U.S. Multifamily Market Spotlight Q3 2020

This article was originally published on Arbor Chatter as "U.S. Multifamily Market Spotlight Q3 2020", and all charts and images are from Arbor Chatter.

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• U.S. multifamily rent growth fell 1.2% year-over-year, yet renters have kept up with payments.
• Vacancy rose to 5.0%, up from 4.6% one year ago, although remained in line with long-term averages.
• Investment activity dropped to half the volume from at the same time last year.

While not immune to the effects of the recession, the multifamily real estate market has shown resilience thus far in the pandemic, compared with other property sectors. Rent payments have held steady, although rent growth slowed and vacancy increased. Investors showed caution, with sales volume and lending activity declining compared to last year. Additional assistance to support renters through the remainder of the pandemic would solidify the stability of the sector.

Multifamily Market Rent Growth

Rent growth in the U.S. multifamily market showed further declines in the third quarter, as the COVD-19 recession dug deeper into the U.S. and put the brakes on a strong 10-year run for the sector.

Moody’s Analytics REIS reported that effective rent growth fell 1.2% year-over-year, down from an increase of 3.7% in 2019. A 1.9% decrease was measured for the third quarter alone, which was the steepest decline on record. The declines in rents have been primarily driven by Class A properties, which fell 1.7% year-over-year. In comparison, Class B/C properties fell 0.6% year-over-year. Overall, rent growth is forecasted to decline by a record 2.6% in 2020, steeper than the declines posted during the Great Recession, and is expected to continue to decline in 2021 before turning positive again in 2022.

The U.S. vacancy rate rose to 5.0%, up from 4.6% one year ago, and reaching its highest level since 2011. However, the vacancy rate remained in line with long-term averages, as the market was starting from a strong point. REIS forecasts that the vacancy rate could increase to 6.5% by the end of 2021. The vacancy rate for Class A buildings jumped to 6.4%, from 6.0% at the end of 2019, while Class B/C properties increased only slightly, to 3.7% from 3.6%.

Despite the overall market downturn, a few markets were able to post positive results. Indianapolis posted the strongest rent growth year-over-year, at 3.1%. According to the REIS COVID-19 impact tracker, the rate of job decline in Indianapolis has been better than most Midwest metros. The city’s diverse employment base and well-educated work force will help accelerate the Indianapolis recovery.

Additional Midwest markets also were among the national rent growth leaders, such as Cleveland (up 2.8% year-over-year), Kansas City (up 2.6%), and St. Louis (up 2.6%). Last year’s growth leader Phoenix increased 2.3%. The high-priced coastal markets continued to post the largest declines. The San Francisco multifamily market dropped 9.6% year-over-year, while the New York Metro fell 7.4%.

Thus far, an overwhelming majority of renters have been able to keep up with rent payments throughout the pandemic. The National Multifamily Housing Council (NMHC) Rent Payment Tracker found 94.8% of apartment households made a full or partial rent payment by the end of October, down slightly from 96.6% one year ago. With the CARES Act benefits expiring on December 26, the NMHC warns that the federal government will need to deliver additional stimulus to protect the stability of the nation’s rental housing sector.

More than 13 million workers were being supported by pandemic unemployment benefits at the end of October. Renter households could see a bigger impact from the expiration of the extended benefits, since renters tend to be more cost burdened than homeowners. Renters are not the only ones who will struggle. Without rental income many landlords will be unable to pay property expenses, such as taxes and utility bills.

Capital Markets

Investment activity continued to slow, as a price disconnect remained. Through the first three quarters of the year, multifamily sales volume dropped to $81.3 billion, half the total from at the same time last year, according to data from Real Capital Analytics (RCA).

Cap rates for multifamily transactions remained at historic lows, averaging 5.3%, and were in line with the level measured at the end of 2019. Multifamily cap rates remained the lowest among the major property types, followed by industrial (6.1%), office (6.6%), retail (6.6%) and hotel (8.7%).

RCA also reported that their Commercial Property Price Index increased 7.2% for the apartment sector, down from an 8.8% increase one year ago. However, the rate of increase remained significantly higher than the U.S. overall rate of 3.6%. The industrial index was the only segment to post a higher increase than apartments, rising 8.5%

Refinances accounted for 74% of apartment loans through the first nine months of the year, which was the highest level of year-to-date refinance activity on record. Through the same time period in 2019, refinances accounted for 63% of multifamily lending, which was in line with the five-year average.

Historically low interest rates spurred the high percentage of refinance activity. RCA reported that the average multifamily mortgage rate fell to 3.4% in August, sliding from 4.1% at the same time last year, and the lowest on record.

The Mortgage Bankers Association (MBA) projects multifamily originations will fall to $288 billion for this year, down 21% from 2019’s record total of $364 billion. Going forward, MBA forecasts an increase in multifamily lending volume for 2021, rising to $305 billion.

Economic Overview

The economy made strong gains in employment over the summer, although through October total employment was still down over 10 million jobs since the start of the pandemic, according to data from the U.S. Bureau of Labor Statistics. The unemployment rate finished at 6.9%, a significant improvement on the COVID peak of 14.7%. However, this figure remained higher than the pre-COVID rate of 3.5%.

The Department of Labor reported that a total of 21.1 million people were receiving unemployment benefits in October, including 13.1 million receiving extended pandemic assistance. Jobless claims still remained elevated, with more than 700,000 people per week filing claims. Prior to the pandemic, the previous record weekly high was 695,000 for the week of October 2, 1982. Claims have eclipsed that 40-year record every week since March 21st.

Gross domestic product jumped an annualized 33.1% in the third quarter, yet total production remained a net 3.5% below pre-pandemic levels. The GDPNow model estimate from the Atlanta Federal Reserve for the fourth quarter was 2.2% as of the end of October.

Ultimately, the duration of the recession will be determined by the course of the pandemic. Recent vaccine news has been encouraging, although timelines for widespread accessibility of an effective vaccine still remain unknown. With COVID-19 cases surging as the country heads into winter and no sign of additional fiscal support from Congress, a clear timeline of recovery remains unknown.

Midyear 2020 Multifamily Investment Market Update

This article was originally published on Arbor Chatter as "Midyear 2020 Multifamily Investment Market Update", and all charts and images are from Arbor Chatter.

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- Refinances accounted for 73% of apartment loans, up from 61% in 2019.

- Apartment mortgage rates fell to 3.6%, marking the lowest rate on record.

- A total of $55.0 billion in sales volume was recorded, sharply down from the pace of 2019’s record high.

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Refinance Activity Increases

During the first half of 2020, the multifamily lending environment experienced a historically high level of refinance activity.

Refinances accounted for 73% of apartment loans through June, according to data from Real Capital Analytics (RCA) reflecting property and portfolio transactions of at least $2.5 million. This was the highest level of first-half refinance activity on record. In comparison, refinances during the first half of 2019 accounted for 61% of multifamily lending, which was in line with the five-year average.

The high percentage of refinance activity has been spurred by historically low interest rates. RCA reported that apartment mortgage rates fell to 3.6% in the first half of 2020, down from 4.5% at the same time last year, and marking the lowest rate on record.

Sales Activity Slows

Although there has been an increase in refinancing, the COVID-19 pandemic led to a steep drop in sales activity. Through the first six months of the year, $55.0 billion in multifamily sales volume was recorded, not the lowest volume on record, but sharply down from the pace of 2019’s record high of $190.0 billion. However, apartments remain the preferred commercial real estate sector, leading all other major types in investment volume during the first half of 2020 as it had for all of 2019.

RCA commented that the pause in investment activity signaled that the market is in a “shock and triage” phase of the cycle, as potential buyers remain cautious. The market won’t enter the “price discovery” phase until forced sales lead to an increase in volume.

The recession caused by the pandemic has also affected apartment values. As of June 2020, the Real Capital Analytics Commercial Property Price Index (RCA CPPI) fell to an annualized rate of 7.1%, down from 8.4% compared to the same time period of last year. Cap rates remained stable, averaging 5.3% through June, in line with the 2019 average.

The Sector Shows Resiliency

Although these measures show the multifamily market is not immune to the effects of the recession, and while the course of the pandemic is still unknown, the sector has shown resiliency thus far. Renters have prioritized paying their rent, despite the high level of unemployment. The National Multifamily Housing Council’s Rent Payment Tracker found 91.3% of apartment households made a full or partial rent payment by July 20. Additionally, with high prices and tight supply in the housing market, many would-be home buyers will be forced to remain renters, which will help to stabilize the multifamily market.

Phoenix Multifamily Market Spotlight Q1 2020

This article was originally published on Arbor Chatter as "Market Spotlight: Phoenix Multifamily on Solid Ground", and all charts and images are from Arbor Chatter.

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• The Phoenix multifamily market had highest rent growth in the U.S. over the last 12 months.
• Investment volume reached a record high in 2019, and price growth significantly outperformed the U.S. overall.
• Employment growth was stronger than the national average, with balanced growth across industries.

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Phoenix Multifamily Market on Solid Ground

Prior to the onset of COVID-19, the Phoenix multifamily market stood on solid ground. The market had the highest rent growth in the nation, along with an active development pipeline and high investment activity.

The Reis COVID-19 Impact Dashboard predicted that a diverse economy and strong recent job growth will protect the market against significant losses. Employment growth ranked sixth in the U.S. over the last five years, with balanced growth across industries. Additionally, the market has moderate exposure to the leisure, hospitality and retail sectors, which are most vulnerable to the impact of COVID-19, accounting for 22% of the labor market.

The depth of the downturn is becoming more apparent, although the course of the pandemic and success of public health measures will determine the duration of the recession. The Valley of the Sun is not immune to the economic effects of the recession that will be felt throughout the nation. However, starting from a position of strength, in the longer term the market is expected to remain attractive to investors given its diverse economy and employment base.

Rental Market

During the last recession the Phoenix multifamily market experienced a steep downturn. However, it rebounded with a strong recovery, which included the highest rent growth in the U.S. over the last 12 months. According to Moody’s Analytics REIS, the average asking rent in Phoenix increased 6.9% during the 12 months ending in March 2020, and has risen every quarter since third-quarter 2010. The rent growth for Class A properties was 6.3% over the last 12 months, while Class B/C rents increased 6.4%.

The Valley’s vacancy rate was 4.6% at the end of the quarter, only slightly higher than the 4.4% rate reported one year ago, despite elevated levels of new construction. The Class A vacancy rate finished at 5.3%, while vacancy in Class B/C properties was 3.7%.

The lowest vacancy rates were in the Maryvale and Sunnyslope submarkets. The Central Phoenix South submarket, where much of the new development has taken place recently, had one of the highest vacancy rates among submarkets, at 6.5%.

“Phoenix multifamily is likely to take some hits in this downturn, given that the area is projected to lose close to 10% of its total employment base,” said Dr. Victor Calanog, Head of Commercial Real Estate Economics for Moody’s Analytics REIS in a statement prepared for Arbor. “Though vacancies are projected to rise and rents are expected to fall, we do not anticipate breaching historic highs for vacancies and rent declines will likely be lower in magnitudes relative to ’08 and ‘09.”

Development

Multifamily development in Phoenix was booming prior to the COVID-19 pandemic, and residential construction has continued to operate as an essential business throughout.

Demand was able to keep pace with supply during the cycle, with 7,200 new units coming online during 2019, alongside 7,400 units of net absorption. More than 9,600 new units are expected to be delivered to the market in 2020 according to the Reis baseline forecast, which would approach totals not seen since the 1980s. However, that total could fall as low as 6,700 under more severe scenarios.

At the submarket level, the Central Phoenix South submarket had the most new units delivered recently, while the Chandler/Gilbert submarket had the most units under construction.

Investment Activity

Phoenix multifamily investment volume reached a record high of $8.2 billion during 2019, according to data from Real Capital Analytics (RCA). However, in the first three months of 2020, investors showed signs of caution, with only $1.3 billion in sales recorded. This was lower than the five-year quarterly average of $1.4 billion, and an annualized rate of only $5.1 billion. Cap rates remained at a historical low of 4.9%, down from 5.1% one year ago.

The slowdown has yet to affect pricing. The RCA Commercial Property Price Index for Phoenix increased an astounding 19.8% for the 12 months ending in March, up from 16.0% one year ago. U.S. overall apartment property prices rose 11.0% year over year, the fastest growth for the sector since 2018, and prices for all commercial properties increased 7.2%.

The duration of the pandemic and the magnitude of how investment activity will be affected are still unknowns, but past downturns may be a guide. RCA data shows that the Phoenix apartment market took 76 months to get from its lowest point during the Global Financial Crisis back up to its peak. This was the third longest recovery time in the country. The average recovery time of the markets covered was 46 months.

Economy

Nearly all measures of the Phoenix economy were strong going into the COVID-19 pandemic. The area had experienced strong employment growth, along with the fastest population gains in the country, including positive in-migration. These factors should help the Valley fare better than most markets, and improves its outlook amid the national recession.

Prior to the pandemic, job growth in the Phoenix-Mesa-Scottsdale, AZ metro area was 3.2% for the 12 months ending in February 2020, significantly stronger than the U.S. overall rate of 1.6%, according to the U.S. Bureau of Labor Statistics. The number of jobs in the metro area fell by 7.6% in April, after Arizona closed nonessential businesses, representing a loss of 229,000 jobs in just two months, but faring better than employment for U.S. overall, which declined 12.9%.

By the end of April, the unemployment rate for the metro area had jumped to 12.3%, up from 3.8% in February prior to the shutdown. That rate is expected to continue to increase in the coming months as the full effects of the pandemic are measured, and may reach beyond the leisure, hospitality and retail sectors.

Los Angeles Multifamily Rents Hit New Highs for 2017, Class B/C Vacancies Decrease

Los Angeles remained one of the more sought-after multifamily markets in the U.S. during 2017, as rent growth and investment volume ranked near the top nationally. The vacancy rate also remained low, despite an influx of new supply, and demand for additional housing remains high. The local economy has recovered from the recession, although high housing costs and restricted in-migration may slow expansion.

Read the full report on Arbor Chatter here: Los Angeles Multifamily Rents Hit New Highs for 2017, Class B/C Vacancies Decrease

Dallas Multifamily Posts Strong 2017, Eyes on Supply & Demand Balance for 2018

The Dallas multifamily market posted strong results in 2017 as rent growth continued and investment activity was high. Vacancy — driven by an influx of new supply — increased,  though levels remained well below previous highs.

Read the full report on Arbor Chatter here: Dallas Multifamily Posts Strong 2017, Eyes on Supply & Demand Balance for 2018

U.S. Multifamily Year in Review 2017 – Still Going Strong

This article was originally published on Arbor Chatter: U.S. Multifamily Year in Review 2017 – Still Going Strong and all charts and images are from Arbor Chatter.

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The U.S. multifamily market continued to post strong results during 2017. Rent growth slowed, although remained healthy, and appears to have peaked in 2015. Despite a high volume of new supply, vacancy increased only slightly and remained at historically low rates. Investment activity was slow to start the year, yet gained momentum as the year went on, and finished just below 2016’s record highs.

Rental Market

The fourth quarter marked the 32nd consecutive quarter with positive rent growth for U.S. multifamily properties, according to data from Reis. Rent increased 4.2% during 2017, up from 4.0% during 2016, although was below the peak of 5.9% posted in 2015.

The vacancy rate increased to 4.5%, up from 4.2% one year ago, yet remained well below the previous high of 8.0% in 2009. The active development pipeline suggests 2016 may have been the cyclical low for vacancy.

Rent growth in Class A properties increased 4.3% year-over-year, as compared with 3.2% for Class B/C properties. Additionally, vacancy in Class A properties increased to 5.8% from 5.5% at the end of 2016, while Class B/C vacancy rose to 3.4% from 3.1%.

Birmingham had the most substantial rent growth among primary markets for the year, increasing 7.3%. Gains in the financial services and construction industries have driven the local economy.

New Development

Data from Reis showed that 2017 was a record year for multifamily supply growth in the U.S., as more than 221,100 new units came online, surpassing the 2016 total of 219,800 units. Demand struggled to keep pace with the additional supply, as absorption totaled 167,700 units, down from 213,900 units in 2016.

Many projects initially expected to finish during 2017 were delayed into 2018, suggesting an even stronger year ahead. Reis forecasts that a total of 265,100 new units will be added to the market in 2018, with absorption predicted to reach 202,500 units.

A total of 199,600 Class A multifamily units were delivered during 2017, building on last year’s total of 207,100 units. In the last eight years, less than 28,000 Class B/C multifamily properties have been added to the market.

Sales Market

Following a slow start to the year, multifamily investment activity increased as the year progressed. Data from Real Capital Analytics (RCA) showed that 2017 volume reached $150.1 billion, just below the historical high of $161.2 billion recorded during 2016, marking the first year since 2009 with a decline in volume.

The average sales price was up 1.0% on the year and up 19% compared to the five-year average. Cap rates continued to decline, falling 10 basis points during the year, to 5.6%.

The RCA CPPI™ apartment price index increased 10.6% during 2017, higher than the 10.1% increase for 2016. In comparison, the all property index increased 7.1% in 2017 and 8.6% in 2016.

Economic Overview

According to data from the U.S. Bureau of Labor Statistics (BLS) , total nonfarm payroll employment in the U.S. increased 1.5% during 2017, a gain of 2.2 million jobs, which was the lowest annual total since 2012. Employment trended up in construction, food services and drinking places, health care, and manufacturing. The unemployment rate was 4.1%, an improvement on the 4.7% rate reported one year ago.

The BLS also reported that over the last 12 months, the Consumer Price Index increased 2.1%. The shelter index rose 3.7%, down from 4.0% one year ago, with both the owners’ equivalent rent and the rent of primary residence indexes increasing 3.2%.

Real gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2017, according to the “advance” estimate released by the U.S. Bureau of Economic Analysis.

The U.S. Census Bureau reported that the homeownership rate finished 2017 at 64.2%, up slightly from 63.7% at the end of 2016. This marked the first annual increase since the peak of 69.2% in 2004, during one of the biggest housing booms in history.

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.

A Look at the Most and Least Expensive Multifamily Investment Markets

This article was originally published on ALEX Chatter: A Look at the Most and Least Expensive Multifamily Investment Markets.

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As we enter the fall buying season, it’s useful to look at pricing in major multifamily markets through the first half of the year. Not only in the priciest markets, but also in markets that may represent higher yield opportunities.

Using transaction data compiled by Real Capital Analytics, we calculated the average sale price in the top 50 markets in the U.S. – specifically, the weighted average price per unit paid for apartment sales transactions over $2.5 million recorded during the 12 months ending in June 2016. The average price for the U.S. overall during that time was $134,000/unit.

Most Expensive Markets

San Francisco ($492,500/unit) was the highest priced multifamily investment market over the last 12 months. Its local economy has been boosted by the expansion of the technology sector, while opposition to new development has limited new supply. Given those attributes, San Francisco should remain among the more favored markets in the long term.

Manhattan ($485,800/unit) was second on the list, weighted heavily by the purchase of Stuyvesant Town and Peter Cooper Village for $5.3 billion at the end of last year. New York City remains the favorite destination for international investment capital. However, investors of all types have begun to approach this market with caution as the luxury condominium market has slowed recently. The area also now has the highest level of new development in the pipeline of any multifamily market in the country.

The third highest priced multifamily investment markets was also in the Bay Area: San Jose ($334,800/unit). Boosted by a strong local economy built around Silicon Valley’s entrepreneurial spirit, San Jose’s long-term forecast remains bright.

Washington, D.C. ($284,500/unit) and Boston ($257,200/unit), two additional traditional international gateway investment markets, rounded out the top five highest priced markets.

Least Expensive Markets

It’s also useful to look at recent sales transactions in the lowest priced multifamily markets, to see where high-yield opportunities may lie.

“The secondary and tertiary markets of the U.S. have apartment assets that price at a lower rate per unit and also at higher cap rates,” said Jim Costello, Senior Vice President at Real Capital Analytics. “In the six major metros, cap rates came in at 4.8% in during Q2 2016 versus a 6.4% rate in the secondary and tertiary markets. Given that GSE debt is priced about the same across markets in terms of mortgage rates, it implies more positive leverage opportunities in the secondary and tertiary markets.”

The lowest priced market over the last 12 months was Memphis ($54,600/unit). Memphis is expected to maintain strong economic growth as a major transportation hub with a healthy job market, low business costs, and an attractive downtown area.

Indianapolis ($57,600/unit) was another strong market that finished at the bottom of the list. The local economy is expected to continue its recent expansion, which has been driven by low business costs and favorable demographics, along with gains in employment in the high-tech and life sciences sectors.

Three Ohio markets, Cleveland ($59,600/unit), Columbus ($63,100/unit), and Cincinnati ($77,300/unit) were among the lower priced markets. Data from Real Capital Analytics shows that the average apartment cap rate in Ohio came in at 7.6% in during Q2 2016. The local economy in these markets should continue to pick up steam in the near term, based on strong growth of healthcare and professional services sectors.

Houston ($73,700/unit), where the local economy has been hurt by falling energy prices, rounded out the top five lowest priced markets.