Multifamily NOI Growth Heads South and West

Article originally posted on Globe St. on June 20, 2022

The returns landed where the people went.

NOI is a critical consideration in CRE, though often more honored in the breach than the accurate calculation because so many factors can throw an initial back-of-the-envelope estimate off.

One of the factors is location. Trepp recently examined Freddie Mac multifamily loans from 2021. “The Freddie Mac financial statements were broken down by NOI, revenue, and expenses geographically, looking to unveil where the changes in NOI have been the most prominent,” the report said. “On a national level, NOI has grown approximately 3.50%. A regional analysis shows that NOI growth was centered in the regions that were beneficiaries of consumers who opted for more space during the pandemic.”

The result shouldn’t be surprising. The opportunity for stronger profits come where demand is hottest, and the Sun Belt and west have dominated emerging housing markets because that’s where many people have been moving at least as early as 2020, according to U.S. News. Last year, the two regions were expected to be the big areas of retail development, and retail doesn’t succeed without people who need places to live.

The regional NOI changes that Trepp documented were telling. On the low end, Mid-Atlantic was -0.47%, New England had only 1.33%, Pacific was 1.51%, Northwest Central came in at 1.52%, and Southwest Central logged 2.74%. The best performer in the non-hot regions was Northeast Central at 3.28%.

Then there were the winners: Southeast Central hit 5.73%, South Atlantic had 5.90% growth, and Mountain came in at 8.45%.

“Examining NOI on a state-by-state basis paints a clearer picture,” Trepp noted. “For states with more than $500 million in CMBS investment, the largest NOI growth was concentrated in Arizona (11.13%), Utah (10.47%), South Carolina (9.75%), and New Mexico (9.41%). Meanwhile, the areas that suffered the most were Washington D.C (-10.27%), New York (-4.63%), and Massachusetts (-3.07%).”

Though the state data showed that a purely Sun Belt and West grouping didn’t account for all the growth. For example, some of the mix of other states with the highest NOI increases that weren’t clearly in the Sun Belt or West were Maine (11.15%), West Virginia (9.76%), South Dakota (8.97%), Delaware (8.46%), Connecticut (8.01%), Indiana (6.9%), Rhode Island (6.22%), and Kentucky (5.84%).

The lesson? There are regions that, broadly speaking, are seeing higher rates of NOI growth than others, but everything eventually comes down to specifics. Rather than thinking into what region to put investment capital, look at least at a state level to avoid being hoodwinked by an average that doesn’t apply evenly.