The multifamily market started 2020 on solid ground and experienced nearly 10 years of above-average growth. However, the first half of 2020 is essentially the tale of two economies: the pre-pandemic economy and the economy of the pandemic’s first three months in the U.S. The unprecedented nature of this crisis will impact the housing market, but to what extent is still being played out. However, because of weakened economic drivers, multifamily fundamentals are expected to slow throughout the rest of this year and possibly into next year.
The labor market was on strong ground before the pandemic hit in March. The economy added 2.3 million jobs in the 12 months ending February 2020 and the unemployment rate continued to tighten down to 3.5%. During the second quarter, the unemployment rate peaked in April at 14.7% with 23 million out of work. In May and June, employment started to rebound, adding 7.5 million jobs since April. First quarter gross domestic product (GDP) fell by 5% while second quarter dropped 32.9%. March and April were one of the most volatile economic times in history. While unemployment is improving as the economy begins to recover, it is expected to remain elevated for the foreseeable future.
Investment activity has slowed in March but since June, our volume has increased compared with the start of the year as we provide the market with liquidity when other market participants moved to the sidelines. Cap rates remained relatively stable as interest rates dropped and cap rate spreads increased. Quarterly price appreciation was relatively flat; little movement in property prices indicate that market perception of the multifamily asset class continues to favor longer-term fundamentals. Given the volatile few months since the pandemic, some impact to property prices is expected this year but not as severe as the Great Recession.
Total multifamily origination volume is expected to slow in 2020, but the extent to which is still uncertain. We estimate volume it could slow by -20% to -40% this year – the magnitude of which is dependent on the recovery trajectory and how well the virus can be contained.
Multifamily demand in the second quarter saw a meaningful slowdown given the nationwide shutdown, but at the same time saw a high rate of lease renewals as tenants remained in their units during the height of the lockdown. Slower completions this year will help offset some of the reduced demand. Reis reports completions are tracking lower this year by at least 30% compared with pre-pandemic levels. With less units expected to be delivered over the year, that may provide some relief to rents and vacancies that will be impacted from a slowdown in demand.
The pandemic-induced recession in 2020 will continue to drive changes in macroeconomic and multifamily forecasts for the remainder of the year. Rent growth is expected to slow and vacancy rates increase for the rest of the year due to the higher unemployment and reduced income: rents are anticipated to be down -1.2% to -1.7% while vacancy rates could increase 200-250 basis points. Declining income growth and collections are not estimated to impact well-positioned properties, especially given the solid footing the industry was entering the recession with, with several years of above-average income growth and property price appreciation.
To learn more about our forecast, including analysis of specific metros and details on growth projections, please read the full Midyear Outlook Report.
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Insights and perspectives from Freddie Mac staff on current topics and events related to housing and the Multifamily industry.
Meg McElgunn
Senior Director, Freddie Mac SBL Production
Corey Aber
Senior Director of Mission, Policy and Strategy
Steve Guggenmos
VP Research & Modeling
Steve leads multifamily related research at Freddie Mac. In this role he performs research related to national and market-specific multifamily conditions. His team supports the multifamily business by developing models and quantitative approaches that determine risk-based capital allocations. The models capture loan level risks and also the benefits of the diversification and structural credit support for pools of multifamily mortgages, supporting the core business strategies of Freddie Mac Multifamily.
Performance in the multifamily market was strong during 2019 and is expected to remain healthy into 2020, but with the potential for moderated growth in comparison to recent years.
In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market. 2018 ended much stronger than anticipated with near record absorptions and stronger rent growth compared with the prior few years.
Recent research shows that an increasing number of multifamily units are not affordable for low- and very low-income households.
Rental affordability is a significant challenge for metropolitan statistical areas across the United States. Our research shows that supply just hasn't kept pace with demand in many metros, and that's pushing affordable rents out of reach for millions of American families.
In our research, we find that performance in the multifamily market remained healthy during 2018, despite high levels of new supply entering the market. We expect this trend to continue into 2019, but with more modest growth in comparison to recent years.
Performance in the multifamily market remained healthy in the first half of 2018, and is expected to continue throughout the second half of 2018 and into 2019, but with continued moderation from the prior few years.
Market rate multifamily rents have been dramatically increasing in recent years as housing demand significantly exceeds available supply. In contrast, during the same period rent growth has been moderate for units with restricted rents, such as those funded by the Low-Income Housing Tax Credit (LIHTC) program.
More of the same! By most measures, the multifamily market will continue to grow with moderately increasing demand, with the growing population fueling the rental housing market.