U.S. APARTMENT OVERVIEW AND OUTLOOK

U.S . APARTMENT OVERV IEW AND OUTLOOK

C B R E E C O N O M E T R I C A D V I S O R S

Q2 2021

CBRE ECONOMETRIC ADVISORS Q2 2021 | APARTMENT OVERVIEW & OUTLOOK

2 0 2 1 O U T L O O K – S O M E H I G H - L E V E L T H O U G H T S T H A T D R I V E O U R F O R E C A S T

• We assume that COVID-19 will be manageable as the U.S. economy normalizes. Although COVID-19 cases will fluctuate the deployment of vaccines will limit the number of chronic cases that overwhelm the health system and materially impede economic activity.

• Presently, air travel and restaurant visitor volumes are back to pre-pandemic levels. U.S. consumers will remain aggressive in coming quarters and continue to shift spending from goods to services. This will push the U.S. economy from a ‘recovery’ to an ‘expansionary’ phase.

• Growth in labor-intensive sectors, such as leisure & hospitality, will drive 4.5% employment growth in 2021 and the labor market should exceed pre-pandemic levels by mid-2022. This outlook is predicated upon rising labor market participation, which should get a boost from children going back to school in the autumn and unemployment benefits being scaled back.

• Our outlook for inflation has shifted upward as the combination of surging demand, supply bottlenecks, wage growth and index base effects have increased prices by >5% Y-o-Y. But most of the factors driving CPI are transitory and inflation should fall back to the low-2% range by next year. Specifically, imbalances in the microchip space—a key input into many durable goods—are expected to even out in coming quarters, putting downward pressure on inflation.

National multifamily fundamentals continued to improve in Q2 2021.

Quarterly rent increased by 3.5% from Q1 2021, and Y-o-Y rent increased by 0.5% to $1,737 per unit. The vacancy rate for our national sample of

properties was at 4% in Q2, 60 basis points (bps) below the second quarter of last year.

Recovery is on the horizon: 60 of CBRE EA’s 69 tracked apartment markets posted positive Y-o-Y rent growth.


S U M M A R Y : Q 2 2 0 2 1 U . S . A P A R T M E N T F U N D A M E N T A L S

RENTS

• Average rent increased by 0.5% Y-o-Y in Q2. Secondary metros with less exposure to COVID-related economic shocks and/or those seeing in-migration from major metros (e.g., Phoenix, Riverside and Tucson) led rent growth in Q2.

VACANCY

• The overall vacancy rate declined by 60 bps Y-o-Y in Q2 to 4%. Among CBRE EA’s 69 tracked apartment markets, only seven registered Y-o-Y increases in vacancy, while 62 recorded decreases.

SUPPLY

• The supply pipeline slowed down. Completion of 65,562 new units in Q2 was down by 19% compared with Q2 2020.

CAPITAL MARKETS

• Q2 investment volume totaled $52.7 billion, a 238% increase from a year ago. The national cap rate remained low at 4.88%.


R E N T S T A B I L I Z E D I N Q 2 2 0 2 1

Source: CBRE Econometric Advisors, RealPage Inc., Q2 2021.

National Multifamily Fundamentals—Net Effective Rent ($/month), Vacancy (%), Employment Growth (Y-o-Y, %)

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Forecast • Average rent increased by 3.5% Q-o-Q and by 0.5% Y-o-Y.

• Rents bottomed out in Q4 2020 and are continuing to rebound.

• Employment growth bottomed out at -11.7% in Q2 2020.

• Note: national averages are dominated by the largest metros, which are seeing the strongest headwinds.

• Rents in many secondary and tertiary metros have already recovered to pre-COVID levels.


H I G H R E N T / G R O W T H M E T R O S H A R D E S T H I T B Y C O V I D - 1 9

Nominal Effective Rent Growth (Q2 2020 to Q2 2021, %) – Top and Bottom 10 Markets


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T H R E E - Y E A R F O R E C A S T : C O M P O U N D A N N U A L R E N T G R O W T H


Baseline Rent Forecast Through Q2 2024: Compound Annual Growth Rate (%)

• CBRE EA forecasts 5.2% compound annual average rental rate growth (CAGR) over the next three years.

• Forecast CAGR is unusually high because current rent is near the bottom of a COVID-related dip.

• 11 of the nation’s 20 largest markets by total inventory are among the top 20 markets for three-year CAGR.

• San Francisco leads the major markets with forecast compound annual growth of 12.5%.

• Our baseline outlook favors major markets and high-growth markets, which we expect to rebound from the upcoming employment recovery.

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Net Absorption (units), Completions (units) & Vacancy Rate (%)

• A 20-year-high absorption rate is forecasted for this year, as COVID-19 subsides and pent-up demand drives the recovery.

• Completions will remain historically high in 2021, but stronger demand is bringing down the overall vacancy rate.

• The vacancy rate in 2021 should remain lower than the historical average.

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Completions Absorption Vacancy

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Q4 VACANCY RATE (%)NET ABSORPTION, COMPLETIONS (UNITS)


C H A N G E S I N V A C A N C Y : T O P & B O T T O M M E T R O S


Change in Vacancy Rate (Q2 2020 to Q2 2021, BPS)

• A large total of completions and less absorption in Q2 led to Y-o-Y increases in major metro vacancy rates.

• Many secondary and tertiary markets saw vacancy rate decreases as renters migrated from larger, more expensive metros.

• Expensive and formerly high-growth markets registered the biggest increases in vacancy.

• Only seven markets registered Y-o-Y increases in their vacancy rates this quarter, while 62 registered decreases.

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D E M A N D S T R O N G E S T I N S E C O N D A R Y A N D T E R T I A R Y M A R K E T S


Top 20: Net Absorption as a % of Inventory (past 4 quarters)

• Markets with the strongest absorption (relative to inventory) over the past four quarters were mostly less-expensive secondary and tertiary markets experiencing migration from major metros.

• Atlanta was the only market among the nation’s 10 largest markets by inventory that was also among the top 20 for absorption for the year ending in Q1 2021.

• No gateway metros cracked the top 20.

• CBRE EA expects out-migration from major metros to be a temporary trend. Markets with high demand before COVID-19 (San Francisco, Seattle) should rebound this year and next.

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L E A D I N G M E T R O S F O R I N V E N T O R Y G R O W T H

Metro Completions to Inventory (%) Units Added Past 4 Qrts.

1 Fort Worth 3.86 6911

2 Jacksonville 3.85 4437

3 Nashville 3.77 5951

4 Charlotte 3.6 6354

5 Orlando 3.47 7793

6 Austin 3.45 8320

7 Richmond 3.37 2862

8 Louisville 3.28 3260

9 Portland 3.16 6906

10 Minneapolis 3.08 9423

11 West Palm Beach 2.96 3536

12 Miami 2.83 8660

13 San Antonio 2.83 5680

14 Madison, WI 2.58 1967

15 Houston 2.52 16307

16 Dallas 2.47 14158

17 Omaha 2.46 1872

18 Salt Lake City 2.4 2384

19 Greenville 2.35 1390

20 Raleigh 2.32 3473

Source: CBRE Econometric Advisors, Dodge Data & Analytics, Q2 2021.

• Completions as a percent of inventory generally mirrors absorption as a percent of inventory.

• This suggests completions are partially driving the geographic spread of absorption to higher-demand secondary metros.


C O R R E L A T I O N B E T W E E N C O M P L E T I O N S A N D A B S O R P T I O N

Source: CBRE Econometric Advisors, Dodge Data & Analytics, Q2 2021.

Absorption (horizontal) vs Completions (vertical) as a % of Inventory (past 4 quarters)

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A P A R T M E N T C O N S T R U C T I O N S T I L L G O I N G S T R O N G

Source: CBRE Econometric Advisors, Dodge Data & Analytics, Q2 2021.Forecasts are based on CBRE EA’s baseline economic scenario. Estimated construction delays are based on historic delay rates.

Sum of Markets Quarterly Completions

• Completions totaled 65,562 units in Q2, down from 80,591 units in Q2 2020.

• Despite the pandemic, Dodge Data & Analytics reports a robust supply pipeline with completions near the cycle high.

• 2021 is expected to see the highest number of completions in 10 years, though some of these projects will be delayed.

• On average, 15% to 25% of the units projected to complete in a quarter are delayed.

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S T R O N G I N V E S T M E N T D E M A N D A N D C A P R A T E S C O M P R E S S I O N I N Q 2

Source: Real Capital Analytics, CBRE Econometric Advisors, Q2 2021.

Quarterly investment volume and cap rate

• Investment volume in Q2 increased by 238% Y-o-Y to $52.7 billion.

• Apartment cap rates (hedonic series) remained low in Q2 2021 at an average 4.88%, helped by strong multifamily fundamentals and agency lending.

• The average cap rate fell by 5 bpsQ-o-Q and by 28 bps Y-o-Y.

• With strong investment demand and investors’ confidence in the multifamily sector, cap rates are expected to compress further in 2021.

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TRANSACTION VOLUME ($, BILLIONS) CAP RATE (%)

NATHAN ADKINSSenior Economist

T +1 206 292 6163

[email protected]

Copyright (C) 2021, CBRE Econometric Advisors (CBRE EA). All rights reserved. Metropolitan employment forecasts are copyrighted by Oxford Economics. Sources of information utilized in this report include CBRE, CoStar, Oxford Economics, and CBRE EA. The information presented has been obtained from sources believed to be reliable but its accuracy, and that of the opinions and forecasts based thereon, is not guaranteed. All opinions, assumptions and estimates constitute CBRE EA’s judgment as of the date of the release and are subject to change without notice. The information and material contained within this product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or real estate assets. This product does not take into account the investment objectives or financial situation of any particular person or institution.

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JING REN, PH.D.Senior Economist

T +1 617 921 5228

[email protected]

U.S. APARTMENT OVERVIEW AND OUTLOOK

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