State of the Market Investment Research | January 2021 Report

Author: David Carlson, Co-Founder & Managing Partner of Redwood Capital Group, LLC

At the risk of being redundant and overtly simplistic, the last year has been an immense challenge for everyone. There is no need to regurgitate the turmoil. But the green shoots of recovery are emerging in the economy, in politics and most importantly with the pandemic. We believe stability is on the horizon. And no matter where you stand on any of these subjects, it is likely we can all agree that we are, in fact, on a path to restoration. The real question is how fast we reach full recovery.

So, what are we thinking for the year ahead? Lots of unfinished business, to be sure.


There is, however, cause for optimism. Federal Reserve Chairman Jerome Powell recently warned the public that the U.S. is still a long way from a robust job market, providing a hint that the central bank’s easy-money policies will remain in-place for the foreseeable future. This is good news for recuperation. The Fed pushed short-term interest rates to near zero and signaled it expects to keep them there for years until it sees “substantial further progress” in the job market. We are, indeed, still feeling labor pains. On January 15, the number of workers filing for jobless benefits posted the largest weekly increase since the pandemic hit last March. According to the Wall Street Journal, unemployment claims rose by 181,000 to 965,000 that week, reflecting rising layoffs amid a winter surge in COVID-19 cases. Moreover, the labor market recovery hedged last month with the December jobs report showing that the U.S. lost 140,000 payroll positions. The larger slowdown included weakness in household spending, though economists expect the economy to rebound later this year as a COVID-19 vaccine is distributed throughout the population. Nevertheless, as infections hit record levels nationwide the increase in unemployment claims is another sign that the economic recovery is, at least temporarily, hitting a speed bump.

State of the Market Redwood Capital Group

There is, however, cause for optimism. Federal Reserve Chairman Jerome Powell recently warned the public that the U.S. is still a long way from a robust job market, providing a hint that the central bank’s easy-money policies will remain in-place for the foreseeable future. This is good news for recuperation. The Fed pushed short-term interest rates to near zero and signaled it expects to keep them there for years until it sees “substantial further progress” in the job market.

Furthermore, two fundamental government programs will drive the recovery. For one, Operation Warp Speed and the new Biden administration will dictate how quickly we can return to normalcy via vaccination plans. The U.S. on Tuesday (01/19/2021) surpassed 400,000 COVID-19 related deaths, as the pace of casualties accelerated following a fourth quarter 2020 surge that overwhelmed hospitals and essentially left nowhere in the country untouched. But the vaccinations have begun and, while not without stumbles and challenges, the deployment is gaining momentum and the process is being perfected. Already President Biden has signed multiple executive orders aimed at taming the spread and improving the deployment of the vaccine. In a bold measure President Biden plans to add community vaccination sites, deploy mobile units, and enlist pharmacies to achieve his pledge that 100 million doses will be administered in the U.S. during his first 100 days in office.

The second major government program to facilitate recovery is the next round of stimulus, and it is welcome, future repercussion notwithstanding. The chart below lays out the current approved and total stimulus.

State of the Market Redwood Capital Group

Now add to this astonishing amount an additional $1.9 trillion proposed by President Biden within hours of his inauguration, even as the ink was drying on the most recent $900 billion stimulus package approved last month. The additional relief plan will continue to help Americans weather the economic shock of the pandemic and pump more money into testing and vaccine distribution. And rightfully so.

Despite the greatest loss of jobs since the Great Depression, we expect the speed of the recovery to be much faster than that of the two previous recessions since 2000. The exclamation point for a healthy 2021Separately, according to a Wall Street Journal survey the U.S. economy is projected to grow 4.3% this year as the country loosens the grip of the pandemic. Economists raised their growth prediction for 2021 U.S. gross domestic product in the January survey, citing that vaccinations and the prospect of additional relief from Washington will enhance economic forecasts. This latest 2021 growth forecast is a significant increase from the 3.7% projection from the Journal’s December survey.

Despite the greatest loss of jobs since the Great Depression, we expect the speed of the recovery is that the U.S. is poised to add more jobs this year than any other on record dating back to 1939. While these gains are unlikely to fully replace total job losses since last spring, various economists and data firms predict anywhere from 5.3 million to as many as 6.7 million new jobs will be added by December 2021. The numbers would put 2021 well ahead of the 4.3 million jobs created in 1946, the start of the post-World War II expansion, for the best year on record.

State of the Market Redwood Capital Group

Multifamily Apartment Sector

As the COVID-19 vaccine becomes widely available, consumers will resume activities such as dining out, attend sporting events and travel. As the additional unprecedented stimulus hits the system, we expect economic growth to slowly gain momentum in the first half of the year and to increase speed in the second half of 2021.

State of the Market Redwood Capital Group

 When we look back on 2020, given the indisputable magnitude of the Black Swan Event we witnessed, we can safely say that the multifamily apartment sector held its own. Across the country apartments generally maintained occupancy, although collection loss increased slightly and rent growth moderated. This contrasts with the Global Financial Crisis (“GFC”) in 2008 when the sector sustained higher vacancy and more pronounced long-term reduction in rent growth. During the 2008-2009 recession, apartment rents declined 7.9% (see chart below).

State of the Market Redwood Capital Group

This is not to suggest that no owners and operators have suffered from the pandemic. In particular smaller properties in more challenging inner-city locations have taken the brunt of the pain. Nonetheless, given the magnitude of the pandemic it is hardly inaccurate to claim that we avoided the expansive damage done by the GFC in 2008, which resulted in large scale foreclosures and downward pressure on property valuations. To the contrary, this time around multifamily apartment valuations did not retract at all.

The main reasons for this wildly different outcome have to do with debt and stimulus. During this current cycle most owner operators and their lenders were significantly more disciplined with leverage. In 2008 many investments were made utilizing up to 85% or more in debt. Today that number is likely in the 65% loan-to-value range. Hence much healthier debt service coverage and far fewer foreclosures. Additionally, the magnitude and swiftness of government stimulus tempered the impact of job loss. Recalling our Redwood mid-year 2020 Economic Outlook, the $700 billion Emergency Economic Stabilization Act of 2008 and the $840 billion stimulus package under the American Recovery and Reinvestment Act of 2009 combined for roughly $1.5 trillion and was deployed over a matter of years. Whereas now, roughly $5 trillion of projected total stimulus was delivered over a matter of months due to the harsh and immediate impact of COVID-19.

However, the clouds have not parted in total. New development still threatens to weaken occupancies and rent growth in several metropolitan areas. Developers are expected to deliver 403,644 new apartments nationally in 2021, with much of that concentrated in a few urban markets currently overcrowded with new apartments, including but not limited to New York, Los Angeles, Seattle, and San Francisco. As such, 2021 will be the biggest year for multifamily construction in decades. According to RealPage, deliveries in 2021 will be up approximately 17% from 2020 when developers delivered 344,380 new apartments in the face of the pandemic. For perspective, on average developers delivered approximately 200,000 apartment units per year since 2000, according to RealPage.

Further still, due to the extension of a federal moratorium on evictions until the end of March 2021 some property owners, particularly among Class-C assets, may experience difficulties as collection loss continues to mount. And conversely, when the moratorium expires a vast majority of unemployed residents that have been protected from formal evictions are going to face a somber housing problem. It is a double-edged sword. Thankfully, more help is on the way in the form of $25 billion in rental assistance as part of the most recently approved stimulus package and the continued efforts of the National Multi-Housing Council (“NMHC”) to lobby for even more assistance beyond that $25 billion.

But in that face of these obstacles there is cause for significant optimism. We project job growth to gain momentum throughout the year, proving out a recovery faster than those in the past. Development is limited to a handful of markets (mentioned earlier) as opposed to evenly spready across the nation. And demand for apartments during the global pandemic has proven out that multifamily is the most stable asset class in commercial real estate.

Even in the first months of the pandemic the U.S. absorbed 71,493 apartments in the second quarter, according to CoStar. Despite being lower than the historical quarterly average, that is remarkably vigorous considering most of the U.S. economy was in lock down. Underscoring the sector’s demand strength, the U.S. absorbed a net 114,000 apartments in the third quarter, one of the strongest third quarters CoStar has ever recorded in multifamily. Need more convincing? Based on preliminary projections fourth quarter 2020 absorption is expected to be the strongest since 2015. And finally, if we assess apartment occupancy during the pandemic, there was a minimally recorded downward trend to 93.2% percent in the fourth quarter of 2020 from a peak of 93.8% during the second quarter of 2019, according to CoStar. A decline that slight is essentially inconsequential given the circumstances.

In conclusion, the multifamily apartment sector continues to benefit from fundamentally sound demand, healthy capital markets demand on both the equity and debt side, disciplined financial structuring, limited overall national supply and significant fiscal relief. The likelihood of even more stimulus and a swift distribution of vaccinations ensured by the Biden Administration should safeguard that the underpinning of a fundamentally healthy multifamily sector is not destabilized.

About Redwood Capital Group, LLC

This report was prepared by Redwood Capital Group, LLC (“Redwood”). Based in Chicago, Redwood is an institutionally focused, vertically integrated real estate investment manager concentrated on the multifamily apartment sector, with capabilities in investment, asset, property, and construction management. The company employs a highly disciplined investment strategy focused on core-plus and value-add apartment communities and identifies distinctive opportunities with the potential for attractive risk-adjusted returns. As of December 31, 2020, Redwood’s portfolio consists of 8,441 apartments across 28 communities throughout the United States with a gross asset valuation of approximately $1.5 billion.

Redwood is headquartered in Chicago, Illinois with regional offices in Atlanta, Georgia and Dallas, Texas. For more information, please visit

Redwood Capital Group, LLC

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