Small multifamily assets—those with 50 units or less—are enjoying favorable market conditions. Recent and historical vacancy figures provide quantitative evidence of their investment potential.
CBRE Research examined the historical vacancy data in the country’s three largest small-asset multifamily markets: New York, Chicago and Los Angeles. Together these metropolitan markets have about 1.1 million units in properties with less than 50 units, or roughly 23% of the country’s total unit count of small multifamily assets, according to Yardi Matrix. Other qualitative and quantitative evidence indicates the trends evident in New York, Chicago and Los Angeles are also taking place across other major markets.
Statistics Reveal Very Low Vacancies
In New York and Los Angeles, overall vacancy in small multifamily properties is less than 1.5%. Chicago is higher, but still low and healthy at 4.0%. The small-asset vacancy rates in all three metros are under the U.S. average vacancy rate for larger assets.
Vacancy rates have been trending down since at least 2011. Most of this tightening occurred between 2013 and 2015, with the largest annual decline in vacancy occurring in 2015. Since then, vacancy rates have remained mostly unchanged.
Among the three markets, Chicago had the largest decline in small-asset vacancy and, since 2015, its vacancy rate has been below the rate for larger properties. The Q4 vacancy rates for small assets in all three markets were below their 2011-to-2018 averages.
Small assets in all three markets have experienced less seasonal volatility in vacancy rates than larger assets, which have much more seasonal fluctuation. Small-asset vacancy also is less volatile through cycles. Although not evident in the 2011-to-2018 Yardi data, other statistics show that small-asset vacancy was less impacted by the 2008/2009 recession than the larger-asset market.
Five Factors Contribute to Low Vacancy
The cyclical and secular factors helping to create strong overall multifamily demand are also helping small multifamily properties. In addition to the broad multifamily demand drivers, the small-asset segment has five unique drivers contributing to low vacancy:
- Anecdotal evidence indicates that small multifamily assets have higher retention and lower turnover rates than larger assets. For the broader multifamily market, turnover averaged 46.8% of all sizes of communities in 2017 (most recent national figure available), according to the National Apartment Association. For small assets, the loss of just a few residents can create a high vacancy (e.g., if three residents vacate a fully-occupied 35-unit property, vacancy goes from 0% to 9%). However, residents in smaller assets typically live in the units for longer periods than those in larger assets.
- Most small assets in the U.S.—and certainly in the metropolitan areas analyzed—are older and located in urban neighborhoods, many of which have experienced considerable gentrification and increased popularity in recent years.
- The multifamily industry’s increased amount of property renovation and redevelopment in recent years has included smaller properties. The improved quality has added to small-asset rental appeal.
- Development of new communities with less than 50 units has remained at low levels over the past decade. Most multifamily development in this cycle has been of larger communities. Many of the companies building smaller projects in previous cycles were local builders; during the past recession, many of those companies went out of business and never returned. Higher land and building costs have been prohibitive for those builders who remain operating. For larger mainstream developers, the economics of building small properties are not as appealing as those of larger properties.
- Small multifamily assets typically have lower rents than larger assets. The small assets’ older age and lower level of amenities partly explain the lower rents. Even if the properties have been renovated, rents still come in under the newer and larger product in the same neighborhoods. Having a rich amenity package and a newer community are not important to all renters; location and more affordable rents can be very attractive. Furthermore, lower rents open these assets to a wider pool of potential renters, assisting owners in maintaining lower vacancy rates.
The near-term outlook is for continued low vacancies in small multifamily assets in New York, Chicago and Los Angeles, as well as other major markets. Strong multifamily demand, very limited new supply in the communities where small assets are located, improved neighborhood and product quality and attractive rents for potential renters should all contribute to maintaining very low vacancies in small multifamily assets for the next few years.
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