Chicago Multifamily Market Update: Deal Volume Up as Investors Chase Yield

This article was originally published on ALEX Chatter: Chicago Multifamily Market Update: Deal Volume Up as Investors Chase Yield and all charts and images are from ALEX Chatter.

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The Chicago multifamily market remained strong during Q3 2017, as rents continued to set new record highs. Rising vacancy rates remained in line with the market’s historical average, despite a historically high influx of new supply. Corporate relocations and an emerging technology sector have driven demand. Additional demand factors include more millennials entering prime renting age and baby boomers downsizing into apartments.

Rental Market

According to Reis, the average asking rent for multifamily properties in Chicago reached $1,347/unit at the end of Q3 2017, up from $1,336/unit during Q2 2017, and represented the highest level on record. Year-over-year, rent was up 4.9%. The Class A average at the end of the quarter was $1,835/unit, up 5.8% year-over-year, while rent for Class B/C properties drifted upward 3.0% to $1,065/unit. Gold Coast, an area with a high concentration of new luxury development, posted the highest submarket rent, at $2,480/unit. Reis projects overall rent growth in Chicago will average 4.8% during 2017, and will slow to 1.7% by 2021.

After rising in every quarter since year-end 2009, Chicago’s vacancy rate finished at 4.5%, an increase as compared with 3.8% one year ago. The increase has been mostly driven by the addition of new high-end luxury developments to the market. The Class A vacancy rate finished at 6.1%, up from 5.0% year-over-year, while Class B/C properties finished the quarter at 3.5%, up from 3.2%. East Lake County had the lowest submarket vacancy at 2.0%. Reis forecasts that the market’s overall vacancy rate will reach 4.7% by the end of 2017, then inch up to 4.9% by the end of 2021.

“Although the apartment vacancy rate is expected to continue to rise as the supply of new units is expected to exceed occupancy growth, the increase in vacancy should be moderate,” says Barbara Denham, Senior Economist at Reis. “Most major metros face a similar predicament: higher new completions and decelerating demand.  Chicago’s excess supply is much lower than most major metros as developers have been more cautious relative to other cities, and demand growth has been steady.”

New Development

Among the top U.S. markets, Chicago had the most cranes working on residential projects, according to the most recent Crane Index survey from Rider Levett Bucknall. However, demand for newly constructed luxury apartments has not been able to keep up with the pace of new supply, as more than 6,806 new units were completed during 2016, while absorption totaled 6,233 units. The highest concentration of new development has been in the City West, Gold Coast, and Loop submarkets.

Reis forecasts 7,329 new units will come online in Chicago during 2017, which would mark the highest annual total in the last 30 years, while absorption is expected to reach only 4,155 units. An additional 16,363 new units are expected to be delivered through 2021, representing 3.5% of the existing inventory, with absorption expected to total 14,427 units during that time.

Sales Market

On the multifamily investment side, the Chicago market turned in a strong quarter during Q3, as prices increased and cap rates declined.

Data from Real Capital Analytics (RCA) showed that sales volume totaled $1.6 billion during the quarter, higher than the five-year quarterly average of $892.2 million. The 12-month average sale price was $190,990/unit, up 9.0% from the same time one year ago.

Through the first nine months of the year, sales totaled $3.3 billion, higher than the $2.9 billion recorded for the same period during 2016. For all of 2016 sales totaled $4.6 billion, the highest annual total on record.

“It should come as no surprise that deal volume is growing in Chicago even as it falls in other major markets of the US. Investors are hungry for yield and Chicago has that and then some,” says Jim Costello, SVP, Real Capital Analytics. “Over the last 12 months, cap rates in Chicago have averaged 140 basis points lower than those for the large coastal markets. This growth in deal activity is following the yield advantages.”

The RCA Chicago Apartment CPPI™ increased 9.1% over the last 12 months, compared to 9.9% one year ago and 10.0% for the U.S. overall.

Foreign investment accounted for $503.5 million of transaction volume year-to-date. Canadian investors accounted for $262.5 million of activity, with France following close behind at $201.0 million.

Chicago’s 12-month rolling average cap rate at the end of September was 5.9%, down from 6.1% one year ago, although higher than the U.S. overall average of 5.6%.

Economy

The Windy City’s recovering business cycle continues to move forward at a healthy pace, although budgetary issues and high crime rates remain a concern.

The U.S. Bureau of Labor Statistics reported that total nonfarm employment in the Chicago-Naperville-Arlington Heights, IL metropolitan division increased by 0.3% (representing 11,100 jobs) during the 12 months ending in September 2017, lower than the 1.2% gain for the U.S. overall during that time.

The largest gains over the last 12 months were in the financial activities sector (up 4.1%), while the losses were measured in the trade, transportation, and utilities sector (down 0.7%). Chicago’s unemployment rate fell to 4.2%, an improvement from 4.9% one year ago, and in line with the U.S. overall rate.

The local housing market continued its recovery, as the S&P Case-Shiller Home Price Index increased 3.9% during the 12 months ending in September, trailing the U.S. index, which increased 6.2%. Chicago’s index remains well below its pre-recession high set in March 2007.

The Zillow Home Value Index for Chicago increased 6.4% during the 12 months ending in September 2017, lower than the 6.9% increase for the U.S. index during that time. Zillow also reported that Chicago's price-to-income ratio came in at 3.1, putting it 2.2% higher than the market historical average, although in line with the U.S. average. Mortgage affordability was reported at 41.4% lower than the historical average, while rental affordability was 20.8% higher than its historical average.

Q1 2017 Multifamily Market Update: Despite Slow Sales, Prices Still Up

This article was originally published on ALEX Chatter: Q1 2017 Multifamily Market Update: Despite Slow Sales, Prices Still Up and all charts and images are from ALEX Chatter.

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Average asking rents in Colorado Springs increased 6.6% year-over-year as of March 2017, according to Reis. While familiar primary markets comprise most of the top 10 strongest performing markets, we are starting to see more secondary markets outperforming.

The U.S. multifamily market continued to post positive results during Q1 2017. Rent growth remained strong, while vacancy remained low and demand kept pace with high levels of new supply. Investment activity was slow to start the year, although prices continued to increase. 

Rental Market

According to data from Reis, the average asking rent in the U.S. reached $1,314/unit during Q1 2017, a 3.2% increase over the $1,273/unit average reported one year ago. This marked the 29th consecutive quarter of growth, although lower than the 5.7% annual growth rate reported one year ago. The asking rent for Class A properties increased 3.0% year-over-year, while Class B/C rents increased 3.1% for the same period. Overall, Reis forecasts rent growth will average 3.2% during 2017, then slow to 2.1% by 2021.

Landlords continued offering concessions in lieu of discounting rents, as the asking-to-effective rent spread was $54/unit at the end of the quarter, representing the largest gap since 2009. Asking rent increased 3.2% for the 12 months ending in March 2017, while effective rent grew 3.0%.

The strongest performing multifamily market in the U.S. over the last 12 months was Nashville, where average asking rent increased 8.1% to $1,029/unit, up from $952/unit. Rent growth has been boosted by active new development and by strong employment gains, led by the health-care industry. The supply chain bears watching, as nearly 8,000 units were completed over the last two years, and about 18,000 units are expected to be completed through 2021.

Seattle posted the second fastest growth among primary markets, increasing 7.1% to $1,606/unit from $1,500/unit. Driven by a strong local economy — with a broad industry base featuring aerospace, high-tech, and e-commerce — rents have increased in every quarter since 2009 in the market.

Reis also reported that the national vacancy rate remained low despite new deliveries, finishing the quarter at 4.3%. Vacancy was essentially unchanged from one year ago and remained below the most recent high of 8.0% in Q1 2010. The Class A vacancy rate finished at 6.0%, up slightly from 5.8% at the end of 2016, while the Class B/C vacancy rate was essentially unchanged at 2.9%. Reis forecasts the overall vacancy rate to finish 2017 at 4.8% and reach 5.2% by 2021.

Multifamily development continues to make headlines throughout the U.S., and while oversupply remains a concern, demand has so far been able to keep pace with supply. Reis forecasts a total of 291,352 new units to come online during 2017, eclipsing the 210,526 units that were delivered during 2016. Absorption totaled 207,103 units during 2016 and is expected to reach 211,614 units for 2017.

A pullback in supply is expected over the next several years and some 2017 projects could be pushed further into the cycle.

Sales Market

Multifamily investment activity was down sharply to start the year. Pricing increases, with sellers unwilling to lower asking prices, may point to a disconnect between buyers and sellers.

Data from Real Capital Analytics showed that a total of $26.0 billion in apartment transactions were recorded during Q1 2017, which was lower than the five-year quarterly average of $30.7 billion. The average sale price was up 11% compared to the five-year average price.

The average cap rate for Q1 2017 multifamily sales was 5.4%, down from 5.7% one year ago, and represented the lowest level on record. The cap rate spread over the 10-year Treasury yield was 290 bps, down 30 bps since the end of 2016.

The multifamily sector continued to show strong price growth compared to other property asset classes. The Moody’s/RCA CPPI™ apartment price index increased 8.1% during the 12 months ending in March 2017, but was lower than the 14.9% increase measured one year ago. The all property index increased 7.2% over the last 12 months, compared with 9.1% one year ago. 

Economic Overview

As the U.S. economy continued into an eighth year of expansion, wage growth began to increase as the labor force neared full employment.

According to the U.S. Bureau of Labor Statistics (BLS), total nonfarm payroll employment edged up 1.6% for the 12 months ending in April 2017, as compared with 1.9% one year ago. The unemployment rate was 4.4%, an improvement on the 5.0% rate measured in April of last year.

The BLS also reported that real average hourly earnings increased 2.7% during the 12 months ending March 2017, as compared with a 2.5% gain for the 12 months ending in March 2016, while the Consumer Price Index (CPI) increased 2.4%.

Gross domestic product (GDP) rose at a 0.7% annual rate in Q1 2017, up from 2.1% during Q4 2016, as reported by the U.S. Bureau of Economic Analysis (BEA). 

The U.S. Census Bureau reported that the homeownership rate finished Q1 2017 at 63.6%, down slightly from 63.7% at the end of 2016, yet slightly higher than the 63.5% rate reported one year ago. These compare with a high of 69.4% in 2004, during one of the biggest housing booms in history.

The S&P/Case-Shiller U.S. National Home Price Index© reported a 5.8% annual gain in February, up from 5.6% last month and 5.2% one year ago. Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last 12 months.

The Numbers Behind the Dallas Multifamily Boom

This article was originally published on ALEX Chatter: The Numbers Behind the Dallas Multifamily Boom.

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View over downtown Dallas from the Reunion Tower.

Dallas was one of the hottest multifamily markets in the U.S. during 2016. Rent growth accelerated as vacancy reached historic lows, strong employment growth continued to drive new development, and investment activity reached record highs.

Rental Market

Dallas posted the fastest rent growth and the lowest vacancy in the Southwest region during Q4 2016. According to Reis, the average asking rent reached $1,063/unit during the quarter, up from $1,049/unit during the third quarter, and has risen in every quarter since year-end 2009. Year-over-year, asking rent climbed 6.0%, up from $1,003/unit in Q4 2015. Reis forecasts rents will grow 5.1% during 2017, and will slow to 2.0% by 2021.

The class A average was $1,290/unit, up 5.0% year-over-year, while class B/C properties rose 5.7% to $785/unit. Central Dallas posted the highest submarket rent, at $2,103/unit.

Reis also reported that the vacancy rate in Dallas ended the year at 3.8%, an improvement from 4.7% one year ago, and the lowest level since 1993. Class A vacancy was 4.7%, while class B/C properties finished the year at 2.6%. Mesquite/Seagoville had the lowest submarket vacancy rate, at 1.2%. Reis forecasts vacancy will increase to 5.3% by the end of 2021.

New Development

Multifamily development in Dallas has been among the strongest in the nation, with the second most units completed during 2016 and planned to come online during 2017, trailing only Houston.

Construction data from Reis shows 11,567 new units completed during 2016, which built on strong totals of 11,955 units in 2015, 12,346 units in 2014, and 10,177 units in 2013. Much of the new development has been in high-amenity high-rises near downtown. Reis analysts forecast 19,696 new units to come online during 2017, representing 4.2% of the existing inventory, and would be the highest annual total on record for the market.

Amid the flood of new supply, demand has remained strong. Absorption totaled 14,462 units during 2016, the third highest total on record for the market, and absorption is forecast to reach 14,150 units for 2017.

Investment Sales

The Dallas investment market posted a record breaking fourth quarter. According to data compiled by Real Capital Analytics, multifamily volume reached $3.1 billion, more than double the five-year quarterly average of $1.7 billion, and the highest quarterly total on record for the market. Sales totaled $9.4 billion during 2016, higher than the 2015 total of $8.3 billion. There were 406 significant transactions recorded during the year, compared with 392 for all of 2015.

The purchase of Landmark Apartment Trust Inc. by Starwood Capital Group and Milestone Apartments Real Estate Investment Trust in January accounted for a significant portion of Dallas sales volume in 2016. The deal included 27 multifamily properties in the Dallas market, made up of more than 6,800 units and valued at approximately $458.1 million.

Dallas also solidified its standing as a desirable market for foreign investment. A total of $341.7 million in foreign capital was used to purchase multifamily properties in the market during 2016, which was following an even stronger 2015 when $1.6 billion in capital came through. Furthermore, Dallas has been the number two destination in the U.S. for foreign multifamily investment over the past five years, trailing only Manhattan.

The average multifamily sale price in Dallas for 2016 was $112,846/unit, the highest level on record for the market, and up 21% from $93,158/unit during 2015. In comparison, the U.S. overall average sale price was $145,720/unit, up 7.2% from $135,895/unit one year ago.

The average cap rate for 2016 sales in Dallas was 6.1%, down from 6.5% in 2015, and the most recent high of 8.2% in February 2009. The cap rate spread over the 10-year Treasury yield was 355 bps, down 69 bps year-over-year, which was tighter than the five-year average of 437 bps. In comparison, the U.S. cap rate was 5.7%, as compared with 5.9% one year ago.

Economic Overview

Data from the U.S. Bureau of Labor Statistics showed that employment for the Dallas-Plano-Irving, TX metropolitan area increased 4.2% (representing 103,400 jobs) during 2016, higher than the 1.6% gain for the U.S. overall during that time. The largest gains over the last 12 months were in mining, logging, and construction (up 6.5%); professional and business services (up 6.1%); and leisure and hospitality (up 5.6%). No major industry sectors reported losses on the year. The unemployment rate rose to 3.6%, essentially unchanged from one year ago, and lower than the U.S. overall rate of 4.7%.

The housing market also remained strong during the year, with price growth higher than the national average. The S&P Case-Shiller Home Price Index for Dallas increased 8.1% during the 12 months ending in December, outpacing the U.S. index, which increased 5.8%.

The financial services and business services sectors are expected to continue to drive employment growth in Dallas during 2017. The area’s strength as a distribution center, high concentration of corporate headquarters, and favorable demographics will solidify its economy in the longer run; although growth will be business-cycle dependent because of a high exposure to the volatile high tech industry.

Affordability

The market boom in Dallas has taken a toll on affordability. The city council has taken up a task force to address the issue and a recent report from the Federal Reserve Bank of Dallas showed the housing market to be the least affordable major metro area in the state.

Zillow measures rental affordability as the share of household income spent on rental payments, excluding utilities and other costs.

According to data from Zillow, rent affordability in Dallas-Fort Worth, TX was 29.9% at the end of 2016, ranking 84th out of 300 markets. In comparison, the historical average for the market measured from 1985 through 1999 was 21.8%, ranking a more favorable 241st.

Despite the recent increases, rent affordability in Dallas remained only slightly higher than the national average of 29.2% at year-end. Historically, the national average was 25.8%.

Multifamily Remains a Favored Asset Class — Q4 2016 Market Update

This article was originally published on ALEX Chatter: Multifamily Remains a Favored Asset Class — Q4 2016 Market Update and all charts and images are from ALEX Chatter.

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Nashville posted the second fastest growth among primary markets, with year-over-year rents climbing 8.2% to $1,020/unit, according to Reis.

Despite uncertainty surrounding the election and slowing rent growth in some higher-priced markets, U.S. multifamily properties remained a favored asset class during Q4 2016.

Overall, rent growth continued and vacancy held steady, while development was active and demand was elevated. Job growth remained strong, although economic growth remained slow, and uncertainty hung around the new administration and rising interest rates.

Rental Market

According to Reis, the average asking rent for multifamily properties in the U.S. reached $1,308/unit at the end of the year, a 3.7% increase over $1,261/unit one year ago. This marked the 28th consecutive quarter of growth. Over the last 15 years, multifamily rent growth has averaged 2.7% annually. Reis projects that rent will grow 3.5% during 2017, then will slow to 2.2% by 2021.

The asking rent for class A properties finished the quarter at $1,511/unit, up 3.4% from the $1,461/unit year-end 2015 mark, while the average for class B/C properties was $1,063/unit, up 3.5% from $1,027/unit.

Seattle claimed the top spot for rent growth among multifamily markets during 2016, where the average asking rent increased 10.5%, climbing to $1,601/unit, up from $1,449/unit. Rents have been driven by a strong local economy and increased foreign investment. Seattle also had the most active construction cranes in the country at the end of 2016, as well as the fastest home-price growth in the nation.

Nashville posted the second fastest growth among primary markets, increasing 8.2% to $1,020/unit, up from $943/unit. Rent growth has been boosted by strong employment gains, led by the health-care industry, and active new development. Nearly 8,000 units were completed over the last two years, and 17,800 units are expected to be completed through 2021.

Tacoma, a relief valve for Seattle’s soaring rents, posted 8.1% rent growth and finished at $960/unit, as compared with $888/unit one year ago. In addition, vacancy dipped to the lowest level since Reis has been tracking it.

While rent growth slowed throughout most of the Bay Area, Sacramento grew 7.9% during the year, rising to $1,178/unit from $1,092/unit, and representing the fourth fastest growth in the nation.

Portland posted the fifth largest rent growth during the year, at 7.4%, boosted by high-tech job growth, including renewable energy business and tech start-ups.

Growth in high-priced markets slowed at the end of the year, finishing flat compared to 2015 levels. Year-over-year rents in Boston was 0.3%, while New York City finished up 0.2%. San Francisco posted a decline of 0.3%.

Reis reported that the national vacancy rate finished the quarter at 4.2%, essentially unchanged from one year ago, although well below the most recent high of 8.0% in Q1 2010. Class A vacancy finished at 5.8%, essentially unchanged from the end of 2015, while class B/C vacancy improved to 2.8%, down from 3.1%. Overall, vacancy is expected to reach 4.7% in 2017, then increase to 5.1% by 2021.

More than 195,700 new multifamily units were completed in the U.S. during 2016, falling short of the 210,300 units completed during 2015, which was the highest total on records going back 15 years. Demand outpaced new supply during the year, with 197,600 units absorbed, which was higher than the 2015 total of 201,600 units.

Investment Sales

According to data from Real Capital Analytics, sales volume for multifamily properties in the U.S. reached a record-high total of $158.4 billion during 2016, slightly more than the previous high of $153.4 billion recorded during 2015. The average sale price was $145,700/unit, up from $135,900/unit for 2015.

Blackstone and Starwood Capital Group were the most active buyers during the year, with $14.5 billion and $10.6 billion in purchases, respectively.

The average cap rate was 5.7%, compared with 5.9% for 2015. In comparison, sales for all property types averaged a 6.1% cap rate in 2016 and 6.3% in 2015. The most recent high for multifamily cap rates was 7.0% during the third quarter of 2009.

Private investors accounted for 58.9% of multifamily transactions, the largest share of all investor types, and was higher than the 53.2% share reported during 2015. Cross-border capital investment represented 5.7% of total volume, down from 12.8% in 2015.

The Moody’s/RCA CPPI™ apartment price index increased 12.7% during the 12 months ending in November 2016, lower than the 14.8% increase measured one year ago. The all property index increased 9.3% over the last 12 months, compared with 11.5% one year ago.

Economic Overview

The U.S. Bureau of Labor Statistics reported that employment increased 1.5% during 2016. The largest increases were in the professional and business services (up 2.7%) and education and health services (up 2.4%) sectors, while mining and logging posted the biggest loss (down 10.3%). Job growth totaled 2.2 million in 2016, slightly lower than the increase of 2.7 million during 2015.

The Consumer Price Index increased 2.1% for the 12 months ending December, breaching Federal Reserve’s inflation target of 2.0%, and was the largest 12-month increase since the period ending June 2014. The index for all items less food and energy rose 2.2% and the energy index increased 5.4%.

Gross Domestic Product for the U.S. increased 1.9% during Q4 2016, down from 3.5% in Q3 2016. Growth was driven lower in part by a downturn in federal spending and weaker exports, which were offset by increased housing investment. Full-year growth for 2016 was 1.6%, matching the slowest annual pace since the recovery began.

Where is Commercial Real Estate Headed in 2017?

This article was originally published on ALEX Chatter: Where is Commercial Real Estate Headed in 2017? and all images are from ALEX Chatter.

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Left to Right: Panel moderator Barbara Byrne Denham (Reis); Charles Ostroff (Arbor Realty Trust, Inc.); Anika Khan (Wells Fargo); Bob Knakal (Cushman & Wakefield).

Here are key findings from the annual Reis Breakfast Briefing held at the New York Athletic Club in Manhattan last week.

Victor Calanog Ph.D., Reis, Inc. introduced the panel, which included Anika Khan of Wells Fargo Securities, Bob Knakal of Cushman & Wakefield, and Charles Ostroff of Arbor. The panel was moderated by Barbara Byrne Denham of Reis.

The panel answered questions covering the state of the commercial real estate market and what can be expected in 2017. Here are some notes of the talking points covered by each of the panelists.

Charles Ostroff – SVP, Agency Products, Arbor Realty Trust, Inc.

Despite a high level of multifamily development, absorption has remained strong. Rent growth is slowing, but remains positive and should be in the 3 – 4% range nationally next year. All of the new development is Class A product, no one is building the Class B/C product that remains in high demand.

The current financing market is still led by acquisitions, as opposed to refinances. Sellers are also looking at certainty of execution, not only the highest bid. The caps for Fannie Mae and Freddie Mac will remain at $36.5 billion for 2017, and will act as a balloon to provide additional liquidity if needed.

The Trump administration policy will be a wait-and-see approach. While policy details are uncertain, we could be entering a period of de-regulation. It will take time to roll back Dodd-Frank, if it happens at all, as banks are already set up for risk retention. Lending is a matter of competition and lenders need to decide how much risk to take.

Anika Khan – Managing Director & Senior Economist, Wells Fargo

Commercial real estate is subject to business and economic cycles. Economists have warned that real estate has reached a mature phase and that asset values are at an alarming level. Any unbalance in the economy could disrupt prices.

We don’t have clear policy details for the Trump administration, although infrastructure is a big fiscal multiplier. It remains to be seen what level of spending will be approved. Infrastructure spending has less impact during a late stage expansion — like we are in now — than during a recession.

Bob Knakal – Chairman, New York Investment Sales, Cushman & Wakefield, Inc.

We are in the second inning of a new game. The last game ended last year. 2014 and 2015 were the best two years ever for New York real estate. Sales volume is expected to be down in 2016, compared to the previous two years’ historic levels. Land and hotel values are already declining and other sectors are plateauing. Office concessions are way up, but rents remain stable, as fundamentals are eroding and interest rates are rising.

Forty percent of residential sales in Manhattan are investors buying condos, adding pressure to the rental market. Foreign investment remains strong, as Manhattan real estate acts as a safe deposit box for foreign investment, and Brexit has been a boost.

Tax laws that are beneficial to the real estate industry, such as capital gains tax rates and 1031 exchanges, should remain unchanged in the new administration.