eXp Commercial is one of the fastest-growing national commercial real estate brokerage firms. The Chicago Multifamily Brokerage Division focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.
Apartment vacancies nationally dwindled to another record low in September at just 2.7%, according to RealPage, Inc. This marked the fourth consecutive month of record-breaking lows in a dataset going back three decades.
Ultra-low vacancy traces to unprecedented demand from both new renters moving in and existing renters choosing to renew leases. Remarkably, new lease demand in the 12-month period ending in September shattered the pre-2021 peak by an incredible 50.5%. At the same time, apartment resident retention surprisingly surged to 58.0% – surpassing the all-time high set during the peak of the lockdowns in April 2020. Retention rates represent the share of renters with expiring leases who choose to renew in a given period.
The fact that more new renters are entering the front door, but fewer existing renters are leaving out the back door is an unprecedented phenomenon that translates to a severe shortage in rental housing availability at every price point and in essentially every city across the country.
In apartment operations, a vacancy rate of 4% to 5% is considered essentially full, accounting for normal turnover time. As of September, though, vacancy registered below 4% in 140 of the nation’s 150 largest metropolitan areas. Furthermore, 113 metros reported vacancies below 3% and 48 came in at or below 2%. Among large metros, the top three were Orange County, CA and Providence, RI (both at 1.12%) and Riverside, CA (1.37%).
In practical terms, such low rates equate to essentially no availability. Units are getting re-leased quickly upon notification of a move-out, and property managers are turning vacated units over in record time.
Unlike in the single-family market, the lack of apartment availability does not trace to a lack of construction. In fact, new completions over the last 12 months reached a three-decade high of 362,807 units. Not long ago, that volume of supply was considered a major risk factor for apartment investors. Fast forward 18 months, and the supply wave proved surprisingly insufficient to meet the demand boom.
Net absorption in the 12 months ending in September surged to a record high of 610,715 units. That topped the previous record set earlier this year and smashed the pre-2021 record set in 2000 by an incredible 50.5%.
Incoming market-rate apartment renters are moving in with larger incomes than ever before. The typical household income for a new renter in the 3rd quarter of 2021 topped $70,000, compared to $62,600 in 2020.
Renewal demand has been equally surprising. Retention rates initially spiked as high as 57.8% in spring 2020 when renters couldn’t or wouldn’t move due to lockdowns. Retention then eased back once lockdowns subsided, and few expected retentions ever to approach lockdown-era highs again. But retention surged back up over the last three months and reached a new pinnacle of 58.0% in September 2021.
In other words, renters looking for other housing options are often finding that their best and most affordable option is to stay put. There are a few available apartments, single-family rentals, or for-sale homes. The options that do exist are often much more expensive. Plus, property managers routinely price renewal leases well below new lease rents.
As the Fed plans tapering its mortgage-bond purchases, mortgage rates are heading higher.
Mortgage rates rose to a three-month high last week as the bond markets reacted to the Federal Reserve’s announcement it would “soon” begin tapering its fixed-asset purchases.
The average U.S. rate for a 30-year fixed home loan jumped to 3.01%, the highest since June 24, from 2.88% in the prior week, Freddie Mac said in a report on Thursday.
That means the 2.65% bottom in January’s first week likely will stand, at least for this cycle, as the lowest ever recorded in a Freddie Mac data series that goes back to 1971.
“It’s clear that rates are probably more inclined to trickle up, to increase, as opposed to decreasing,” said Daniel Roccato, a professor of finance at the University of San Diego and a money coach at Credible.
That outlook comes with a caveat: If the Covid-19 pandemic worsens with new variants and consumers snap shut their pocketbooks again because they’re too afraid to go to stores and restaurants, all bets are off, said Roccato.
“As long as consumers continue to leave their bunkers and continue to spend money, the economy is going to continue to improve, and that’s going to cause mortgage rates to edge upward,” Roccato said.
The average rate for a 30-year fixed mortgage probably will rise to 3.1% in the final three months of 2021 from 2.8% in the prior quarter, according to a forecast by Mortgage Bankers Association on Sept. 21. That would be the highest since 2020’s second quarter, in the opening weeks of the Covid-19 pandemic.
The Fed began buying Treasuries and mortgage bonds in March 2020 to support the economy during the pandemic and prevent a credit crunch. The increase in demand meant investors had to accept smaller yields, which translates into lower home loan rates.
In July 2020, mortgage rates fell below 3% for the first time on record, as measured by Freddie Mac.
Since last year, the Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities a month. Both types of purchases put downward pressure on home loan rates because mortgage-bond yields tend to track long-term Treasuries.
As of last week, the central bank held $5.4 trillion in Treasuries and $2.5 trillion of mortgage bonds backed by Fannie Mae, Freddie Mac, or Ginnie Mae, according to a report issued by the Fed on Thursday.
While interest rates for home loans are heading higher, no major forecaster is predicting a spike. The average rate for a 30-year fixed mortgage probably won’t reach 4% until the end of 2022, according to the MBA forecast. That would be the highest since 2019’s second quarter.
“The pending taper and change to the monetary policy outlook will likely contribute to a modest increase in mortgage rates over the medium term,” MBA said in a commentary issued with its forecast.
“The biggest challenge to the housing market continues to be the lack of supply, hindered by the same supply chain constraints that are impacting the broader economy,” MBA said.
Rising home prices and interest rates will decrease housing affordability even further in the months ahead, predicts National Association of Home Builders Chief Economist Robert Dietz.
In a recent NAHB newsletter, Dietz said his outlook comes as home prices have risen more than 30%, on average nationwide since the start of 2020. A year ago, 43% of new home sales were priced below $300,000. In August, the share fell to 30%.
New homes are 24% lower than a year ago because of higher construction costs and some limiting of sales.
“While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume and encourage more home construction,” Dietz said.
He bases his prediction of continuing declining affordability not only on rising prices but also in the belief interest rates will rise as the Federal Reserve tightens monetary policy.
“Indeed, the 10-year Treasury rate has increased 37 basis points since the start of August. And consumer confidence declined to a seven-month low in September because of virus and inflation concerns. The prospect of higher taxes is certainly having a negative impact as well,” Dietz pointed out.
He cautioned builders will need to watch resale inventory in local markets to gauge how higher prices and rates are affecting available demand.
Dietz noted the surge in single-family construction at the end of last year means that for the first time since 2013, there are now more single-family homes currently under construction than individual apartments.
But year-to-date multifamily starts are up almost 17% on a year-to-date basis thus far in 2021 as a rebound for the rental market has taken hold while single-family starts were down 2.8% for the month.
While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume (and encourage more home construction). Unsold inventory stands at just a 2.6-month.
NAHB is not alone in its assessment.
In the summer, Frank Martell, president, and CEO of CoreLogic predicted price rises would continue in 2021 and could very well push prospective buyers out of the market in many areas and slow home price growth over the next year.
As the oldest Millennials are approaching 40, their needs are changing. Because they have different factors influencing their needs than they did in their 20s and 30s, Millennial renters’ preferences have shifted considerably.
Today’s Millennials are renting for longer periods than previous generations. They are delaying plans to get married and start families. But even when entering these different stages of life, a good portion of this demographic prefers to rent, compared to earlier generations who were already buying their first home at that stage.
And while some can’t afford to buy, others enjoy the flexibility that renting offers. JP Bacariza, vice president & market leader for Ryan Cos.’ Tampa office, said larger, three-bedroom units and single-family rentals have become a popular option for Millennials who want to avoid the commitment of homeownership.
Work life
The COVID-19 pandemic forced Millennial office workers to shift to remote working and changed the way they utilize space. Compared to 10 years ago, when renters were trekking to the office every day, today they need space to comfortably work from home.
A Millennial who would have been content with a one-bedroom unit is now looking for a two-bedroom apartment, with the functionality of the space equally important as the square footage.
“With Millennials working from home, they need to be able to conduct Zoom calls and not have major distractions or disruptions,” said Bekkah Doyle, senior marketing specialist with REACH by RENTCafé at Yardi.
Communal space at 2Hopkins. Image courtesy of LIVEbe Communities
The option to work outside their apartment is a major selling point. According to Bacariza, Millennials expect to see decentralized office space for remote work on the list of property amenities. To meet this need, many communities are providing membership-based office space for rent, either through the community or through a partnership with a coworking provider.
At 2Hopkins, a 21-story, 183-unit community in Baltimore, Md., operator LIVEbe Communities moved away from the traditional business center model that was common 10 years ago and replaced it with cubbies and banquettes. Residents have separation for privacy, but they can also interact with other residents.
“They really appreciate those areas, where they can get comfortable and know that they don’t have to go somewhere (else) to access those types of spaces,” said Elaine De Lude, vice president at LIVEbe.
Shifting space needs
Outdoor space is another important consideration for Millennial renters, who are more cognizant of their mental health and well-being.
“They want to be outdoors more; they want fresh air, nature, and natural light,” said Richard Lake, managing partner of Roadside Development.
Rooftop spaces, outdoor pavilions, pool decks with cabanas, green spaces, and communal spaces with a firepit or other focal point are newer amenities that have become necessary comforts.
With the rise of e-commerce and grocery delivery services, package lockers and cold storage are a necessity that was less prevalent 10 years ago.
Millennials want to live in a community with a long amenity list. Amenities used to be clustered in one area of a property, but today’s Millennials want to live differently, according to Lake.
“Sometimes they want the energy and excitement of other people, and other times they just want to sit on the roof and have a glass of wine while watching the sunset with their dog,” said Lake.
With many in this demographic owning pets, they are also looking for properties with dog parks, dog runs, and pet spas.
Roadside’s City Ridge, a mixed-use, 750-unit development in Washington, D.C., will feature several amenities across the community to cater to this generation’s lifestyle, including a rooftop greenhouse with an organic garden, a maker space, a commercial kitchen, and an outdoor pizza oven.
These “more soulful and more intimate amenities are just as important as creating those wow moments,” said Lake.
Rooftop deck at The Remy. Image courtesy of LIVEbe Communities
When it comes to fitness and physical health, the Millennial renter is looking beyond the traditional fitness centers. Developers have had to expand offerings from just one on-site gym to include a yoga room, a TRX training room, or another secondary fitness space, something Bacariza said is hugely important today.
Getting social
A subset of the amenity list includes those with a built-in social element that supplies a community feel. Theater rooms are now less appealing and are being replaced with options that create more of a social scene, such as game and recreational areas, wine bars or regular events that are executed in a social setting.
“These environments enrich people’s lives and create bonds between the residents,” said Bacariza.
Connection and engagement are more important to this generation, but this should be an authentic experience. You need to show how your community fosters that.
“It’s not enough to say you provide excellent customer service. Millennials are asking ‘What does that look like? Show us … let us feel it,’” De Lude noted.
Dedicated training space at 2Hopkins. Image courtesy of LIVEbe Communities
To retain your Millennial residents, you need to be relatable.
“Being transparent is really key,” said RENTCafé’s Doyle, “as Millennials are very self-sufficient in finding out more information about your business than just what you are putting out there.”
This demographic is savvy enough to call your bluff when you describe your average pool as “resort-style.”
Show and tech
Convenience is also high on the Millennial checklist. As a tech-forward demographic, they want convenience, accessibility, and the ability to do things on their own.
To that point, “our buildings have to get smarter,” said Lake.
Millennials use technology to find apartments, so they expect communities to utilize technology in various ways, whether it’s self-guided or virtual touring, smart locks or smart thermostats. Wi-Fi connectivity is also a must-have.
“Millennials are the smartphone generation, so as many things as we can access and control from our smartphones the better,” said Doyle.
As a connected generation that no longer writes checks and has ditched bank transfers in favor of mobile-based options, Millennials would prefer using an app to pay their rent and make maintenance requests.
Technology is also an important element of marketing to Millennials and communicating with them. This generation would rather communicate by text message than call the management office.
“The Millennials expect to be followed up within that manner,” De Lude said. “That expectation is a change in behavior from 10 years ago.”
Real Estate Alert (REA) released rankings for the first half of the calendar year 2021 with Marcus & Millichap as the #1 firm for the sale of Multifamily properties valued at $5M to $25M.
During the first half of 2021, Marcus & Millichap’s Multi-Housing Division seized on the opportunity to leverage the firm’s vast network and qualified buyer pool to effectively move capital and deliver top-notch returns for our clients. Our investment specialists’ expertise coupled with real-time market insight allowed us to lead the apartment sector in the $5M to $25M segment, demonstrating our continued commitment to thriving in the current market.
WASHINGTON, D.C. — The Federal Housing Finance Agency (FHFA) has set the 2022 multifamily loan purchase caps for Fannie Mae and Freddie Mac to be $78 billion for each agency for a combined total of $156 billion. The 2022 caps are based on FHFA’s projections of the overall growth of the multifamily originations market. This year the caps are set at $70 billion a piece for both Fannie Mae and Freddie Mac.
The FHFA wants the agencies to keep their focus on providing liquidity for affordable housing and underserved markets. Just like this year, the organization is requiring that at least 50 percent of Fannie Mae’s and Freddie Mac’s multifamily business in 2022 to be mission-driven affordable housing, or for units affordable to residents earning 80 percent of area median income (AMI). However, at least 25 percent of the agencies’ multifamily business is required to be affordable to residents at or below 60 percent of AMI, up from the 20 percent required this year.
Additionally, the FHFA is expanding certain definitions of what it determines as “mission-driven affordable housing.” Starting next year, the FHFA will allow loans on affordable units in cost-burdened renter markets and loans to finance energy or water efficiency improvements for units affordable at or below 60 percent of AMI to now be classified as “mission-driven.”
“The increases of the multifamily loan purchase caps and higher mission-driven business requirements assure that the enterprises’ multifamily businesses have a strong and growing commitment to affordable housing finance, particularly for residents and communities that are the most difficult to serve,” says Sandra Thompson, acting director of the FHFA.
