Looking Ahead: Real Estate Markets in 2021

January 25, 2021
By Soren Godbersen
Posted In: Market Commentary

The global outbreak of COVID-19 represents a massive sea change for commercial real estate markets. We do not need to belabor these points, but before turning to specific trends for 2021, let’s reiterate a few of the broad themes of the pandemic and post-pandemic world with respect to CRE:

  • Many of the macro trends evident before COVID have been accelerated by the pandemic, such as net migration of millennials to secondary and tertiary markets, and the continued growth in ecommerce market share. 
  • While gateway cities have experienced enormous short-term pain, the death of the city has been greatly exaggerated; cities yield irreplaceable network effects, are essential to economic innovation, and will attract new generations of knowledge workers. 
  • We are in the early innings of asset price reshuffling. The economic recovery will take many shapes across markets and property types, creating a broad array of opportunities for real estate investors. 

Let’s take a look at some of the key themes in real estate and capital markets in 2021, and how they are shaping our originations pipeline.

What Matters for Real Estate Markets in the Coming Year

Cities & Their Multifamily Markets in 2021 and Beyond

The population growth of urban cores has been slowing since 2011. The pandemic, and its attendant health considerations, may augment this trend in the coming years. Still, cities offer irreplaceable economic diversity, cultural opportunity, and network effects, all vitally important for younger professionals. It is much more likely that established urban cores will innovate and rebound cyclically than experience a permanent slump in population growth and economic activity. While the “urbanization of the suburbs” has been going on for the past decade, the “suburbanization of urban cores” may characterize core urban real estate markets in the coming years. The most economically vibrant cities the U.S. (and those hit hardest by the pandemic) are doubling down on urban green space, bike infrastructure, and the reclamation of sidewalks and streets for restaurants and foot traffic. 

Here are a few reasons we expect cities (and particularly core urban office and multifamily markets) to show resilience in 2021 and beyond:

  • A new generation: millennials, and their lifestyle preferences, have been the primary driver of key real estate trends for over a decade. Gen Z, typically defined as being born in 1995 or later, will be entering the workforce in droves, and will likely be drawn to the social, cultural, and economic opportunities of urban cores just like past generations. Generation Z is the most educated, culturally diverse, and technology-steeped generation ever, and should suffuse knowledge capitals with new cohorts of renters, consumers, and office workers. 
  • The urban core office is not dead: some pundits have predicted that the pandemic will sound the death knell for the central business district office. Indeed, with at least partial work-from-home adoption across most industries, most firms will look at traditional office space differently. However, survey data does not support the most pessimistic view: 98% of office tenants expect to reenter their office by Q3 of this year. The fundamental reason that traditional offices will not die off: firms and their people need them. The data on remote work productivity are mixed, but most office tenants believe that the collaborative and “chance encounter” benefits of a real office are essential and irreplaceable, even as collaboration technology improves. We can expect that many office tenants will pursue satellite offices, part-time and rotating office workforces, and other flexible arrangements. As such, office operators must be responsive to new use-of-space imperatives and to new health and safety demands, including updated HVAC systems and touchless entry. While this may introduce new costs in the short run, forward-thinking operators should be able to engineer profitability through creative floorplans and revamped leasing models.
  • Responsive markets: relocation by renters and reevaluation of office footprints by employers will put downward pressure on rents and asset values in gateway markets like New York and San Francisco. However, the cache, economic diversity, and density of these markets makes it highly likely that new office tenants and renters will respond to lowered rents, and that these markets will stabilize and rebound as the vaccine rollout progresses and as tourism resumes. 

The Looming Squeeze on Credit

No two recessions are the same, but deleveraging — both on the part of households and banks — tends to follow an economic downturn. Throughout 2020, credit markets were buoyed by an aggressive Fed that injected billions of liquidity. In 2021 and beyond, we can expect many traditional sources of capital to tighten balance sheets and practice more rigorous underwriting standards. According to an Urban Land Institute survey, 34% of real estate firms expect debt capital for acquisitions to be undersupplied in 2021, and 53% expect debt capital for development or redevelopment to be undersupplied, up from 8% and 20%, respectively, in 2020.

At a moment when distressed real estate investment opportunities may arise across a broad set of markets and asset types, this tightening may create a robust market for bridge financing instruments, driving average rates up and leverage levels down. Should this trend materialize, EquityMultiple will capitalize to evaluate preferred equity, subordinate debt, and senior debt opportunities on behalf of our investors, while also keeping an eye toward opportunistic equity investments to facilitate diversification across the capital stack

Possible Legislative Changes 

The incoming administration has spoken of financing a “caring economy” largely with taxes, or repeals of existing tax incentives, for the real estate industry. Notably, the administration has floated the idea of ending 1031 Exchange incentives in order to boost near-term tax revenue. While these notions may be troubling for real estate investors, we feel that it is unlikely that drastic changes to the tax code are imminent. The majority in both houses of congress is slim, and the multifamily lobby and other actors should exert enough influence to stave off precipitous change. 

Still, some aspects of “caring economy” could prove beneficial to real estate investors. The incoming administration has discussed bolstering tax incentives for affordable housing development, and reshuffling (potentially expanding) the census tracts eligible for Qualified Opportunity Zone benefits. 

In 2020, rent collections exceeded expectations in most markets, thanks in no small part to a robust fiscal policy response by the federal government. Returning to the most critical measure of economic health for CRE markets, the ability of the government to effectively combat the pandemic, and to deploy fiscal policy to buoy employers and renters, will be key to the resiliency of multifamily markets and office markets. Investments in infrastructure could also stimulate job growth and provide a lifeline to cities and states hit hard by the virus. 

Inflation…Is That Still a Thing?

If you ever took an intro macroeconomics course, you probably recall the classic positive relationship between economic growth and inflation. This relationship generally failed to materialize over the record 12 year run of job growth, ending in 2020. What’s more, the flood of stimulus money into the economy following the financial collapse–an increase in the supply of money–did not effectuate a large spike in prices, as macroeconomic orthodoxy predicted. The experience of the past several decades has led to a new consensus among economists: the relationship between prices and economic growth is dead.

As the global economy recovers from the effects of COVID-19, however, a growing chorus of economists believes that a period of higher inflation may be on the horizon. Digitalization of economies and globalization in past decades–amounting to greater cross-border price fluidity–helped to temper inflation. Even before the pandemic, protectionist industrial policy in the U.S. had begun to reverse this dynamic. Now, as the global economy moves toward recovery, the following factors may augur a period of higher inflation:

  • The onshoring of supply chains by the U.S. and other developed economies and increased production costs as a result of the pandemic.
  • Fiscal and monetary policy infusions that may well surpass the 2008 response, increasing the supply of money in the economy.
  • A release of pent-up consumer demand, following the lifting of social distancing mandates, like we have never seen before. An increase in the velocity of money, all else being equal, should also increase price levels.

The good news for real estate investors is that CRE is perhaps better equipped than any other asset class to weather inflation. Put simply, fiat currency (like paper money) can be devalued to the point of being worthless. Real estate is fundamentally scarce and holds intrinsic value. Prices of real estate assets typically rise in parallel with –

  • The cost of inputs: raw materials and labor cost in the form of wages.
  • Demand, as a function of job growth in net population growth in a market or submarket.

Real estate values tend to capture price increases as a result of input cost. Demand in healthy real estate markets tends to track alongside overall economic growth, hence operators are insulated against growth-driven inflation, as rent growth can protect price-adjusted NOI and valuations move in lockstep with average rents.

Multifamily Markets in 2021

The “Great American Move” was already underway: before COVID, a combination of high cost of living, unfavorable local tax regimes, and greater adoption of remote work was prompting mid-career professionals to leave gateway cities. The pandemic has accelerated this trend. Sunbelt cities like Phoenix, Albuquerque, and the Texas metros have been the beneficiaries, exhibiting strong population growth and relative economic strength during 2020. 

Similarly, the pandemic has reinforced the value of “home” for many mid-career professionals, particularly millennials now starting families. Millennials are willing to pay a greater premium for fenced yards and ancillary space for home offices. While this demand trend has stoked single-family markets in affordable metros across the U.S., it has also filtered down to other residential property types. SFR (single-family rental) operators have responded to a glut of demand for stand-alone rental homes. While Class A multifamily was overbuilt in many markets prior to the pandemic, the “Great American Move” is creating opportunity for investors in family-ready Class B apartments that offer outdoor space and a more favorable price-per-square foot. 

Urban multifamily in Tier I markets is likely to lag the overall recovery, creating price discounts. As noted above, there is no reason to believe that the nation’s most iconic cities will be permanently depressed by the pandemic; more likely the urban planners, developers, and businesses of these gateway cities will adapt, much as cities have adapted to other public health crises in the post-industrial era. As such, distressed opportunities and discounts will emerge in certain submarkets of gateway metros. 

Markets & Submarkets to Watch

Metros with little reliance on tourism showed resilience throughout 2020. Through 2021–as states reopen and the vaccine rolls out–the secondary and tertiary markets with rapidly diversifying local economies will show staying power.  

Here are just a few: 


Phoenix has begun to attract the attention of large institutional investors. Job growth for the coming decade is forecasted at 48% in the Phoenix MSA, versus 33% nationwide. The local economy — historically predicated on being the region’s finance and healthcare center — is now diversifying into aerospace and technology. While job growth prospects are sunny for the foreseeable future, cost of living is remains substantially below other major western metros, and the city maintains a business-friendly reputation. 

Phoenix drew an influx of California residents throughout 2020, driving multifamily demand and positive net absorption in the second half of the year. We expect Phoenix’s multifamily and industrial markets to show strength for the foreseeable future. 


Number four on ULI’s “Markets to Watch” list, Dallas keeps on growing. ULI forecasts a 1.6% growth in households in the Dallas MSA, twice the national figure. Employment growth is also predicated to outpace the national average over the next 5 years – 2.5% vs. 2.2%. Meanwhile, the metro area’s average household income exceeds the national average and the average percentage of income allocated to rent is far below the national average – 17.7% vs 29.5%. 

All of this sets the stage for sustained rent growth in the coming years. The metro also boasts an overall low cost of living and favorable tax regimes for both individuals and businesses. 

Kansas City

Despite macroeconomic volatility, the Kansas City multifamily market recorded stable economic performance through 2020. Asking rents in the metro ended the first half of the year up 3%; in June, average rents climbed by 0.2% on a trailing 3-month basis, while the U.S. average slid by 0.3%. 

In April, Kansas City’s unemployment rate climbed to 11.7%–still three percentage points lower than the national rate–before recovering relatively quickly. By July the unemployment rate had dropped to 7.1%, and job growth for the metro is forecasted at 1.4% for 2021. Current forecast suggests the KC economy will fully recover the jobs lost due to COVID by Q1 2023, about a year faster than the U.S. overall, driven by a local economy that is diversifying into trade, utilities, healthcare, manufacturing, and finance. 

The Bottom Line  

While the present crisis has brought significant pain for cities across the country, America’s most iconic cities should not be counted out. Many of the demographic and migratory trends favoring sunbelt metros, non-Class A multifamily, and last-mile industrial had already taken shape prior to the crisis. As the vaccine rollout progresses and states reopen, we can expect opportunities to arise at significant price discounts in various submarkets of Tier 1 multifamily and office markets. 

While the present crisis is truly unique, the benefits of private commercial real estate remain the same: a chance to realize alpha alongside experienced operators, and to invest in a tangible asset that stands to gain from demand shifts and demographic trends. We believe that these opportunities will arise throughout this year across a wide range of urban and suburban markets and across the capital stack. We look forward to presenting a diverse set of rigorously vetted investment offerings in 2021 and beyond. 

“In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists” – Erik Hoffer


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