While we’ve survived the shortest recession in the history of our economy, the effects of the recession impacted by COVID-19 were devastating to parts of our economy, and the road toward a full recovery may be a long one.
A total of 22 million American jobs were lost in March and April as the economy was largely shut down to slow the spread of COVID-19. Today, 12 million of those jobs have been recovered, while approximately 16 million individuals are receiving some type of unemployment benefits. Most experts believe that remaining job losses may not be fully recovered until 2022-2023.
We certainly cannot underscore the impact of COVID-19, including the loss of more than 450,000 lives and significant disruptions to our economy and our livelihoods. Thankfully, the multifamily industry has weathered the storm better than most, particularly multifamily assets throughout the Sun Belt and the suburbs. The forecast for multifamily investments is bright, particularly for stable, suburban assets in secondary and tertiary markets in the Sun Belt and Midwest. The national trend of working from home has shifted demand from urban to suburban submarkets, according to a recent report by Marcus & Millichap. Housing supply is not meeting demand in suburban markets as vacancies decline and rents increase.
It shouldn’t be a surprise that the demand for suburban housing units is increasing. Sixty percent of the millennial population is now over 30 years old and beginning to start families. Additionally, construction trends over the past decade have disproportionately favored urban housing units compared to historical trends. Below is a chart comparing suburban and urban multifamily construction over the past decade as a percentage of all multifamily housing units built.
| 1990-1999 | 2000-2009 | 2010-2019 | |
| Suburban Construction | 95% | 89% | 52% |
| Urban Construction | 5% | 11% | 48% |
Additionally, the aftermath of COVID-19 has also accelerated the country’s migration patterns. The population has begun to shift from expensive, urban markets in California, the Northeast and Illinois toward the warmer, lower-cost, lower-tax suburban Sun Belt markets, bolstering demand for Class B apartments in this region which will drive rent growth and high occupancy levels for the foreseeable future. Below is a chart with the information provided by the National Multifamily Housing Council highlighting population growth and loss in select states over the past year. More than 1,000 people are moving to Texas every day while 660 people per day move to Florida. Conversely, almost 350 people leave New York every day.
Change in Resident Populations July 2019 – July 2020
New York: (126,355)
Illinois: (79,487)
California: (69,532)
Pennsylvania: (15,629)
Tennessee: 56,509
South Carolina: 60,338
Georgia: 81,997
North Carolina: 99,439
Arizona: 129,558
Florida: 241,256
Texas: 373,965
As we’ve been doing for the past decade, Timberland Partners will continue to target acquisitions throughout the Sun Belt (and Midwest) where employment and population growth exceeds the nation in search of strong risk-adjusted returns. However, in the next year or two, there will also be opportunities for contrarian investments. Some of the best acquisitions we made at Timberland Partners following the Great Recession were in Michigan at a when time institutional investors were drawn to the relative safety of the “sexy six” markets (Boston, Los Angeles, New York, San Francisco, Seattle and Washington DC). There could be some opportunities for contrarian investments in urban markets and markets that are experiencing population loss. Demand for apartments in urban cores will return once these areas are “fun” again. Presently, there are not many compelling reasons for downtown living. Restaurants, stadiums, offices and concert venues are still closed, for the most part. Once they open up and these cities are “fun” again, demand for housing will return.
Additionally, while much has been published about the population exodus of states like Illinois and New York, the fact is that suburban Chicago and suburban New York City are still growing as people native to those cities move outside the urban core to start families. It would be short-sighted not to review opportunities in these markets for an appropriate risk-adjusted return just because general population trends and subsequent investment capital are both migrating to the Sun Belt.
The next couple of years should provide a number of opportunities for individuals interested in multifamily investing. The industry should continue to experience tailwinds as the country’s demographic trends favor rental housing. 52% of people ages 20-29 are living at home right now, according to the Bureau of Labor Statistics. At some point, a large portion of this cohort will need to venture outside their parents’ homes and many will choose rental housing. Furthermore, single-family housing is not an affordable option for most of the population. According to Attom, during the fourth quarter of 2020, single-family homes were less affordable than their historical averages in 55% of all counties in the United States.
