In the first quarter of 2020, I sat down with my colleague Jordan Karr to discuss the state of multifamily markets; however, before publishing the conversation we could see that the state of play was beginning to shift, as COVID-19 began to dominate headlines and weigh on expectations. Now that we are just past the mid-year point, Jordan and I connected again to see how multifamily markets are developing. The following are excerpts from our mid-year conversation.

Jordan is an account executive at Reonomy. In his current role, Jordan helps brokerage, investment, and lending organizations to leverage Reonomy data and applications in their business and decision-making processes. Prior to joining Reonomy, Jordan cut his teeth at Marcus & Millichap in the New York and New Jersey area.

Omar: So far this year has been quite a roller coaster. The first few months of 2020 — pre-COVID 2020 — seem both recent and very distant. So much has changed in so little time. What do you recall about the macroeconomic environment as we were entering 2020?

Jordan: The long-term broad-based economic expansion continued as it had since the global financial crisis. Gross domestic product (GDP) was growing between 2.0% and 2.5% annually, which was perhaps a bit more moderate than economic growth during other expansions, but the continued positive growth meant that the expansion coming into 2020 was the longest on record. The combination of deregulation and a low interest rate environment in the last few years meant that there was a bit of additional growth, which seemed to be helping to offset some of the economic drag from trade regulation. And finally, the labor market in the first two months of the first quarter was incredibly strong — with the unemployment rate near all-time lows and showing no apparent signs of weakness.

Omar: A broad economic expansion and tight labor market helped wage growth to continue to continue to outpace inflation and boosted consumer confidence. So, how did the national multifamily market look at this time?

Jordan: All of this backdrop supported continued strength in the multifamily market across the country. Single family housing production was still a bit low compared to historical levels — and this was due to main reasons. First, the shift in preference for renting by many young adults, and second, the challenge that many would-be homebuyers faced with securing down payments. The result from all of these factors combined was continued positive effective rent growth across multifamily properties and continued cap rate compression across almost all market tiers.

Omar: How does the recent multifamily market performance compare to past periods of performance?

Jordan: At the end of the expansion in 2020, we were seeing an increase in interest for multifamily across the spectrum. While there was demonstrated appetite for higher-end and luxury properties, benefiting from the continued urbanization trend, we also saw affordable and workforce housing garnering greater attention and higher valuations, as it, too, was benefiting from the tight supply of units.

Omar: Were there any markets in particular that have caught your attention?

Jordan: Yes, some of the top markets were those with a track record of good job growth, which could support rent growth, and in areas with cheaper costs of living. Markets such as Phoenix, Tampa, Atlanta, San Diego, and Dallas come to mind.

Omar: And how has COVID-19 changed the multifamily investment landscape?

Jordan: At the start of 2020, I think it is fair to say that nearly everybody in the multifamily space had positive, if not high expectations for the year ahead. However, when COVID hit, the first reaction we saw was that transaction activity dropped off sharply, as slated deals were either delayed or cancelled while buyers tried to assess the situation. But we’re starting to see recovery in the job market, and deal activity is resuming.

Omar: What are some trends to watch going forward?

Jordan: One of the big questions that I’m interested in is, to what extent will COVID interrupt or even reverse the past urbanization trend? A real case can be made that the smaller markets with lower cost of living may stand to benefit greatly in the post-COVID world, especially if remote work is more widely adopted and employees have greater ability to relocate away from their company headquarters or physical office locations.

Omar: I agree with you on that point and wrote about that briefly in a recent Reonomy Research report (“Resilient, Not Invulnerable”). Are there any specific areas of concern?

Jordan: Mortgage rates continue to be very low compared to historical levels, which could increase the attractiveness of purchasing for some; however, the availability of this low-cost financing is still to be determined before it really can move the needle for multifamily. Also, as you wrote in that same piece, effective rent growth may face some challenges in the near-term as unemployment is still elevated and as government relief transfers to consumers burn off. All in all, I think that there are more reasons to be positive than negative. Multifamily is a defensive property type and will continue to be one. Some markets may see valuations come down a bit, as the recovery will reshape how we work and where we live, but other markets will stand to gain from this.

Omar: Jordan, I hope you are right and thank you for taking the time to speak with us today.

Jordan: Thank you.