2021 was a record-setting year for multifamily real estate. The pandemic may have triggered an exodus from expensive urban centers, but demand for multifamily properties reached unprecedented levels, boosted by a combination of higher spendable income and historically low interest rates.

US government-sponsored mortgage provider Freddie Mac’s multifamily unit estimates that investment in the country across the first nine months of 2021 alone hit $179 billion, almost eclipsing the highest-ever annual total of $193 billion, set in 2019, with three months to spare.

“Investors are looking to asset classes with the strongest rent growth potential as a means to offset inflation,” says Aaron Jodka, director of research, US capital markets at real estate firm Colliers. “Multifamily and industrial are the best poised asset classes, along with alternative assets such as life science, to do that via rising rental rates.”

Booming investment in the US showed up in two key areas. “The number of units sold in Q4 2021 alone accounted for 42 percent of the number traded over the past four quarters,” says Matt Vance, Americas head of multifamily research for CBRE.

“But it is more than just the number of properties that sold. The price per unit has risen 24 percent in the two years from Q1 2020 to Q1 2022. Again, strong fundamentals and competition among buyers has put significant downward pressure on cap rates and boosted asset pricing.”

In Europe, real estate firm JLL estimates that €22.5 billion real estate services firm was invested in forward-funding multifamily deals last year, accounting for 39 percent of total transaction volume in the sector and exceeding the office sector for the first time.

“There were several things contributing towards increased activity in the European sector, such as low interest rates, the resilience of the sector through covid lockdowns, as well as investor uncertainty around the future of office and retail,” says Richard Valentine-Selsey, director of residential research at real estate services firm Savills.

“The price per unit has risen 24 percent in the two years from Q1 2020 to Q1 2022”

Matt Vance

Multifamily investment in Germany was the continent’s main driver last year, topping 55 percent of total investment in the sector, mainly due to Vonovia’s acquisition of Deutsche Wohnen, while Sweden and Denmark were also boosted by the Heimstaden-Akelius megadeal. Combined, Savills estimates that the two deals accounted for 40 percent of total European multifamily investment.

“Several factors have converged contributing to the record run-up in multifamily over the last few years,” explains Brian Murphy, CEO at real estate lending platform Veleta Capital. “An enormous amount of liquidity coupled with record low interest rates over the last few years have compressed cap rates and driven asset values to all-time highs.”

Murphy adds that the government stimulus and the global shift in the way people work has also contributed to surging rental growth in the US over recent years. Record rental growth in an already supply-constrained asset class has only fueled activity and favored sellers.

Strong appetite

While last year may have been truly exceptional, multifamily momentum appears to have kept pace across the first quarter of 2022. In the US, investment volumes hit $63 billion, a 56.4 percent increase year-on-year and the highest Q1 on record. CBRE figures show that multifamily accounted for 37 percent of total commercial real estate investment volume, followed by office at 21 percent and industrial at 20 percent.

“Strong migration to the Sunbelt has supported incredible rent growth, while occupancies are at all-time highs across markets,” highlights Jodka. “This has attracted capital to cities throughout the Southeast and Southwest. That said, investment capital is chasing properties throughout the country, with strong volumes in the Northeast, Midwest, and West as well.”

All 69 markets tracked by CBRE in the US recorded year-on-year rent growth in Q1, with 56 of them hitting double digit gains, up from 49 in Q4 last year. All Pacific markets achieved double digit growth, while the Southeast region reached rent growth of 22 percent.

“Although the overall market has seen increased investment, the Sunbelt markets on this list are the real ‘hotspots’ today,” adds Vance. “Looking ahead, as rent growth responds positively to the tightening occupancies in major coastal cities, we expect buyers to expand their Sunbelt focus into the gateway cities and other large coastal markets like Seattle.”

In Europe, Germany-based lending specialist Catella Real Estate describes the residential market as the most dynamic of all asset classes in Q1, but warns that the war in Ukraine, rising inflation and lingering effects from the pandemic are likely to slow economic recovery.

From the 63 European cities that Catella tracks, average monthly apartment rents increased by 3.82 percent year-on-year in Q1. The cheapest apartments were found in the Belgian city of Liège, followed by Brno in the Czech Republic and Malaga in Spain, while the most expensive rental market was still Geneva, Switzerland.

Many countries across Europe are seeing falling yields, according to Catella, with sideways movement notable in the UK, Poland and Switzerland. In the final quarter of last year, JLL pointed to strong capital pressures in Europe that were already turbo-charging yield compression.

“Construction costs are up dramatically, deliveries are taking longer and developers are having to recast their stabilized assumptions”

Brian Murphy
Veleta Capital

Turning the page

The outlook may be positive for further investment, but there are still some looming challenges to consider. “The main headwinds are coming from inflation (cost of materials and labor), rising interest rates and their impact on borrowing costs and geopolitical factors,” says Will Mathews, multifamily lead at the Colliers Capital Markets board of advisers.

Veleta Capital’s Murphy adds that the rapid rise in interest rates, coupled with supply chain issues, are significant challenges to further investment growth in the sector. “Construction costs are up dramatically, deliveries are taking longer and developers are having to recast their stabilized assumptions,” he explains. “The market is in price discovery, and we expect that to last another handful of months as investors weigh opportunities.”

Vance says that in the US investment activity this year should come close to 2021, despite rising borrowing costs, but cautions that “we could see a deceleration next year.”

Jodka emphasizes that “since 2021 set an all-time investment sales record, breaking 2019’s previous peak by 82 percent, it will be hard to maintain that level of investment growth.”

Before the war in Ukraine added inflationary pressures, JLL said that regulatory changes in Europe could also impact market activity and potentially deter further investment.

In February, the Spanish government passed the “Right to Housing Law” bill aimed at controlling rental prices and making housing more affordable. Landlords that leave houses unoccupied for more than two years will face higher municipal tax rates, while the new law also caps rental prices in areas deemed “stressed” because of high housing demand.

Last year, Germany’s highest court ruled that the government’s similar experiment with market intervention was illegal following the introduction of a rental cap in Berlin in February 2020. Real estate investors successfully argued that the move was unconstitutional on the grounds that the law could only be determined by the federal government rather than the state.

In 2022, the German federal court also denied a call for a referendum on rental freezes in Bavaria. Like Spain, Germany has struggled to solve its housing crisis, with supply failing to match spiralling demand.

Elsewhere in Europe, the Irish government has introduced tighter rent controls and a transfer tax surcharge on bulk purchases of single-family rental homes. In December, the rules were amended so that rent cannot exceed inflation or increase more than 2 percent annually, depending on which is lower.

Investors will be conscious of the impact further government regulations in 2022 and beyond may have on the market, but with a supply crunch in many countries rumbling on, authorities will also be wary of deterring private capital.

Dallas continues to dazzle

“Five of the top 10 multifamily investment markets [in the US] have seen a big jump in recent years. And investment activity is trending well above historical annual averages,” says CBRE Americas head of multifamily research Matt Vance. These include Dallas/Fort Worth, Phoenix, Houston, Miami/South Florida and Atlanta.

Vance notes that renter demand and a healthy, but manageable, supply pipeline have pushed vacancies to a new record low of 2.3 percent. These strong fundamentals and the short-term nature of apartment leases have positioned the sector well to capture the persistent inflation and net operating income growth. Colliers director of research, US capital markets, Aaron Jodka, points to the strength of the Dallas market in particular. “Last year, Dallas had more sales volume ($29.1 billion) than the entire region of the Mid-Atlantic, Midwest, or Northeast (individually, not all three combined). Dallas has been the top investment sales market since 2016.”