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Markets and Trends

Commercial Real Estate Investors Follow Migration Trends

What the U.S. housing shortage means for commercial investors

Housing shortfall back in the spotlight.

Employment growth, reopening economies, and the revival of population mobility in the first half of 2021 led more people to search for residences after being locked in place during much of last year. This amplified the ongoing housing shortage in the U.S., a storyline that was largely camouflaged by more pertinent narratives that emerged during the pandemic. Despite record levels of both single-family and multifamily development, demand is poised to outpace supply and could further aggravate the shortfall in the coming decade. More than 1 million new households are expected to form in every year through 2031, a pace that builders will struggle to keep up with. The current landscape of historically high material costs and insufficient labor in the construction industry will institute additional hurdles as well.

Demographics and widening affordability gap foretell greater renter demand.

The accelerated rate of household growth over the next several years is primarily due to the aging Millennial cohort. The largest segment of the grouping is reaching their early 30s, an age range that has typically aligned with family formation and the transition to homeownership. The housing shortage has pushed single-family sale prices to new heights, though, raising the bar to become a first-time homebuyer. The difference between an average monthly apartment rent and a typical mortgage payment on a single-family house in the U.S. more than doubled over the past year. As a result, many households that would like to buy a home but are priced out are opting to rent, directing demand toward multifamily housing, particularly luxury units for those on the margin. At the same time, some young households prefer the flexibility of a shorter-term apartment lease and reduced maintenance costs as well as the lifestyle and amenities that higher-quality apartment complexes offer. Improved demand for luxury rentals was reflected in the national Class A vacancy rate falling 100 basis points in the second quarter to 4.5 percent.

Economic momentum catalyzing multifamily sector.

In a clear illustration of the state of the recovery so far, the multifamily sector posted one of its strongest periods of performance in the second quarter. Over 218,000 apartments were absorbed in the April through June timeframe, a record going back to at least 1993. The surge cut the national vacancy rate to 3.8 percent, nearly in line with the 2019 low of 3.7 percent, while effective rents climbed above pre-pandemic levels. The strong increase in renter demand was driven by multiple factors, including employment growth and household formation. More than 1.7 million jobs were added in the U.S. during the months of April through June, spearheading the strongest quarter of household formation in nearly 20 years. Many who were previously jobless found a sustainable source of income, which enabled them to move into their own residence after living with family or friends during the pandemic.

Downtown apartments strengthening as young adults find jobs.

Many recent college graduates were unable to find employment last year when the pandemic disrupted hiring activity. Some were able to fulfill remote roles, which may have prompted them to live with family or friends through the health crisis to save on expenses. Now, as companies are beginning to bring workers back into the office and ramping up hiring, more of the younger generation are accepting jobs and relocating. This is a tailwind for apartment demand, especially in urban areas as people in their 20s often prefer the downtown lifestyle and nearby amenities. The allure of living downtown has been revived by the reopening of shops, entertainment venues, and attractions. These trends were exemplified in the second quarter when the urban cores of major markets combined to record 40,000 units of absorption, the largest quarterly total dating back to the beginning of this century.

Investors focusing on outperforming Sunbelt markets, pressuring cap rates.

Many people are prioritizing quality-of-life and cost-of-living considerations when deciding where they want to live, which is bolstering relocations to the Sunbelt. Phoenix, Dallas-Fort Worth, Atlanta, Houston and Las Vegas each recorded in-migration of at least 35,000 people last year. The additional residents are boosting apartment performance in these metros, garnering the attention of more investors. In Phoenix, vacancy cratered to a historic low of 3.2 percent in the second quarter, which produced an eye-catching 16.6 percent year-over-year jump in the average effective rent. Similarly, vacancy in Las Vegas fell to a decade trough of 3.3 percent, resulting in a 13.9 percent rent climb year over year. Other metros with annual rent growth exceeding 12 percent include Riverside-San Bernardino, Tampa, Sacramento and Jacksonville.

Many commercial real estate investors are following migration trends and concentrating on secondary and tertiary markets in the Sunbelt, which is expanding the buyer pool and intensifying competition for assets. The average price per unit of transacted apartments grew by more than 10 percent over the past year in Phoenix, Columbus, Jacksonville, Atlanta, Las Vegas and Pittsburgh. Nationally, the average price grew by half that amount at five percent annually to $171,000 per unit for trades priced $1 million and above. The average cap rate, meanwhile, dropped to 5.1 percent, which is the lowest measure in more than two decades and down 100 basis points from 2013. On the other hand, price growth is lagging in some gateway metros like San Francisco and New York City. The recovery of these markets has turned the corner however, and opportunistic investors remain active.


John Chang serves as the National Director of Research Services for Marcus & Millichap. He is responsible for the production of the firm’s vast array of commercial real estate research publications, tools and services. Under his leadership, Marcus & Millichap has become a leading source of market analysis, insight and forecasting, and the firm’s research is regularly quoted throughout the industry and in mainstream business media.

John oversees a team of dedicated real estate research professionals who produce the firm’s more than 1,000 annual market research publications and conference presentations. These detailed reports, analyses and presentations integrate economic and financial market trends with insights on all major commercial property types including: Hotels, Industrial, Manufactured Housing, Multifamily, Office, Medical Office, Retail Multi-Tenant, Retail Single-Tenant, Self-Storage and Seniors Housing.
John is a seasoned industry analyst who has been quoted in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force and the NAIOP Research Foundation. He regularly presents at a wide range of conferences and events hosted by industry-leading organizations such as the NMHC, NAIOP, ULI, CCIM, ICSC, SSA and numerous others.

John joined Marcus & Millichap in April 1997 as a Research Manager in the Seattle office. After holding executive marketing and e-business positions with premier residential real estate firms in the Pacific Northwest, he rejoined Marcus & Millichap in November 2007 as the head of its Research Services division. John was elected as Vice President in 2010, advanced to First Vice President in 2013 and promoted to Senior Vice President in 2018.