Affordability, lack of supply continues to drive demand and bolster rent growth

By Lori Santarelli and Michael Moran

 Housing issues are currently front and center with affordability issues plaguing many parts of the country as the pandemic is putting more pressure on housing costs and increasing housing prices. The tragic dynamics of the COVID-19 crisis has devastated urban retail and small businesses where density is most intense, a reflection of the problems besetting the “Class A” multifamily luxury segment, where vacancy rates have spiked. But the combination of affordability, proximity to vibrant central business districts and greater living space provided by Class B and Class C apartments – precisely those targeted by PCRP Group’s investment strategy – are thriving.

Nationwide the median price for a single-family house rose 12% from just a year earlier.  Low mortgage interest rates and increased demand have made it more difficult for first time home buyers to qualify to purchase a home or even save for a down payment. And it has disincentivized mortgage lenders from extending credit to first-time and marginal buyers, supercharging the multifamily rental market.

Not surprisingly, in the near-in suburban markets where we at PCRP Group concentrate on investing, there has been a flood of migration from the urban core to less dense areas, and we see that as a trend that will likely continue, driven not only by prices and credit dynamics, but also by the reality that many employers report that in the post-pandemic economy, more of the workforce will be permanently “remote,” perhaps spending a few days a week in an office, but mostly working from their own homes.

Fully 69% of companies surveyed in the recent S&P Global Market Intelligence’s Digital Pulse report that the pandemic revealed that 75% of their employees can work remotely without negatively impacting productivity.   As a result, 64% of companies have determined that they will increase remote working capabilities permanently, downsizing their own expensive central city real estate footprints.  This will hurt center city businesses – and the lunch trade, tailors and retail outlets that will now serve fewer commuters. It will also persuade far more households to reassess whether or not they need to live within daily striking distance of the office.

Tragically accurate

Long wary of the upscale “inner core” urban development that powered some residential real estate development firms since the 2009 global financial crisis. These Class A luxury high-rise market dominated new supply coming online during the past decade, and PCRP Group saw that as an imbalance that was going to end in tears. Not only was Class A overpriced and overbuilt, they were entirely beyond the means of the huge middle class and working class families that are the key to housing demand.

As 2020 draws to a close, PCRP Group’s forecasts have proven tragically accurate, driven by the sad calculus of the pandemic, with its unemployment spike, lockdowns and mandates for social distancing. Millennial and Gen Y renters, still facing significant headwinds in obtaining mortgages and showing a consistent preference for the flexibility that rental living affords, are planting their flags in multifamily housing within striking distance of the amenities of city centers. In droves, they’re choosing to live in Class B and C+ developments that provide safe and comfortable living – including extra space for that “remote” working environment ­– at more sustainable prices.

Moody’s Analytics reports that the vacancy rate for Class A buildings – in effect, the number of units that produced no rental income for their investors – jumped to 6.4% at the end of September 2020, up from 6.0% at the end of 2019. During the same period, the Class B and C properties that PCRP Group focuses on increased only slightly, to 3.7% from 3.6%. At a time when demand for housing is intense, the Class A figures are a warning about their ability to produce returns, and indeed this increase took place during a period when eviction moratoriums and significant government stimulus was holding back the dam. (More on this below).

The “pricing out” of working families pre-dates the pandemic, of course. For four years now, US Census Bureau figures have shown that Millennials ages 25-39 have been leaving big cities for the greener, less expensive suburbs located just outside many of the same metropolitan areas (MSAs or “Metropolitan Statistical Areas”) targeted by PCRP Group’s model. Five of the 10 MSAs identified by the research group Smart Assets as top destinations for millennial renters are in our sights, and the rest are in the Top 20.

Resilience and returns

The “R” in PCRP Group’s name, “Resilience,” refers to more than climate dynamics. In fact, those MSAs that have performed best look at resilience as a holistic concept, from climate to tax policy to demography. So, it is no surprise to us that rent growth in these suburban multifamily apartment markets that we target have outperformed other markets during the pandemic. Below is a timeline of how multifamily rent performed nationwide during the COVID-19 pandemic and its associated economic disruptions:

  • Q1 2020: Rents increased consistently across core markets as well as suburban markets
  • Q2 2020: Rents declined across the board in both core markets as well as suburban markets; however, rents declined faster in core markets than in suburban markets
  • Q3 2020: Rents continue to plummet in core urban markets, but a rebound begins in suburban markets.  According to Globe Street, by October suburban rents had increased 0.5% since the start of the year – a year that saw urban economies virtually shut down, sometimes multiple times.

So, what’s next?

Anyone who tells you they know what the effects of COVID-19 will be in 2021 is trying to sell you something. The fact is, no one has accurately forecast the course of the virus or its effects on the US economy or its real estate sector with any reliability. Our stance has consistently emphasized caution and the fact that this is, by definition, an unprecedented moment in economic history.

The political gridlock in Washington has not helped, of course, nor has the disturbing uncertainty that surrounded the 2020 general election. With that (hopefully) in the rear view mirror, some points bear mentioning before we make any predictions or, more importantly, before we have confidence rolling out multifamily projects to our investors:

  • Stimulus Interuptus: As of this writing, the US Congress has proven unable to agree on another round of economic stimulus despite very high unemployment rates and signs that the economic pulse that began to beat tentatively in Q3 is faltering. This speaks directly to tenants’ ability to pay rent and represents a serious uncertainty as 2021 dawns. Whether or not Congress acts should not be laden with this amount of uncertainty. Sadly, it’s a crapshoot.
  • Eviction Moratorium: Among the provisions Congress has left to change is an eviction moratorium that was imposed in Q2 by the US Centers for Disease Control for epidemiological reasons. This moratorium, barring 11th Hour, Christmas Eve action by the Congress, will expire on December 31. The impact of this nationally is almost impossible to predict, and it is debatable whether real estate investors who may have been carrying non-performing units during the pandemic will be able to quickly find tenants in the current economic conditions. At the very least, the courts – as hamstrung as any institution by the pandemic – will struggle to manage the flood of eviction actions filed in Q1, and a new Congress may very well act to reimpose the moratorium.
  • Vaccine Exuberance: The arrival of several vaccines able to confer immunity to the virus is an enormous accomplishment and has to stoke optimism. But in the US (and around the world also) these vaccines will not begin to be available to the general public until at least the end of Q2 and possibly not until mid-summer. That means, for all the cheer everyone should feel about these anti-COVID weapons, there are still months and months of pain, human and economic, to endure.
  • DeUrbanization: Even when the pandemic subsides, dramatic new trends in where people live and work will be in play. The pandemic spawned a test-case of remote working global in scale, and the idea that the world’s corporations will “return-to-normal” and continue paying the kinds of business district commercial real estate rents that existed beforehand is naive. Emerging financially pinched, the corporate sector will look hard at their real estate footprint as a place to balance the books. This will have knock on effects not only for the retail sector, urban tax revenues and transportation industry that moved tens of millions daily to center city jobs, but also for residential real estate around large cities. Will people want to live inside dense metropolitan areas? The answers given right now usually depends on what’s at stake, financially, for the source.

PCRP Group believes this presents a landscape of risk and uncertainly that simply is not reasonable to expose our investors to at this time. We continue to believe that a tipping point will be reached with regard to fiscal and monetary stimulus that has prevented the worst so far. In that regard, the relationship between the Democratic House and Republican Senate will be a key factor. Compromise will be necessary to cushion remaining COVID-related distress if the US economy, and the multifamily housing market, is to avoid a downturn.

But the fundamental resilience of the Class B and Class C residential real estate market as an investment has again been proven during this crisis.


As in 2008-2009, when this class of housing investment outperformed all other real estate assets, we remain bullish on multifamily real estate as a long-term producer of passive (tax-advantaged) income and a builder of wealth.

This will be our last newsletter for 2020, so we want to wish you and the world a very Happy Holiday season and a very happy, healthy, prosperous (and much improved) New Year.