New research by Yardi Matrix and NKF reveal a host of interesting trends within the multifamily sector. Not only has the U.S. multifamily industry exhibited remarkable consistency, it remains a darling asset class for investors.
Rents increased by $5 in April 2019, as robust job creation continued to drive absorption of about 300,000 new units per year, reports Yardi Matrix. The average rent increase represents year-over-year and year-to-date growth of 3% and 0.8%, respectively.
NKF’s first quarter report showed annual effective rent growth increased 10 basis points to 3%, led by above-average growth in Las Vegas, Phoenix, Orlando, Jacksonville and Tampa. Rent growth was particularly strong in the Class B space, which increased 3.4% year-over-year.
Meanwhile, on the investment front, NKF says investment sales volume totaled $36.4 billion in Q1 2019, up 1.3% year-over-year, with more than 70% invested in non-major markets. Trailing 12-month sales volume rose 8.1% to $175.2 billion. NKF writes, Q1 2019 marks the eighth consecutive quarter in which multifamily represented the highest sales volume of all property types.
NKF researchers indicate cap rates decreased 2 basis points quarter-over-quarter to 5.39% nationally, with major markets increasing 3 basis points and non-major markets decreasing 7 basis points. Yields between major markets and non-major markets compressed to 85 basis points, representing the tightest spread since Q1 2013, according to NKF.
Researchers at Yardi Matrix write in the report, “With the prime rent growth season just starting, it remains to be seen whether this year’s gains will be stellar or merely average, but in any event there seems to be no reason to think the multifamily juggernaut is going to hit the pause button.”
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The apartment sector is one of the most actively traded sectors in real estate, pushing past office buildings in the third quarter of 2018. Apartment investments offer owners a stable, diversified portfolio and high and consistent cash-flow yields compared with other commercial real estate sectors.
The apartment sector is compelling for a wide variety of reasons, which are explored in a new report from CBRE and Bay Area investment firm Hamilton Zanze. The paper looks at the top reasons individual investors should get into multifamily real estate.
Here are five of the top highlights:
1. Renting's Continued Popularity
Today's millennials are still likely to rent rather than own, especially the younger ones. Plus, Gen Z is just starting to enter the market as a new renter pool. Baby boomers, too, will continue to drive demand for apartments, due to lifestyle changes and “downsizing,” opting for rentals in retirement.
Homeownership rates are still down from pre-recession levels, and CBRE and Hamilton Zanze expect any upward movement to be modest. In 2017, homeownership rates were 32% among 25- to 29-year-olds and 46% among 30- to 34-year-olds, well below the national average of 64%, indicating that many young residents will remain renters. This decline in homeownership is due to increasing levels of debt (student loan balances held by those ages 30 and younger have ballooned by more than one-third over the past 10 years, according to the Federal Reserve Bank of New York), hindering young people from saving up for down payments or qualifying for mortgages.
2. Significant Pent-Up Demand
Since the Great Recession, the number of financially burdened young adults living at home has increased. As the economy moves toward full employment and wages increase, it's anticipated this pent-up demand could translate into over 3 million to 4 million additional renters. Meanwhile, the annual new-apartment supply averages only around 325,000 units.
3. Favorable Performance in Economic Downturns
Apartments tend to remain stable during recessions compared with other property types, and the sector is less sensitive to changes in economic activity. Apartments have a much shorter leasing cycle, one year, compared with four to seven years for other major property types, making them flexible and able to adjust more quickly to changes in the market cycle.
Apartments tend to have lower capital-expenditure requirements and lack the tenant improvement and leasing commission requirements of other property types. Therefore, a higher proportion of net operating income is distributable as cash flow, and the yields are generally higher and more stable than for other property types over the long run, according to CBRE's data.
Apartments also tend to recover more quickly than other property types as the economy emerges from recession. According to the Real Capital Analytics (RCA) Commercial Property Price Index (CPPI), core commercial property fell 36.6% during the global financial crisis and it took 78 months for full recovery, while apartment values fell only 32.2% and took just 47 months to recover the loss.
4. Favorable Performance in Both Stable and Rising Interest-Rate Environments
If interest rates remain low, apartment investors are likely to continue to benefit from low financing costs. Apartments have benefited from financing rates that have averaged more than 48 basis points lower than those of commercial property over the past 10 years, according to RCA. Apartment investors may also benefit from higher interest rates, as apartments will serve as an effective inflation hedge. Over the long term, apartment rents have tended to outpace overall inflation rates.
5. Location, Location, Location
In this cycle, a large share of new apartments has been constructed in urban markets with a high concentration of Class A development. While this asset type is in demand, developers have also overlooked prime suburban areas.
Many "renters by necessity" will continue to fuel demand for suburban product and are looking for apartments in select, well-located, suburban areas with quality transit, amenities, and school systems.
Suburban rent and occupancy performance have outperformed that of downtown areas, says the CBRE/Hamilton Zanze report. Investors continue to acquire apartments at more favorable initial acquisition yields, or cap rates, in the suburbs. According to the CBRE Cap Rate Survey, the national average suburban, Class B cap rate is 5.41%, while the comparable cap rate for infill locations is 5.14%.
Multifamily Executive 5 Reasons to Invest in Multifamily Hamilton Zanze and CBRE on the many benefits the apartment market has to offer buyers. By Lauren Shanesy
Read the article on MFE's website HERE
Yes, apartments are still a good investment, but for more fundamental reasons than during the past eight years. What I mean by this is apartments have always been a good investment. Unlike other commercial real estate investments, apartments are tied much more to residential trends and demographics. Starting in 2010 and continuing through early 2018, the fallout from the crash and recession created an imbalance in homeownership that gave rise to an increase in apartment rental rates. The rent increase directly correlates to an increase in the value of apartment buildings. But apartments are still a good investment for traditional reasons versus heavy appreciation, even with changing circumstances such as rising interest rates, rising property taxes and a potential recession. If investors focus on property fundamentals, hone their investment strategy and conservatively underwrite for today’s market, apartments are still a high-performing investment in 2019.
A normalization of value appreciation in apartments is usually related to a projection of flatness in net operating income (NOI). Historically, flatness of NOI is anticipated when two primary drivers occur: rent softness (meaning rents are not growing well) and anticipated interest rate increases. The current market seems to have both of these factors. Current rent softness comes from years of rent growth and a large supply of new construction units being delivered and a large supply of new construction units being delivered. Interest rates in Q4 2018 are higher than Q4 2017, and more increases are forecasted for 2019. Locally in Chicago, the third factor for NOI flatness is property tax increases, as city, county and state government continually raise taxes to increase revenue.
Focus On Fundamentals
For apartment investing, that’s the bad news. The good news is that if you focus on the fundamentals and invest for the long term, apartments are still the most compelling product type in commercial real estate. The key reason for this is simple, if trite: People always need a place to live. For investing in apartment buildings, remember three fundamental factors of location, value-add and underwriting.
Location is the primary factor for any real estate investment, but what makes a location good varies by product type (residential, industrial, office, apartment, retail, etc.). For apartments, good location usually means easy access to centers for employment and transportation (e.g., public or highway access).
Hone Investment Strategy
Value-add means ways to increase the value of your property. Increasing the NOI of the property despite the market in general projecting flatness for NOI is one of the best ways. The obvious is making physical improvements that result in higher rent (i.e., new kitchen cabinets). The less obvious maybe how to decrease expenses or create better operational efficiencies. Other ways to add value may have to do with overall returns over the lifespan of the investment. A trend right now for achieving this is investing in Opportunity Zones. These investments reduce or eliminate your capital gains, thus significantly increasing your overall returns.
Underwriting means carefully analyzing all of the income and expense related to an investment, including a conservative proforma of the changes expected, looking at financing options and determining what your return on investment will be at the purchase price being contemplated. Set a threshold you have to achieve and hold yourself to it. If your target is 10%, underwrite honestly and conservatively and do not invest if you cannot get the numbers to cross that minimum threshold.
Apartments remain a solid commercial real estate investment class — if not still the golden child. Getting back to the fundamentals described above should result in a long-term appreciating asset and a meaningful return on investment.
Read this article on Forbes HERE
As the housing market cools down across the US, economists say rental prices could be set to rise.
Declines in residential-construction activity and rising interest rates are expected to compound historic housing shortages across the country, pricing an increasing number of Americans out of the market. Meanwhile, reduced mortgage-interest deductions and new caps on state and local tax deductions have reduced incentives for Americans to own homes.
Many economists expect the housing market to continue to slow, which could drive more Americans to rent instead. Apartment vacancy rates have fallen to 5.6% in the third quarter of 2018 from 5.9% last year, according to Real Capital Analytics, a research firm.
"Home sales are set to tread water over the next couple of years, which is good news for the rental sector," the Capital Economics economists Matthew Pointon and Andrew Burrell wrote in a recent research note. "If Americans aren't buying homes, many will look to rent one instead."
Rental demand looks set to rise. In a recent National Multifamily Housing Council survey, the number of landlords reporting tightening rental conditions on a seasonally adjusted basis rose to its highest level in more than a year.
Economists expect that to cause rental prices to increase within the next year or so, depending on how much supply comes onto the market in the meantime. Meeting demand could be particularly difficult in the West and in the South, according to First American's chief economist, Mark Fleming, as younger renters move toward technology hubs.
"We've witnessed this dynamic play out in cities, especially coastal markets, where the tide of millennial demand has contributed to tight apartment inventories and increasing rental costs," Fleming said.
Against a backdrop of historically low unemployment levels and signs of upward pressure on wages, those dynamics lead to confusion among consumers and delay investment.
Americans are used to seeing the housing market perform in tandem with the economy, according to Jonathan Miller, the chief executive of Miller Samuel, a real estate and appraisal firm. But with a growing disconnect between the two, he said buyers seemed to be hesitating.
"Consumers are still looking to buy, but they're waiting until they're more comfortable," he said. "People have a lot to process, and the sense of urgency to buy hasn't been there in more than a year."
It is extremely critical to be sensitive to exit cap rates and projected price per unit values, and understand the local market and its variables, Michael Flaherty of L5 says in this EXCLUSIVE.
EL DORADO HILLS, CA—It’s no surprise that good deals are not so easy to find in the current US multifamily market. That’s where strategic positioning comes in, both from an acquisition standpoint and also a capital improvement position.
One company that has a handle on this type of strategy is L5 Real Estate Investments. L5 is a privately held investment firm focused on value-add multifamily properties that provide high-yield, passive cash flow and long-term capital appreciation for its investors through strategic acquisition, renovation and asset management.
The firm currently has in excess of $380 million of assets totaling 4,100 units under management in seven states. In this exclusive, Michael Flaherty, founder and CEO of L5 recently discussed investor sentiment with regard to multifamily properties, the challenges of locating value-add investments and how to improve properties for better cash flow.
GlobeSt.com: How is the multifamily market looking these days from an investor standpoint?
Flaherty: L5 Investments focuses on value-add apartment acquisition opportunities and we are finding that we have to be more patient and prudent in our search as good deals are certainly not easy to find. The opportunities are out there, they are just more challenging to find compared to a few years ago. Regardless, we remain believers in the sector–we are largely seeking long-term holds and are flexible on exit strategies, as a result, we remain bullish on this sector’s continued strength into the future. People will always need safe, updated, competitive housing choices.
Additionally, throughout this run, we continue to be laser focused on providing our private investors with consistent, attractive returns. With that said, we have had to revise and alter our structure and criteria to continue to realize a favorable ROI as cap rates flatten out and interest rates slowly rise.
GlobeSt.com: Is it harder to find value-add properties now than it was last year? Why or why not?
Flaherty: It has always been hard, but it is certainly more challenging now. I think the main reasons for that are more players in the market and some buyers may have become a bit too aggressive as far as what they will pay. It is important that our investment decisions are conservative and make sense financially based on market fundamentals and future projections for any given asset. L5 has been and will continue to be conservative in what we buy, and we don’t let emotions drive us into a deal that just doesn’t pencil. We are also not under any pressure to buy a certain quota within a given timeframe–if we find a few deals great, more is great too, but we have the benefit of being patient and sitting on the sidelines ready to jump in when its right.
GlobeSt.com: What are the best ways to make an apartment community a better cash-flowing asset?
Flaherty: Our goal for acquiring any multifamily asset is adding smart value and buying for long-term cash flow. As a result, the most important way value can be added is buying right. It is extremely critical to be sensitive to exit cap rates, projected price per unit values, and understand the local market and its variables like jobs, mass transit, local amenities, schools, etc. Lastly, it is important to have the right strategy from a capital improvement position to ensure that a planned rehab is completed on time and on budget while still matching the tenant demand on a micro-market/local level.
GlobeSt.com: What is your outlook on this sector for the remainder of the year?
Flaherty: As a buyer, we are ideally looking to strategically acquire two or three more communities this year. We see that demand in suburban locations near growing job centers is strong. Compared to higher priced urban products, our more affordable rents and competitive communities continue to be attractive solutions to rising rents and market affordability concerns. As a result, our portfolio has continued to increase in occupancy.
Finally, with cap rates and pricing per unit leveling off a bit and interest rates on the rise, we do see signs of easing in the market but are taking that into consideration when we underwrite potential acquisitions. The rising cost of single-family homes, good economic indicators, population growth and an overall trend for Millennials choosing to rent as opposed to owning a home all bode well for ownership in the apartment sector.
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Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
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The unexpected is business as usual in New York real estate, where priorities and plans can shift on a dime. But one development firm I know of recently made a move that had veteran industry players taking note of a major change we’re seeing in the industry—it delayed the official opening of a new apartment building to install more amenities. It’s just one more way demographic shifts are having profound effects on the multifamily housing market. The demand for amenities—everything from luxury dog spas to Internet-connected collaborative workspaces—is creating a real estate race among well-capitalized developers of next-generation apartment buildings. The demand by Millennial consumers for so-called “smart buildings” with a trove of on-site perks is driving a reinvention of multifamily stock. Investors need to recognize these evolving demographics and be responsive to a new wave of demands.
A demand for amenities Amenitization is one of the new keywords for investors in the red-hot multifamily market. It reflects the fact that, though the square-footage of an average apartment unit may be smaller, consumers are still spending more time within the building in spaces that often include movie theaters and other social areas.
The race for developers to out-do one another with amenities owes partly to the age of consumers. During Capital One’s fourth annual survey at ALM’s RealShare Apartments Conference last fall, 72% of real estate executives predicted that technology-savvy Millennials will have the greatest impact on multifamily demand this year, followed by Gen-Xers (16%) and Baby Boomers (12%).
The waning of the big suburban house This is not to say that other age groups aren’t having their impact. Developers recognize the influence of older Americans, whose housing preferences are also disrupting multifamily. The share of the American population over age 65 will shift to 21 percent from 13.7 percent by 2050, according to Real Trends: The Future of Real Estate in the United States. The report, sponsored by Capital One, was conducted by the MIT Center for Real Estate and the Urban Economics Lab.
The Real Trends report reveals that today’s older consumers are demanding higher quality housing and retirement communities than their predecessors. In addition, many Baby Boomers and empty-nesters don’t want to own enormous suburban houses anymore. They increasingly want to be in revitalized city centers and they are trading square footage to be close to the cultural venues and restaurants that urban cores have to offer.
The Real Trends study also shows that demographic shifts are ushering in a new era of advanced multifamily housing – from sustainable building materials to innovative layouts – and construction companies and real estate investors are adapting to these new market realities.
New tax law is fueling the multifamily market In addition to the interest in urban centers, new tax law is also presenting many opportunities for investors. New Federal tax law will surely impact multifamily developments – mainly in coastal markets. Although most of the tax issues have yet to be worked out, home ownership will become less attractive largely due to the elimination of certain deductions. With cheap financing available, investors are betting on increased multifamily demand.
The MIT report details other factors that are stoking demand for new multifamily housing. The global economic crisis of a decade ago slowed down housing construction. Experts predict that, over the next decade, the regular demand for new housing, plus filling the vacuum created by the recession, could require more than 1.65 million units a year. Indeed, America would seem to be at the beginning of an extraordinary multifamily housing boom.
Multifamily construction will also get a boost from new types of architectural designs specially aimed at single-parent consumers. According to the Capital One/MIT report, more than a quarter of American children live in single-parent homes, usually headed by a mother. An additional 15 percent of children live with one parent and a second-marriage spouse. Now more than ever, single mothers juggling careers with childcare are looking for multifamily buildings that offer daycare, babysitting, healthy dining, and even homework assistance.
Shaping the future of the multifamily market Plenty of new multifamily housing, infused with innovative amenities, has already been built in urban centers. Cities continue to become safer and transit upgrades are drawing more consumers downtown. Corporations, recognizing urban cores for their concentration of intellectual capital, are continuing to locate their headquarters in cities, reversing a decades-old trend of building sprawling corporate campuses in suburban communities.
Although it is true that a geographic shift to cities has resulted in compressed cap rates, there’s nevertheless a certain amount of risk to looking elsewhere, including tertiary markets. Investors may tolerate slightly lower returns in urban cores because investments in new apartment developments there are more stable.
The changing face of the American city, a steady demand for building amenities, and a robust economy are attracting multiple generations to a new class of multifamily housing. As technology continues to evolve both amenities and building practices, it’s an exciting and important time to be involved in multifamily. Which is why now more than ever it’s crucial to have a financial partner able to navigate shifts in the multifamily landscape.
Benjamin Stacks is SVP of Capital One Commercial Real Estate. The views expressed here are the author’s own and not that of ALM.
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A joint venture of L5 Investments and BH Equities has sold Huntington Glen Apartments in southwest Houston after making improvements during its three-year ownership.
Austin-based GVA Real Estate Group purchased the 364-unit complex, which consists of 20 buildings on nearly 10 acres at 12023 Bissonnet near Keegan Road. The property was built in 1982.
"Our partnership completed a strategic value-add capital program immediately after acquiring the asset which included addressing deferred maintenance issues, interior unit upgrades, enhancing landscaping and overall aesthetics, and updating community amenities," L5 Investments founder and managing partner Michael Flaherty said in an announcement.
L5 Investments is pleased to announce the recent, successful closing of the Raleigh Apartments – a value-add investment opportunity. The Raleigh is a 52-unit apartment complex, well located in Burien, Washington - a Seattle suburb, 12 miles south of downtown Seattle. The property was purchased for $8,200,000 and is 98% occupied. The Raleigh will be another strong performing asset for our growing portfolio.
The property stands to benefit from our proposed $661,000 rehab program which will include updating key areas including flooring, cabinets, lighting, appliances, and adding in-unit washers and dryers. The scope of work will add immediate value, update the property for today’s tenant needs/interests, enhance our ability to better market the property, and improve the property aesthetics for the short and long term. More importantly, it will enable us to achieve higher rents and maintain high occupancy.
We continue to remove obsolescence from the rental market with communities that offer contemporary housing and services that meet the needs of today’s renter. Whether it is enjoying a coffee in one of our cyber cafés, or relaxing by one of our resort-style swimming pools, we work hard to provide the upscale amenities that many would only expect to find at higher-priced communities.
This increase in rents results in an estimated property value increase of approximately $800,000 - $1,000,000.
September 28th, 2017 ~ Seattle, Washington
L5 Investments' Mike Flaherty will be speaking at the Marcus & Millichap/IPA: Multifamily Forum Seattle 2017.
In its fifth year, this Seattle Multifamily Forum brings together over 450 of the Northwest’s most relevant multifamily developers, investors, owners and operators to discuss current market trends and provide the most up-to-date analysis
The Marcus & Millichap / IPA Multifamily Forums across the U.S. bring together over 6,000 multifamily owners, investors, managers and developers to create an in-person marketplace for learning, discovery, networking and deal making. The sessions address the major issues affecting the apartment and condo markets today, and the networking allows multi-housing principals to meet, talk and source deals and investment capital.
SEATTLE—For apartment renters, it can literally pay to renew their existing leases. Zillow said Friday that market-rate rents increased at a faster pace year over year than did rents for tenants who renewed. The firm analyzed 2015 rent data from the US Census American Community Survey, the most recent data available.
The Y-O-Y increase for renters who renewed in ’15 was 3.6%, compared to a 5.6% rise in rent for beginning a new lease. Dollar-wise, that means a renter who had moved in the past year paid an average of $329 more each month than a renter who had lived in the same place for five years or longer.
In some markets, the gap was even greater. Zillow estimates that Bostonians who stayed in the same rental for five or more years saved as much as 86%, which translated to $8,979 in annual rent payments over the five-year period.
Boston renters also faced the biggest difference between annual market rate rent increases (10.5%) and rent increases for renewing (4.3%). Not far behind in terms of the dollar amount was San Francisco, where renters saved an average of $8,860 over five years for staying in place.
On a percentage basis, the market-rate increases were highest in San Francisco at 12.9% and in Denver at 14.1%. Renters in the New York/New Jersey metro area saved $7,376 during the five-year period by renewing, although on a percentage basis the gap between market rate and renewing was close to the national average.
The number of renter households across the US has risen by four million over the past five years to reach 43 million, Zillow says. The majority of recent household formation occurred on the renter side rather than on the homeowner side, due partly to Millennials reaching the age to move out but not having enough savings to buy a home.
Young adults are also renting longer than ever before buying, says Zillow. The savings of renewing in place could be put toward a down payment on a home, seen as the biggest obstacle toward buying, the firm says.
“Renters have a decision to make almost every year: do they stay in the same place, or should they look for a new unit?” says Svenja Gudell, chief economist at Zillow. “With the country in the middle of an affordability crisis, it’s important for renters to understand how much they can save if they renew their lease instead of finding a new rental.
“Nationally, rental rates have slowed and the savings from renewing are not as significant for renters today,” Gudell continues. “However, in some of the hottest rental markets, where rents are still rising aggressively, continually renewing a lease can mean saving thousands of dollars.”
In related news, Apartment List said Friday that rents nationally grew .05% during June, with 92 of the 100 largest US cities posting Y-O-Y growth. June’s increase over May levels was in line with the monthly growth that the firm has seen over the course of 2017.
Nationally, Y-O-Y growth now stands at 2.9%, surpassing the 2.6% annual in the year-ago period. Apartment List notes that the last month in which year-over-year growth outpaced the level from the year prior was December ‘15, although Y-O-Y growth still lags the 3.5% pace seen in June ‘15.
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L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.