In this week’s issue, we explore recent migration data and its impact on multifamily.
This Week’s Top Headlines
We start off with the week’s multifamily insights and then dig deeper into what migration patterns mean for the multifamily market. Let’s start with the top multifamily stories from this week.
- C-Class Vacancy: Only 3.8% of Class-C apartments were vacant at the end of 2021, down from 7.2% in 2010 — Wealth Management
- Rents: Multifamily rents surpassed pre-pandemic levels in many cities, increasing investment sales to historic highs — Globe St
- Growth: Multifamily growth in some large population centers rebounded from negative growth by posting gains in Q1 2022 — NMP
- Rates: After three weeks of easing, mortgage rates are back on the rise — CNBC
- Negative Leverage: Is also on the rise in the multifamily sector, where banks are making better returns from higher interest rates than investors themselves — Globe St
- Construction: The top 10 metros for apartment construction account for 40% of all units underway, with Dallas taking the top spot — MHN
- Absorption: The absorption rate of unfurnished and unsubsidized apartments jumped by 14% to 66% in Q4 2021, up from 52% in Q4 2020 — NAHB
- Home Prices: Rose at a seasonally adjusted annual growth rate of 28% in March, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index — NAHB
Main Takeaway: Affordable secondary and tertiary markets are poised for robust housing demand and growth in the coming years due to increased inward migration. Factors such as remote work and the labor market are enabling this, and will be exacerbated by increased household formation. This matters to multifamily investors because over the past 2 years rents in downtowns and high-density zip codes fell by 10%, whereas they’ve increase 20% in low-density zip codes.
Story: According to new Census Bureau research, smaller counties on average enjoyed net increases in migration over the past year, while larger counties (500,000+ population) generally seeing outward migration.
The Midwest and South benefited the most from this migration, with the West and Northeast seeing negative inward migration. Analysis of this data shows that more than any other reason, renters and homeowners moved primarily for new jobs.
Indeed, according to a recent CNBC article, 21% of workers in the U.S. took a new job over the last 12 months, and 40% of them are still actively looking for another job. This is causing significant mobility among the population.
According to a recent report from Realtor.com, out-of-market home shopping increased between Q1 2022 and Q1 2021, with gains concentrated in markets with relatively lower median listing prices (i.e. smaller markets).
So what’s causing these macro migratory trends? Let’s start with remote work.
A recent National Bureau of Economic Research (NBER) study found that the shift to remote work explains one-half of the 23.8% national house price increase since late 2019. And, migration accounts for one-third of that total effect on house prices.
The NBER estimates that every one additional percentage point of remote work causes a 0.93% increase in house prices. This is a ground-breaking study and proves what multifamily investors and owners likely suspected: Remote work enables migration which in turn increases real estate prices.
That said, if you’re a working-class renter then remote work really hasn’t changed much for you. This demographic is getting hurt further by inflation because the cost of living is increasing at record levels. This is why President Biden recently announced an action plan for housing supply, focused primarily on manufactured and more affordable housing options.
According to Harvard, household formation growth continued even after the pandemic started, with the total number of households up by 1.5 million between Q1 2020 and Q2 2021. The authors of the above study summarize that “increased working from home could spur additional household growth in suburbs and small metros, which was on the increase even before the pandemic began.”
Further, according Freddie Mac, sole-person households are on the rise, accounting for a total of 44% of all household growth. This indicates “a growing demand for smaller, more affordable homes—which are currently being constructed at near a 50 year low rate.”
Further to our previous newsletter on Gen Z, the largest U.S. demographic, this age group tends to prefer to live in vibrant suburbs, and remote work makes it more feasible for them to transition the less-populated and more affordable markets. Finally, as the immigration taps are slowly turned back on again, expect the demand for smaller affordable markets to continue to rise.
Using data from the US Postal Service and Zillow, we quantify the effect of Covid-19 on migration patterns and real estate markets within and across US cities…[W]ithin large US cities, households, businesses, and real estate demand have moved from dense central business districts (CBDs) towards lower density suburban zip-codes. We label this the “Donut Effect” reflecting the movement of activity out of city centers to the suburban ring. — Arjun Ramani & Nicholas Bloom
“I think we’re heading toward one out of five jobs being fully remote…it’s important to remember that only about 40 percent of jobs are capable of being done remotely. So…half of the white collar jobs that can be done remotely will be.” — Timothy Lee
Chart: Employee Compensation
According to NAHB, multifamily employee compensation costs rose 12% YoY in April. Here is a breakdown of the different roles, and stay tuned next week for an in-depth look at the labor market and multifamily.