Prices have increased by 18% this year and are 8% higher than pre-pandemic levels.

By Lynn Pollack | October 21, 2021 at 07:00 AM

Sales of commercial real estate assets in the US hit record-breaking highs in the third quarter, thanks largely to activity in the apartment and industrial sectors.

Real Capital Analytics’ latest US Capital Trends report shows that deal volume hit $450 billion in the first three quarters of the year, a high watermark for commercial real estate generally. Deal activity has not approached that level since 2007, prior to the Great Financial Crisis. 

According to Green Street’s all-property index, prices have increased by 18% this year and are 8% higher than pre-pandemic levels. The firm has issued a strong “buy now” signal as cap rates continue to slump, noting that fundraising by real estate private equity firms this year has “smashed records” and predicting that continued competition will lead to higher property prices in 2022. 

“Investors could benefit from acquiring assets in nearly all property sectors,” Green Street notes in a recent analysis. “The perfect storm of incredibly low bond yields, high volumes of capital flowing into private equity, and open debt markets where financing rates are near unprecedented levels, will spur continued price increases for commercial real estate.”

Activity was largely fueled in the third quarter by individual asset sales in the apartment and industrial classes, which comprised 60% of total activity, per RCA data. Apartment deal volume in particular was the standout, with quarterly figures higher than the average annual numbers for the asset class between 2008 and 2011. 

Cap rates in popular Sun Belt metros and secondary coastal markets are ranging from the mid-3% to low-4% range, according to Green Street data. The firm notes that deal flow is picking up for Class A properties in coastal markets, with Seattle, DC and Los Angeles seeing prices approaching more normal levels. There are also “signs of thawing” in New York and San Francisco.

“In the near term, rapidly improving operating fundamentals, and accommodative capital markets will bolster apartment values,” Green Street analysts noted in the recent report.

Year-to-date activity also hit a new record for industrial, which has been buoyed by surging e-commerce growth and warehouse/logistics demand. Values for industrial properties have surged by 39% over the last year, and the spread in industrial cap rates between coastal and non-coastal markets “has never been this tight,” Green Street analysts noted in a recent report. The largest industrial sale so far this year is Costco Wholesale’s $345 million acquisition of a 1.6 million square foot facility in Ontario, Calif.

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Spreads between bond and property yields are generous enough to absorb higher long rates in the short term, Investcorp wrote.

By Paul Bergeron | November 05, 2021 at 07:12 AM

The multifamily sector entered the pandemic on solid footing, and despite challenges brought on by the pandemic, it has the potential to continue to outperform in the years ahead, according to Investcorp.

Despite treasury yield increases, apartment cap rates are projected to stay low in the next couple of years, supporting an increase in capital values.

“The economic recovery continues in earnest, but this is raising questions about quite how transitory the current high rates of inflation are,” wrote Michael O’Brien Co-Head of Real Estate North America, Head of Residential Vertical, at Investcorp.

“Core inflation will likely stay elevated, which should force the Fed to push up rates. And while rising Treasury yields are projected to squeeze the yield gap enjoyed by apartments, given the strong prospects for NOI growth in the apartment sector, apartment yields are projected to stay low.”

Spreads between bond and property yields are also currently generous enough to absorb higher long rates in the short term, O’Brien said.

The current spread between apartment cap rates and 10-year Treasury yields is 186 basis points, above the 2001 to 2021 average of 200 basis points.

“Lower vacancy rates and accelerating rental growth will support apartment income. A substantial recovery in net operating income will mean that yields see little change over the year, despite strong investor demand.

“The industry is underpinned by strong fundamentals and it has shown resilience during these disruptive times. As such, despite the uncertain long-term implications of the pandemic, it should not affect the dynamics of supply and demand. Demand for multifamily property is expected to remain strong and will continue to outpace supply.”

O’Brien noted that younger generations saddled with student debt will find home ownership unattainable. And while the recent crisis has led to even more millennials and Generation Z living at home with their parents, they will eventually move out and become a strong pool of new renters. 

“Furthermore, the expansion of remote working means that people have more flexibility over where they live, which will likely favor cities where the cost of living is relatively more affordable.”

On the supply side, while the pace of new construction has picked up meaningfully compared to the lows seen a decade ago, this is projected to not be enough to make up for current housing shortfalls, O’Brien wrote. It is estimated that 2.3 million homes are needed each year over the next 10 years to balance the supply/demand imbalance. 

“Until construction ramps up, housing shortages will persist, increasing demand for the rental market. The multifamily sector is projected to continue to perform well as it has over the past two decades.”

He said that rental growth for apartments is also projected to continue to outpace inflation, making it a good hedge against the pressure of rising prices.

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There likely won’t be another spike in rents, but rent growth is likely to persist for the long-term.

​By Kelsi Maree Borland | October 18, 2021 at 07:25 AM

Last year, apartment rent growth was a tale of two cities, or at least two types of cities. Rents plummeted in major metros—in some cases by double digits—and jumped in small cities and suburbs—in some cases by double digits. This year, rents rebounded back in the big cities and continued to grow in emerging markets. This new period of rent growth is likely to be the new normal over the next 12 months.

“We have this supply-demand dynamic. All of the reports I am reading say the same thing: we have never seen anything like this before, and I think it will persist for a long time,” Blake Okland, vice chairman and head of multifamily investment sales at Newmark, tells GlobeSt.com. “The wind is so behind our back as it relates to supply in the submarket.”

Prior to the pandemic, there was a national supply-demand imbalance that had driven a near decade of multifamily rent growth. That dynamic didn’t change during the pandemic. Now, it is creating a foundation for a new cycle of rent growth, at least for the next 12 months. “We are not even a year into this dynamic,” says Okland. “Multifamily shows the best in a downturn. It is a very needs based asset. I think that the thesis for multifamily has continued to gain adoption both domestically and globally. It has become an increasingly desired and safe destination for capital.”

While rent appreciation is going to continue, it won’t be the dramatic double-digit growth numbers from the last year. That growth was the result of rapid and sweeping changes in migration patterns. “Without another migration spike that we saw last year, I think it is reasonable to say that we won’t see as outsized of an increase in rental housing,” says Okland.

Okland adds that the rapid rent growth this year was due to a limited leasing activity in 2020. “This year, I think the growth was enhanced by coming off of a very choppy leasing season,” he says.

Okland’s anticipation of continued rent growth is specific to institutional-grade product. “The stats are not the same for people that are in workforce housing multifamily. Those tenants don’t enjoy the same mobility geographically,” he adds.

Still, the strong demand for multifamily assets and the supply shortage across the country support continued rent growth. “There is a newfound optimism around rents,” says Okland. “This could be more sustainable than you would think; this is not just a one-year trend in reaction to question marks around pricing power following COVID.”

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