Strong Fundamentals Lead to Bullish Sentiment About Multi-Family Market

The multi-family panels participating in the Winter 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey predict interest rates will increase faster than inflation and anticipate drops in vacancy rates through 2024. Demand for single-family detached homes remains strong in the suburbs, but stakeholders in the multi-family sector are confident about the coming three years.

As evidence of their confidence in the market, nearly half of the participating developers in the Bay Area and Southern California currently have plans for multiple developments over the next year. The majority of developers expect to see growth exceed supply as workers return to the office. Marc Renard, Executive Vice Chairman of Cushman & Wakefield, and Heather Riley, Land Use Partner at Allen Matkins, offered their insights into these multi-family trends.

1. Hottest Multi-Family Markets Are Around Transit

Increased infrastructure spending and growth in the logistics industry are increasing the demand for multi-family housing in inland communities. Those who don’t want a long commute are likely to look for housing closer to where they work. In both cases, demand for public transit is a key factor in choosing where to build multi-family housing.

This is no surprise to Riley, who admits that there’s always a market for multi-family housing throughout the state. The difference, she notes, is that “the opportunities and incentives are built around transit.” State and local governments have passed bills to encourage development close to transit areas.

She points to San Diego as an example of this trend. Developers building downtown can build almost unlimited units if the project is located near transit and meets certain requirements.

2. Expect to See a Return to the City

The Omicron variant may have delayed returning to the office, but a strong rebirth of activity in central business districts hints at a renewed interest in city centers. Consumers—especially younger workers—want access to city amenities and prefer being close to work to reduce commute times when they do have to return to the office.

“Don’t bet against the urban core,” says Renard. “What we’re seeing in the city is not an urban exodus, but rather an urban reshuffling.” The United States is a relatively mobile nation. To understand demographic shifts, it’s important to consider all of the factors affecting where people choose to live: politics, quality of life, affordability, and more.

Riley acknowledges the benefits to building in the downtown cores but notes that urban exodus is still a consideration as she references some of the incentives the government is offering for multi-family development, especially when it is located near transit and existing commercial centers. In addition to making it easier for people to build accessory dwelling units on their property, authorities are dropping impact fees for smaller units like micro-units, which can fit well within a suburban or urban landscape.

3. California’s Housing Crisis is Not Getting Better

“There’s a housing crisis in California, and it’s not getting any better,” reports Riley. “People need a place to live.” Multi-family housing is one solution to the problem. Not only does it help get people off the street, but it also paves the way for residents to move up to the next level of housing, according to Riley.

Demand for multi-family housing does not automatically make it possible to build. Groups that oppose development can still rely on the California Environmental Quality Act (CEQA) to delay or defeat projects. For this reason, many developers are trying to build as many units as they can under the umbrella of ministerial work, which does not trigger CEQA.

4. Strong Fundamentals Support Forecasts for Continued Growth

The panelists don’t dismiss some degree of change in demand when people return to work in the office. At the same time, they admit that the office culture has changed, and employers may allow for more flexibility for continued remote work on a part-time basis. Riley points out that many multi-family developers are incorporating workspaces in their designs in new and non-traditional ways.

Renard adds, “Multi-family development still represents one of the most compelling risk-adjusted return investments in the marketplace today.” Supply and demand fundamentals are in check. He expects outside rental growth to continue and occupancy levels to keep tracking above historical trendlines.