Ongoing investor interest in defensive Living sectors

Global Real Estate Perspective, February 2021

The resilience of multifamily cash flows became a key theme of 2020 and throughout the pandemic residential rent collections have held at or just below historic norms. In the U.S., December rent collections were around the 93% range, in line with collections since the onset of COVID. As the secondary economic effects of higher unemployment and downward wage pressure have emerged, the sector is beginning to show some signs of stress. This is not widespread, but instead has remained modest and localized to premium urban locations and secondary locations that have a poor local amenity offer.

The impact of much higher levels of remote working, however temporary, is facilitating a re-evaluation of the mix of attributes that make up a desirable home. Where close proximity to work is less essential and can be aligned with lower cost of living options, renters have a wider range of choices compared with pre-pandemic. In general, this dynamic is playing out in larger cities where rental unaffordability has been most acute, aligned with the countries that continue to have restrictions on free movement.

The return to lockdowns and restrictions on movement have held back some enthusiasm for student housing assets. The combination of short-term cash flow uncertainty and practical challenges of deal execution removed some of the heat out of demand in this sector, though investors remain very positive on the sector fundamentals beyond the current turbulence.

Future trends: Long-term appeal and stability underpin high investor demand
  • Short-term: The rebalancing of multifamily demand towards suburban and some secondary urban locations will slow in 2021 as countries better manage the public health risks of the pandemic and, in some markets, as vaccination rates control the level of new infections. City living will have lost little of its long-term appeal and demand should return to higher-value downtown and CBD locations as health risks ease.
  • Long-term: It will take some time for city center take-up to reverse the downward rent adjustments, particularly in cities that have also experienced increased supply from the short-term tourism rental market. Occupancy will remain sensitive to rent levels well into 2022, with rental growth trajectories only expected to firm up with economic growth re-established. Nonetheless, investor demand and corresponding volumes will continue to be high due to relatively high and stable cash flows as investors renew asset allocation targets for the Living sector segments of student, broader residential and later living.