SitusAMC: Record Level Of Multifamily Returns Prove ‘Extraordinary’ In Q3

SitusAMC, a provider of solutions supporting the entire lifecycle of real estate finance, reported that multifamily investment returns reached record growth in the third-quarter 2021 as rents grew to all-time highs. 

Third-quarter multifamily capitalization rates plunged to 4.5%, the lowest level in history, and nearly 180 basis points below their long-term average (LTA), according to SitusAMC Insights, the data, analytics and research division of SitusAMC.

“Though the industrial sector remains the superstar performer among all commercial real estate segments, the apartment sector’s growth is extraordinary,” said SitusAMC Insights Senior Director Peter Muoio, PhD. 

Apartment returns, as measured by the NCREIF Property Index (NPI), shot up 290 bps from the second quarter to 6.5% — a record high. The sector recouped its pandemic losses within two quarters and its performance has risen steadily since, increasing by over 600 bps from a year prior. Returns stand 450 bps over LTA.

“Capitalization rates for national, institutional-quality properties generally compressed over the last three years, but the COVID-19 pandemic accelerated the trend,” said Jen Rasmussen, PhD, vice president and head of thought leadership and publications for SitusAMC Insights. 

Metropolitan statistical areas (MSAs) in the Sun Belt—including Las Vegas; Phoenix; Riverside, California; and Tampa Bay, Florida— showed some of the highest returns, as did Charlotte and Raleigh, North Carolina, and Memphis and Nashville, Tennessee.

One of the reasons for high returns has been the influx of new residents moving into the areas. The Phoenix market, for example, experienced the largest increase in household migration nationwide during 2020. It also tied for the top spot in total migration with California’s Inland Empire, which benefitted from residents moving east from Los Angeles to Riverside. 

Meantime, capitalization rate compression was greatest in Phoenix; Tampa, Florida; and Charlotte, North Carolina. All three markets experienced a more than 100-basis-point decline from the prior three-month period.

Garden apartments nationwide accounted for a record 8.7% in returns, up 330 bps from the previous quarter and 740 bps from the third quarter of 2020. 

In the South, garden apartments skyrocketed to 9.5% returns, over 700 bps above LTA. High-rise apartments in the South scored their best performance in over two decades while low-rise apartments performed the best in 11 years. The average high-rise return was 5.5%, 350 bps above LTA, while the average return for low-rise apartments was 6.4%, more than 400 bps higher than LTA.