As we look ahead in 2021, there are positive signs that the economy may be on track for a recovery. Approvals of COVID-19 vaccines have presented a light at the end of the tunnel for what has been a long and highly disruptive time for our industry.
In the last year, virtually every asset class in commercial real estate has been impacted in one way or another. Retail and hospitality have borne the brunt of the economic fallout, as social distancing and local lockdown measures have impacted the ability of people to shop and travel. Conversely, the continued shift to online shopping and the need for more people to work remotely have created additional demand for industrial and data center assets. While the multifamily sector may not have been propped up by the pandemic, it has maintained strong performance throughout this period of uncertainty.
Historically, during economic recessions, the multifamily sector has been resilient and has recovered more quickly than other real estate asset classes. Based on the NCREIF Property Index returns, multifamily assets lost 27.6 percent in value during the Global Financial Crisis, but it took only 13 quarters for the sector to regain its pre-recession peak — faster than all other property types. A Pension Real Estate Association survey in the fourth quarter expected the multifamily sector to be the second strongest after industrial in the next few years, with projected total return growth of 5.8 percent annually between now and 2024.
While there was a pause in investment activity in the early days of the pandemic, we saw it pick up again throughout the latter half of the year as multifamily investors moved off the sidelines. We expect this activity to accelerate in 2021, especially as uncertainties continue to clear and attractive financing is readily available.
As multifamily investors with a 50-year track record, we have navigated numerous economic and real estate cycles, and we aren’t seeing the same level of value declines as previous downturns. In fact, after a pause in investment activity in the second quarter due to uncertainty at the onset of the pandemic, our investment activity has rebounded. Sentinel made as many investments in 2020 as we did in 2019, with asset values at or close to pre-pandemic levels. However, some differentiations start to appear when you look at specific markets.
For instance, the flight from dense urban environments has negatively impacted Class A properties in core markets. This has been exacerbated by household consolidation as young professionals move home and a steady supply of new product has continued to hit the market. On the whole, luxury units are taking longer to lease as demand has shifted to lower-priced housing. Markets that have seen the biggest decreases in rent growth include New York, Los Angeles and San Francisco — some of the highest-priced U.S. markets.
For some of the same reasons, lower-density cities and suburban markets that were experiencing positive demographic shifts prior to the pandemic have seen those trends accelerate. In particular, markets that are in or relatively close to large metropolitan areas and situated in good school districts should continue to perform well. As a result, according to CBRE’s 2021 multifamily market outlook, suburban markets are likely to lead the recovery in 2021, while urban submarkets will lag. There are markets with strong fundamentals that we’re targeting with this in mind.
We continue to believe in the long-term potential for core urban markets and believe that there will be unique, opportunity-driven strategies in such markets in the short term. Moreover, the Urban Land Institute’s Emerging Trends in Real Estate 2021 indicates that large cities and urban centers may struggle over the next several years; however, the “COVID-induced pause in their appeal” is not likely to be permanent. Patient investors that are well-capitalized and have a track record of investing in these environments will be best positioned to capitalize on these opportunities.
If there’s one thing our decades of multifamily experience have taught us, it is that the fundamentals remain, even in the wake of economic upheaval. People will always need a place to live and we invest for the long term, not the immediate disruption. While 2020 was unpredictable, it confirmed the viability of that strategic outlook
Michael F. Streicker is president of Sentinel Real Estate Corporation.