates came up for discussion. “The gap between cap rates and the 10-year Treasury has come in some in the past couple of months,” said DeFrancis. “But if you go back to late last year, it was as wide as I think it’s been. That gap is still an outsize gap, but in an environment with much lower yield expectations.”

He added, “All of us on this call think there’s plenty of room for interest rates to rise without impacting cap rates.”

Panelists agreed that the U.S. economy in general will evince stronger signs of recovery in the latter part of 2021 into 2022. That outlook impacts current underwriting in the multifamily sector, Levin said.

“To be competitive right now with so much capital in the market, you have to write through what COVID levels are right now and almost return to pre-COVID level rents,” she said. Intercontinental has also been taking a more proactive approach and starting to focus on development opportunities as well.

Two or three years from now, when these new developments are delivered to the market, “we think the economy is going to be back if not better,” said Levin.

On-demand replays of the April 13 webcast are available by clicking here.