Bigger is Not Always Better: Multifamily Trends

Adnan Zai

The pandemic has turned the nation upside down and changed the way of life for most Americans. Remarkably, the positive trends for multifamily investing have been holding strong. Over the last five years, investment into non-major markets has increased 13.9%. Aside from the fact that there are more metros to choose from, and therefore more quality investment opportunities, investors are realizing that there is more value to be found in smaller markets compared to the largest cities.

Three-Quarters of Multifamily Investment Outside Major Metros

Small markets outside of metro have definitely been good for multifamily investors, even during the pandemic. Globe St. reported that “75.8% of multifamily investment happened outside of major metros last year, according to new research from Newmark.” That percentage is a key to understanding how smaller metro areas were better for multifamily investors, and how they can be a substantial addition to an investment portfolio in the coming years.

The pandemic definitely wreaked havoc with rentals throughout the nation, especially in the largest markets, but there are some positives that have shone through the troubles. Recent reports show that there were several smaller metro areas that surpassed the national average for rent growth. New evidence in Globe St. reported that “Phoenix, Philadelphia and Kansas City all had significant rent growth during the pandemic of 5.5%, 3.2% and 2.8% respectively. This is impressive considering that many markets, including the nation, saw average rents decline during the pandemic.”

There are several reasons multifamily investment has maintained its strength during a difficult economic cycle. CREXi reports that “low-interest rates, limited housing supplies and population migration to the south and west have all contributed to the rise of multifamily. All of this was happening prior to the pandemic—but the pandemic helped accelerate the process.” Social trends favoring larger living area and access to private outdoor space have supported a shift towards smaller metros compared to overcrowded primary markets.

Where Do We Go from Here?

The future looks bright for multifamily investors in smaller markets, and the trajectory seems like it will hold. CREXi reports that “smaller markets, those with a population of less than 2 million, are seeing 4% or higher in growth due to favorable supply/demand.” This amount of growth, when the nation is struggling in the midst of the pandemic, is a really positive sign.

The Multifamily 2021 U.S. Real Estate Market Outlet reports, however, that not all markets will immediately stabilize. “Multifamily segments that had greater market deterioration in 2020—such as Class A assets in urban submarkets, particularly in gateway cities—may not stabilize until well into 2021 and present more investment risk.” Unlike secondary markets, the largest metros will take some time to return to normal.

The Multifamily 2021 U.S. Real Estate Market Outlet report goes on to report that there are many opportunities for multifamily investors. Acquiring assets in the secondary markets, particularly in the Southeast and Midwest regions, will give great opportunities for investors who look for excellent market performance and continued revenues. According to the Multifamily 2021 U.S. Real Estate Market Outlet report, “In the Midwest, Indianapolis was the best-performing market in 2020. Memphis, Detroit, Columbus, Cleveland, Cincinnati, Kansas City, Louisville and St. Louis also were among the best in the country.”

Although the pandemic has turned the nation upside down, multifamily investors seem to have landed on their feet. As the country shifts, the Southeast and Midwest will be stalwarts for multifamily investments. Despite the troubles of the pandemic, the positive trajectory of the last five years will continue and allow multifamily investors to continue developing their portfolios in smaller metro areas.

Adnan Zai

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