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United States Multifamily Capital Markets Report

May 2020

Newmark Knight Frank presents the First Quarter 2020 United States Multifamily Capital Markets Report.

Sales Volume

Despite the fact that sales volume totaled a robust $37.9 billion in1Q20, deal activity decelerated in mid-March due to COVID-19 as travelrestrictions and shelter in place orders were implemented. Transactionvolume is expected to weaken in the second quarter as many sellers arereluctant to bring deals to the market. However, special situations andoff-market transactions may arise with REITs and open-end funds facingredemptions looking to raise liquidity.

Cap Rates

After declining in each of the last three quarters, cap rates nationally rose to 5.47% in the first quarter of 2020. Early indications point towards yields adjusting after March, with some investors seeking out discounts compared to 2019 pricing. With the 10-year treasury note at historically low levels at the end of 1Q20, multifamily properties offer a 477 basis point yield spread.

Rent Growth

Over the last 12 months, annual effective rent growth remained flat at 3.0% while quarterly rent growth rose 130 basis points to 0.5% in the first quarter of 2020 compared with 4Q19. With eight of the top ten markets for rent growth in the Sunbelt, the region remains a strong opportunity for income growth investors even as rates are likely to slow due to the impact of COVID-19.

Supply and Demand

New supply for the first quarter of 2020 totaled 70,319 units, outpacing demand by 42,714 units. Prior to the Coronavirus outbreak, new supply was projected to reach a record level of 350,000 units by year-end. While many of the projects have broken ground, some of the new supply projected for the year will likely be delivered in 2021. Inventory growth was strongest in Austin, Charlotte and Orlando, three key Sunbelt markets that saw substantial net migration and job growth in 2010-2019.

International Capital

Direct international capital sources invested $12.5 billion into US multifamily over the past 12 months, representing a 21.1% decrease year-over-year. 70.9% of acquisitions by international groups have been in non-major markets. However, it’s possible that international groups will shift preferences to core offerings in major markets which are considered to be “safe havens” in light of COVID-19.

Debt Markets

Mortgage debt outstanding grew by $30.5 billion to $1.53 trillion, a 2.0% quarter-over quarter increase. Originations by Fannie Mae and Freddie Mac declined to $24.2 billion in the first quarter of 2020, down 20.1% year-over-year. Both lenders remain active to ensure stability and liquidity in the market.