The multifamily industry withstood the 2020 recession better than most property sectors and market decline was less than in prior economic recessions. Still, it was a challenging year as many landlords and property owners lost rent payments and additional income from waived fees, deferred rents, and delinquencies.
The COVID recession impacted urban submarkets significantly more than suburban ones in 2020, with five major COVID-19-related factors decreasing the appeal of urban submarkets. These factors included remote working requirements; the reluctance to use public transit; the closing of a portion of urban amenities and desire for more living space; and the desire for greater access to the outdoors.
Two economic factors surfaced as core challenges for the urban submarkets. First is income insecurity. The loss of jobs, reduced incomes, and loss of confidence in future income and employment opportunities are challenges to maintaining high-rent properties. While most industries are recovering steadily, some still struggle, including entertainment, tourism and hospitality.
Second is the prevalence of remote work. With work-from-home/work-from-anywhere practices now common for employees, living near the workplace is becoming far less important. CBRE estimates that only 30% to 60% of workers are back in the office, translating to a decreased emphasis on living near bricks-and-mortar offices.
The last non-COVID-related shift is due to Millennials reaching life stages where urban living is being traded-in for larger housing options in less-dense submarkets. This trend is likely to put downward pressure on urban multifamily demand. Gen Z appears to favor urban living, but they constitute a smaller portion of the overall population.
We've written extensively on COVID-19's impact on the residential rental market over the past year. We even commissioned an independent study on the topic, the Effects of COVID-19 on Residential Rentals, 2020 Survey Report. Today we want to look at three challenges specifically impacting the urban multifamily market.
First, is a look at high rents in urban communities. Many renters struggled with the cost-benefit calculus. With fewer benefits from urban living, the justification of the high cost of urban living comes into question. As urban living conditions improve, high rent will become less of a factor. However, some remote renters who became accustomed to more affordable suburban rents may not return due to costs.
Next comes living space and outdoor space—specifically, the lack thereof. The pandemic made us all take a good, hard look at our living spaces. Larger living spaces surfaced as a top amenity as renters spent more time at home.
With steadily improving market conditions, multifamily investment volume is expected to increase in 2021. Multifamily segments that had greater market deterioration in 2020—such as high-end assets in urban submarkets may not stabilize until well into 2021 and present more investment risk. Buyers may seek pricing discounts for such assets, but significantly discounted pricing will remain difficult to find.