Top 10 Markets for Multifamily Sales Volume in 2020

This article was originally published on Arbor Chatter as "Top 10 Markets for Multifamily Sales Volume in 2020", and all charts and images are from Arbor Chatter.

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• Dallas finished as the top destination for multifamily capital in 2020, for the fifth consecutive year. 
• Sun Belt markets such as Atlanta and Phoenix continued to attract investors. 
• U.S. multifamily sales overall fell 28% in 2020, compared to 2019’s record total.

The U.S. multifamily market weathered the COVID-19 pandemic better than most sectors of the economy during 2020, boosted by stimulus packages that allowed tenants to generally keep up with rent payments. According to Real Capital Analytics (RCA), sales activity was down 28% in 2020, compared to 2019’s record total. However, the year finished strong. After moderating in the third quarter, the market posted $56.7 billion in sales in the fourth quarter, which was higher than the volume seen in the entire first half of the year. 

Sun Belt markets led the recovery, as investors sought out affordable markets with positive migration trends, strong economies and good job growth.

Dallas Remains Strong

For the fifth year in a row, Dallas led the nation in multifamily investment activity, with $10.3 billion in sales volume. This was only an 8.0% drop from the $11.2 billion in sales recorded during 2019. Dallas was a strong performer during the recent expansion, finishing as the No. 2 sales market for the 2010s, behind only Manhattan.

 
The Dallas economy fared relatively well during the downturn, with employment declines well below the national average. The ability to work from home buffered job losses among the area’s high concentration of corporate headquarters, while the increased demand for housing boosted the construction industry. These factors, along with positive migration trends and a growing technology sector, make Dallas an attractive market for multifamily investment coming out of the recovery.

Sun Belt Markets Shine

Atlanta finished second in the nation for 2020, with $9.5 billion in multifamily sales volume, a 17.4% drop as compared with 2019. The area’s diverse economy lessened the effects of the recession, although the recovery has been slow as the level of COVID-19 cases remains high.

 
After posting a historical market record in multifamily sales volume in 2019, Phoenix finished 2020 with $8.2 billion in sales. This was the third highest total in the nation, although it was down 22.1% year-over-year. The area’s economy fared better than most markets during the pandemic. Tremendous population growth and business relocations have driven the market's recovery, but an extremely high level of positive COVID-19 cases have hindered this progress.

 
Additional Sun Belt markets filled out 2020’s top 10 multifamily sales volume leaders, including Denver, Austin and Charlotte, with Houston, Tampa and Orlando finishing as runners up.

U.S. Multifamily Market Snapshot Q3 2020

 

The multifamily real estate market showed resilience in the third quarter, despite the COVID-19 pandemic. Rent growth posted declines, yet rent payments have held steady and the market fared better than other property sectors.

Source: Arbor Chatter

U.S. Multifamily Market Snapshot Q2 2020

 

The multifamily market felt the effects of the COVID-19 pandemic in the second quarter. Following a historically strong 10-year run, rent growth slowed and sales volume declined, as investors showed caution. Although the quarter’s results show that multifamily is not immune to the recession, and the course of the pandemic is still unknown, the sector has shown resiliency as compared with other sectors.

Source: Arbor Chatter

Cincinnati is Booming as Economic Expansion Continues

This article was originally published on Arbor Chatter: Cincinnati is Booming as Economic Expansion Continues, and all charts and images are from Arbor Chatter.

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As the tail of this economic expansion extends further, real estate investors continue to search for yield by investing outside of primary markets. Cincinnati has been a beneficiary of that trend, and the market is booming.

Moody’s ranked the Queen City as the best-performing metro area in Ohio. The area’s economic strength was proven when Amazon invested $1.5 billion in a new regional air services hub.

The metro’s multifamily market is experiencing record investment activity and rent growth. This is coupled with low vacancy and high apartment demand. Employment levels are at all-time highs and unemployment is at historical lows. Going forward, Cincinnati’s highly educated and skilled workforce will assure it is well positioned as the economic expansion continues.

Investment Sales Market

Multifamily investment activity in Cincinnati has reached a torrid pace. Sales volume hit a record $609.2 million during 2018, according to Real Capital Analytics (RCA). This volume level eclipsed the 2017 total of $316.7 million, and the previous record-high of $447.3 million in 2016.

The average sale price in 2018 was $75,360/unit, up more than 20% as compared with $62,754/unit in 2017. Additionally, the market started off 2019 on a high note. The first three months of the year recorded a whopping $260.8 million in volume. This was significantly higher than the five-year quarterly average of $96.8 million.

Institutional investors have also increased their interest in the market, making up 13.7% of apartment volume in 2018 (private investors made up 67.1% and cross-border was 19.2%), compared with no activity in 2017 (when the volume was 100% private).

As expected with the property price increases, yields have steadily declined. Cap rates for Cincinnati apartment transactions averaged 6.7% for 2018, the lowest level on record for the market. They were also down from 7.1% in 2017. RCA records show the most recent high was in 2002, when cap rates averaged 9.0%.

Rental Market

On the back of solid investment activity, apartment rent growth in the Cincinnati market continues to accelerate. According to Reis, the average asking rent finished the first quarter of 2019 at $920/unit, up 3.8% from $886/unit one year ago. Rent growth for 2018 was 4.1%, matching 2016 for the market’s highest annual growth rate on record. Class A rent growth was 4.2% and Class B/C was 3.3%. Reis forecasts asking rents overall to increase by 3.8% during 2019.

The market’s vacancy rate improved to 4.1% during the first quarter, down from 4.4% one year ago. This is well below the most recent high of 9.3% during 2003 and 2004. The vacancy rate for Class A apartments was 5.7% at the end of the year and 3.5% for Class B/C assets. Reis reported that strong demand, the market’s small size and limited supply are driving low vacancy conditions. Reis forecasts the overall vacancy rate to climb only slightly in 2019, finishing at 4.6%.

Cincinnati’s development pipeline remains active, with more than 5,300 new apartment units delivered over the last three years. During that time, absorption has totaled 4,300 units. While new supply is currently outpacing demand, the market is making up for a lack of development during the downturn. From 2010 through 2015, only 3,600 units were completed, while 8,100 units were absorbed. Reis forecasts that nearly 1,100 new units are expected to be delivered during 2019, with net absorption expected to approach 800 units.

Economic Overview

Employment levels in Cincinnati have reached historic highs, supported by a strong business services sector, a hot housing market, and a growing commercial aviation cluster. Long-term growth will be solidified by a highly educated and skilled workforce. However, uncertainties around trade policy present risks, given the area’s exposure to tariffs.

According to the U.S. Bureau of Labor Statistics, total nonfarm employment in the Cincinnati, OH-KY-IN metro area increased 1.8% during the 12-months ending in March 2019. This was up from 1.1% in 2018, and higher than the U.S. overall rate of 1.7%. Additionally, the unemployment rate improved to 3.6% at the end of March, matching the lowest level seen since 2001.

The metro’s housing market has outperformed the national rate, driven by limited supply and accelerated demand. Home prices in Cincinnati increased 6.8% during 2018, significantly higher than the U.S. overall growth rate of 6.0%, according to the U.S. Federal Housing Finance Agency House Price Index.

Favorable Multifamily Market Trends to Continue in 2019

This article was originally published on Arbor Chatter: Favorable Multifamily Market Trends to Continue in 2019, and all charts and images are from Arbor Chatter.

Of the top 25 multifamily markets in the U.S., 11 set new record levels of deal activity during 2018. Los Angeles emerged as the country’s new leader, totaling $9.3 billion in sales.

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The U.S. multifamily market further solidified itself as the premier real estate asset class in 2018. Rents increased for the third consecutive year, while vacancy rates remained low despite historically high levels of development activity.

Low cap rates and rising prices didn’t restrain investment activity, which reached record-high volume levels. The economic cycle continued its mature and robust expansion, producing an eighth consecutive year of positive job growth.

Given the favorable demographics surrounding the sector, multifamily investors can expect these trends to continue in 2019.

Rental Market

According to data from Reis, the average asking rent for multifamily properties in the U.S. increased to $1,441/unit during 2018, up 4.9% from $1,373/unit at the end of 2017. The fourth quarter of 2018 also marked the 36th consecutive quarter with positive rent growth. However, it now appears to have peaked during 2015 at 5.9%. Reis forecasts overall rent growth to climb 4.2% during 2019, then slow to 2.2% over the next three years.

The Class A asking rent was $1,660/unit at the end of 2018, up 4.6% from $1,587/unit at the end of 2017. Class B/C properties finished the year at $1,152/unit, up 4.4% from $1,103/unit at the end of 2017.

Las Vegas posted the highest rent growth in the nation, rising 8.6% year-over-year, driven by strong migration trends and a high concentration of prime-age workers. Phoenix took the second spot, posting 7.9% rent growth during the year, followed by Nashville (7.7%) and Charleston (7.5%).

The national vacancy rate increased to 4.9%, up from 4.6% one year ago. Vacancies have slowly and steadily risen since the cyclical low of 4.2% in 2016, though they remain below long-term historical averages and well below the 2009 peak of 8.0%. Although additional supply is expected to strain vacancy in the near-term, Reis forecasts the overall rate to remain reasonably stable, climbing to only 5.3% by the end of 2022.

Driven by the high volume of new construction, the vacancy rate for Class A properties reached 6.2% at the end of the year, up from 5.8% one year ago. Vacancy for Class B/C properties increased to 3.6%, up slightly from 3.5%.

“Although the national homeownership rate increased in 2018, the Reis apartment numbers show that apartment occupancy growth remained healthy in 2018, exceeding the growth in 2017,” noted Barbara Byrne Denham, Senior Economist at Reis. “Likewise, rent growth was higher in 2018. Much of this growth was driven by the strong job market that also was stronger in 2018 than in 2017.”

As expected at this point in the cycle, landlords continued offering concessions to new tenants in lieu of discounting rents, as the asking-to-effective rent spread was $70/unit at the end of the year. This spread was higher than the year-end 2017 difference of $64/unit, and represented the largest gap on record going back to 1999.

New Development

Development activity remained at the highest levels seen since the 1980s, which continued to help fill the backlog created by the lack of development in the years following the recession. Reis reported that multifamily completions in the U.S. totaled 244,400 units during 2018. This was just shy of the 2017 record-high total of 247,500 units.

A lack of new workforce housing development remains an obstacle to affordability throughout the country. A total of 226,600 Class A units were completed during 2018, while a mere 8,200 Class B units were built. Since 2009, nearly 1.4 million new Class A units have been built, compared to 36,900 new Class B units.

Demand has been strong during the current development cycle, although not quite enough to keep up with the pace of new supply. Absorption totaled 204,900 units in 2018, down from 187,600 units in 2017. Class A properties accounted for the bulk of total absorption, while Class B absorption was essentially flat. This was because most new absorption goes into new construction.

High levels of new construction are expected to continue in 2019, with 249,600 units forecasted to come online, and absorption forecasted to reach 206,400 units.

Sales Market

The decline in multifamily investment activity observed in 2017 led many to believe that 2016 was the peak for the sector in this cycle. Despite cap rates at record lows and growing prices, Real Capital Analytics reported that sales volume climbed to a record high of $172.6 billion during 2018. This was more than the $153.9 billion total during 2017 and the five-year annual average of $150.2 billion.

Of the top 25 multifamily markets in the U.S., 11 set new record levels of deal activity during 2018. Los Angeles emerged as the country’s new leader, totaling $9.3 billion in sales. Dallas, last year’s leader, finished only a sliver behind L.A., while Manhattan finished third.

The increase in the 10-year Treasury rate at the end of 2018 did not lead to an increase in multifamily cap rates, which remained at historical lows, and finished the year at 5.6%, essentially unchanged since the end of 2017.

Foreign investment in U.S. multifamily properties totaled $14.8 billion during the year, higher than the 2017 total of $13.1 billion, yet below the $17.5 billion historical high reported for 2015 (which included the $5.2 billion sale of Stuyvesant Town-Peter Cooper Village).

The RCA CPPI™ apartment price index increased by 8.9% during 2018, the strongest among property types, yet this was still lower than the double-digit rates from 2014 to 2017. In comparison, the All-Property Index increased 6.2% during 2018 (compared to 8.4% during 2017), while the office index increased 6.6% (from 5.0% in 2017), the industrial index was up 6.2% (from 9.3% in 2017), and retail was up 1.7% (from 1.9% in 2017).

Economic Overview

According to the U.S. Bureau of Labor Statistics total nonfarm payroll employment rose 1.8% during 2018, higher than the 1.5% increase during 2017. Additionally, December marked the 99th consecutive month of positive job growth. The largest over-the-year percentage gains in employment occurred in the mining and logging (8.7%) and construction (5.1%) sectors, with no major sectors posting a loss.

The metro areas reporting the largest gains were in Midland, TX (6.7%), Colorado Springs, CO (5.5%), and Reno, NV (5.3%).

The Consumer Price Index (CPI) increased 1.9% for the 12 months ending in December. This was the first time it held under 2.0% since August 2017. Key indicators of affordability worsened during the year, as the CPI rent index increased 3.5%, significantly higher than inflation, while average hourly earnings rose at a slower rate of 3.3%.

The U.S. Census Bureau reported that the homeownership rate inched up to 64.4% at the end of September, driven by first-time young buyers entering the housing market. The share of households headed by someone under 35 years old rose to 36.8%, up 1.2% from one year ago, and the highest level since the end of 2013.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 5.2% gain for the 12 months ending in November, down from 6.1% one year ago, and the slowest pace of annual growth since January 2015. Las Vegas, Phoenix, and Seattle reported the highest year-over-year gains.