Q3 2016: Multifamily Construction on the Rise

This article was originally published on ALEX Chatter: Q3 2016: Multifamily Construction on the Rise.

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The U.S. Census Bureau and the Department of Housing and Urban Development recently released new data on residential construction, including data for multifamily buildings (classified as structures with five or more units). All data is seasonally adjusted at an annual rate. 

Building Permits

Total privately-owned residential housing units were authorized by building permits in the United States at a rate of 1,229,000 in October, an increase of 28,000 (2.3%) from the year-end 2015 rate of 1,201,000.

Permits for units in multifamily structures were at a 439,000 rate in October, up 11,000 (2.6%) from the end of 2015, and represented 36% of the total residential permits issued. The multifamily rate for 2015 was the highest year-end level since reaching 614,000 in 1986.

For 2015, the states with the highest multifamily permits as a percent of total residential permits were the District of Columbia (92.6%), New York (83.3%), New Jersey (62.3%), Connecticut (57.5%), and Massachusetts (55.8%).

Housing Starts

Total housing starts were at a 1,323,000 rate in October, an increase of 163,000 (14.1%) from the 2015 year-end total.

Housing starts in multifamily buildings were 445,000, up 67,000 (17.7%) from the end of 2015, and represented 34% of total residential starts. The 2015 total was the highest year-end rate since 381,000 at the end of 2003.

Total residential housing units authorized, but not started, were at rate of 129,000 at the end of October, down from 149,000 (-13.4%) at the end of 2015, including 62,000 in multifamily structures, down from 80,000 (-22.5%).

Housing Completions

Total housing completions were at a rate of 1,055,000 in October, up 22,000 (2.1%) from the end of 2015.

Completions in multifamily buildings were at a 300,000 rate, down 16,000 (-5.1%) from the end of 2015, and represented 28% of total completed residential units. The 2015 total was the highest year-end total since 326,000 units were completed in 2006.

At the end of October, there were 1,049,000 housing units under construction in the U.S., including 597,000 in multifamily structures, representing 57% of the total.

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.