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.

-----

• 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.

Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.

This article was originally published on Arbor Chatter as "Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.", and all charts and images are from Arbor Chatter.

-----

• Indianapolis multifamily rent growth topped the rankings in Q3 2020.
• Vacancy rates remained near record lows for the market.
• The Indianapolis metro area’s economy has performed better than most during the COVID-19 crisis, with unemployment recovering to near pre-pandemic levels.

The Indianapolis multifamily market experienced the nation’s highest rent growth during the third quarter of 2020 and the vacancy remained near record lows. Employment levels recovered to near pre-pandemic levels, driven by a developing technology industry and strong logistics base. While the course of the COVID-19 pandemic will be the ultimate driver of short-term growth, Indianapolis is well-positioned for long-term success.

Rent Growth Continues

According to Moody’s Analytics REIS, effective rent in Indianapolis grew 3.7% year-over-year, the highest rate among major markets in the country. This was well higher than the U.S. overall rate which fell -1.2% during that time. The strong rent growth was not a new trend. Indianapolis outgrew the U.S. overall for 2019 also, at 4.3% vs. 3.7%. Asking rent for Class A properties increased 3.3% year-over-year, compared to 2.2% for Class B/C, going against the national trend of rents in high-end properties falling faster than workforce units.

The market vacancy rate was at historic lows coming into the pandemic, reaching 5.0% at the end of 2019. By the end of the third quarter of 2020, the rate had increased to only 5.2%, although remaining slightly higher than the U.S. overall rate of 5.0%. The vacancy rate for Class A properties increased to 5.8% from 5.4% at year end, while the Class B/C rate improved to 4.4% from 4.5%, following the national trend of stronger workforce housing performance.

Economy Remains Strong

The Indianapolis metro area’s relatively affordable housing prices and cost of doing business has led to positive migration trends over the last few years. The already strong distribution sector has been further boosted by the growth in e-commerce during the pandemic, and the developing technology sector has provided a well-educated workforce. Additionally, the area’s low reliance on hospitality tourism has shielded its exposure to the recession, although the public sector has shown weakness.

According to the REIS COVID-19 impact tracker, the Indianapolis economy has performed better than most major markets during the coronavirus crisis, and the forecast calls for continued strong job growth.

The U.S. Bureau of Labor Statistics (BLS) reported that payroll employment for the Indianapolis metro area had nearly recovered to pre-pandemic levels by the end of October, down only 0.6% since February, or 6,400 jobs. For the U.S. overall, there were 10.1 million fewer jobs at the end of October compared to February, down 6.6%.

The BLS also reported that the unemployment rate for the area was 4.9%, approaching the the level prior to the COVID-19 outbreak of 2.8%, and well below the peak of 13.3%. As a comparison, the unemployment rate for the U.S. overall was 6.9% at the end of October, and peaked at 14.7%.

Outlook

As with most markets in the U.S., the course of the pandemic will determine the outlook for Indianapolis. However, the local economy has low exposure to the industries that have been hit hardest. The multifamily market entered the pandemic on a strong note and the area’s population growth, well-educated labor pool and growing high-tech industries will drive a fast recovery from the COVID-19 slowdown.

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.

-----

• 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.

Top Multifamily Rent Growth Markets Q3 2020

Indianapolis posted the strongest multifamily rent growth year-over-year, at 3.1%. Additional Midwest markets also were among the national leaders, such as Cleveland (up 2.8% year-over-year), Kansas City and St. Louis (both up 2.6%).

Source: Arbor Chatter

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

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.

-----

- 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.

-----

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 Snapshot Q1 2020

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. Although the Valley of the Sun is not immune to the economic effects of the recession that will be felt throughout the nation, the market is starting from a positon of strength.

Source: Arbor Chatter

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.

-----

• 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.

-----

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.

U.S. Multifamily Market Snapshot Q1 2020

The U.S. multifamily market finished 2019 on a historic run, then COVID-19 hit. While the full impact wasn’t felt by the end of the first quarter, initial results indicated a slowdown in rent growth, along with a sharp decline in development and investment activity.

Source: Arbor Chatter

U.S Multifamily Market Snapshot Q4 2019

The U.S. multifamily market posted strong results to end 2019. Q4 2019 marked the 40th consecutive quarter of positive rent growth. At the same time, vacancy rates remained low amid active development. Here’s a quick look at the U.S. multifamily market finance and investment benchmarks for Q4 2019.

Source: Arbor Chatter

Top U.S. Multifamily Markets of the Decade

This article was originally published on Arbor Chatter: Top U.S. Multifamily Markets of the Decade, and all charts and images are from Arbor Chatter.

-----

• The 2010s solidified the multifamily market's recognition as a premier asset class.
• Manhattan was the leader for multifamily investment, with $74.5 billion in transactions from 2010 to 2019.
• Markets in the Sun Belt became hot spots for capital over the decade, including standout cities like Atlanta.

-----

The 2010s decade began in the wake of one of the deepest housing downturns the country had ever seen, amid a global financial crisis, and ended with uncertainties surrounding a trade war with China and accelerated climate change.

There was also a massive demographic shift previously unseen in the country. Baby boomers entered into retirement and millennials came of age.

Over the course of the decade, the multifamily real estate market emerged as a premier asset class. Demand was driven not only by the shifting demographics, but also housing affordability issues surrounding escalating prices, limited supply and stagnant wage growth.

Real Capital Analytics (RCA) recently dubbed the 2010s a “fantastic” decade for the U.S. commercial real estate market overall, as the national RCA CPPI for all property types increased 103% over the last 10 years. The multifamily segment of the index measured an especially successful run, increasing more than 160%, by far the highest of the four major property sectors.

RCA reported a total of $1.2 trillion in transaction volume during the decade, setting record numbers nearly every year. The average sales price increased from $77,900/unit during 2010 to $176,000/unit during 2019, while the average cap rate fell from 6.8% to 5.4%. The top destinations for capital investment were among the largest markets in the country, but a closer look at the data reveals each market’s individual performance.

Manhattan Takes the Top Spot for Multifamily Investment

The Manhattan market led the U.S. with a total of $74.5 billion in multifamily transactions recorded from 2010 through 2019. Manhattan was the nation’s second most expensive market (behind only San Francisco), finishing the decade with an average sale price of $437,400/unit, as compared with $195,900/unit during 2010. Manhattan also finished with the second lowest average cap rate, which declined from 5.6% to 4.4%, again trailing only San Francisco.

Additionally, New York City’s outer boroughs also made the top rankings, with $39.3 billion in volume and prices increasing from $102,200/unit to $237,700/unit.

Demand in the New York area was driven by a tight labor market and strong local economy, including the explosion of the technology sector. Going into the next decade, investors will be keeping an eye on the slowdown in the financial services sector, as well as the stagnant housing market and increasing out-migration.

Dallas Investment Ramps Up in Second Half of the Decade

Dallas was number two on the list, with a total of $68.8 billion in sales. The market dominated the second half of the decade, leading all markets with more than $48.3 billion in sales. The average multifamily sales price finished at $128,500/unit and the cap rate was 7.3%.

Employment in Dallas increased by 35% during the decade, an outstanding rate of growth given the extremely large size of the metro area, adding more than 720,000 jobs. The area’s strong financial services industry and position as a distribution hub, as well as strong population growth and positive migration trends, will continue to drive multifamily demand in the 2020s.

Decade for Los Angeles Characterized By High Housing Costs

Los Angeles finished just behind Dallas, at $65.1 billion. The decade for L.A. was characterized by high prices (finishing at $292,700/unit) and low cap rates (falling from 5.6% to 4.6%), with both trailing only Manhattan among the top markets during 2019.

During the decade, the Los Angeles metro area added nearly 690,000 jobs, representing a 17% growth rate. While a considerable total number of jobs, the growth rate was in line with the national average. The healthcare and construction sectors are expected to remain significant drivers of employment in the area, and high housing costs should continue to solidify rentership demand.

Sun Belt Becomes Top Destination for Capital

Sun Belt markets performed especially well during the expansion. In addition to Dallas, Atlanta ($56.7 billion) and Houston ($47.9 billion) ranked high as top destinations of capital. Atlanta had the highest cap rates among the top markets at the beginning of the decade, at 7.7%, although a strong improvement in occupancy helped depress the cap rate to 5.6% by decade end.

Prices in Houston increased 185%, with cap rates falling from 7.5% to 5.4%, driven by the market’s emerging tech scene. The area’s low taxes and affordable land prices will continue to foster a favorable multifamily investment market.

Austin rounded out the list, with $28.7 billion in multifamily transactions recorded. Austin had the top employment growth rate among large markets during the decade at more than 43%, adding 335,000 jobs.

Western Markets See Strong Price Increases

Some growing western markets where residents went to escape the expensive Bay Area also ranked highly, including Seattle with $40.9 billion in sales. Seattle started the decade with one of the lowest average cap rates in the nation at 5.7%, which declined to 5.0% for 2019.

Phoenix and Denver finished the decade in the same spot, with each falling just shy of $40 billion. Phoenix saw the second-highest price growth in the nation during the decade (trailing only Las Vegas), with the average sales price rising to $157,200/unit from $45,400/unit, an increase of nearly 250%. Prices in Denver also showed a strong increase of nearly 200%, finishing at $219,400/unit.

U.S Multifamily Market Snapshot — Q3 2019

The U.S. multifamily market posted strong results through the first three quarters of 2019, with a 39th consecutive quarter of positive rent growth. Sales volume was ahead of 2018’s pace, and cap rates continued their downward trend. Demographics remain favorable for the sector as the economic expansion continues.

Source: Arbor Chatter

Midyear 2019 Top Markets for Rent Growth

This article was originally published on Arbor Chatter: Midyear 2019 Top Markets for Rent Growth, and all charts and images are from Arbor Chatter.

-----

• The national average asking rent increased 1.9% as of midyear 2019, and is forecasted to grow 4.2% for the full year.
• The multifamily market with the most substantial rent growth over the last 12 months was Denver.
• Knoxville and Albuquerque broke into the top five markets for rent growth during the first half of the year.

-----

At the midpoint of 2019, key indicators showed that the U.S. multifamily market has been off to a strong start.

According to Reis, the national average asking rent increased 1.9% during the first half of the year and is forecasted to grow 4.2% for the full year. Additionally, the vacancy rate improved to 4.7%, down from 4.8% at the end of 2018.

A closer look at the top-performing markets over the last 12 months, as measured by rent growth, shows some familiar strong performers as well as some newcomers.

Denver Moves to the Top

The multifamily market with the most substantial rent growth over the last 12 months was Denver, fueled by a diverse economic base and flourishing technology industry. Reis reported that Denver’s average asking rent reached $1,461/unit at the midyear point, up from $1,364/unit one year ago. The metro’s average asking rent has risen in every quarter since 2009.

This market boom has fueled a wave of new construction, which has put pressure on vacancy. The vacancy rate for Denver’s multifamily market increased to 6.1% at midyear, up from 5.3% one year ago. The vacancy rate was also among the highest nationally for primary markets.

Elevated construction activity is expected to continue. A total of 9,800 new units forecast to be delivered to the Denver market this year. This is compared to the 11,300 units delivered in 2018, which was the market’s highest annual total on record. However, demand remains strong. Absorption is forecasted to approach 8,000 units this year, following a record high of 8,800 units in 2018.

Las Vegas and Phoenix Remain Strong

Las Vegas and Phoenix took the top two spots for multifamily rent growth in 2018, with growth rates of 8.8% and 8.3%, respectively. However, the two metros slipped to the second and third slots to start the year.

The average asking rent in Las Vegas, which has risen in every quarter since 2011, registered $1,124/unit at midyear 2019. This was up 6.9% from one year ago. The delayed yet strong rebound from the recession has driven the local economy, although further improvement will depend on continued gains in industry sectors outside of entertainment and tourism.

Rent in Phoenix grew 6.8% over the last 12 months, finishing at $1,081/unit, having risen in every quarter since 2010. Despite being struck by the recession, the diverse job market in Phoenix has recovered significantly. Additionally, its population has been the fastest-growing in the country.

Knoxville and Albuquerque Break Through

Knoxville and Albuquerque broke into the top five markets for rent growth during the first half of the year, with year-over-year growth rates of 6.8% and 6.3%, respectively.

Multifamily rent in Knoxville has risen for seven consecutive quarters, reaching $801/unit at the midyear point of 2019. It is forecast to increase 6.9% overall this year. Additionally, vacancy fell to 3.4%, its lowest level in nearly 20 years. The metro’s vacancy rate was also among the tightest nationally. The University of Tennessee is a reliable driver of the local economy, which boasts an unemployment rate among the lowest in the country.

The average asking rent in Albuquerque reached $889/unit at midyear and has risen for six consecutive quarters. The vacancy rate was among the lowest in the country. Rent is forecasted to increase 4.0% for the year, driven by a well-educated workforce and diverse economic base. This includes the opening of a new Netflix production hub and Facebook data center.

U.S. Multifamily Market Snapshot — Q2 2019

At the midpoint of 2019, key indicators showed that the U.S. multifamily market was off to a strong start, with a 38th consecutive quarter of positive rent growth. The vacancy rate remained below long-term averages amid high levels of development activity. Sales volume was ahead of 2018’s pace, hitting a record-high annual total, and cap rates continued their downward trend. Demographics remain favorable for the sector as the economic expansion continues.

Source: Arbor Chatter

Multifamily Industry Prepares for LIBOR Transition

This article was originally published on Arbor Chatter: Multifamily Industry Prepares for LIBOR Transition, and all charts and images are from Arbor Chatter.

-----

• The London Interbank Offered Rate (LIBOR) has been the multifamily industry's benchmark for determining interest rates for adjustable-rate mortgages for decades.
• LIBOR's expiration in 2021 is leading multifamily lenders to prepare for a transition to an adjustable-rate alternative, which is likely to be the Secured Overnight Financing Rate (SOFR).
• The mortgage industry sees several benefits of using SOFR, which is based on actual transactions instead of self-reported data or estimates.

-----

For decades, the multifamily industry has used the London Interbank Offered Rate (LIBOR) as the benchmark for determining interest rates for adjustable-rate mortgages. An estimated $1.1 trillion in outstanding commercial mortgage loans are tied to LIBOR.

With LIBOR set to expire at the end of 2021, multifamily lenders are preparing to transition to an adjustable-rate alternative. Replacing such a widely used benchmark of the financial industry is a significant undertaking. Although the mortgage industry has begun to prepare, there is still work to be done.

Issues Around the Use of LIBOR

The LIBOR index is an average of interest rates submitted by major banks across the globe. At the end of the financial crisis, there was controversy regarding market manipulation by participants. Several banks misrepresented their submissions to achieve better returns and to avoid signaling financial weakness. This exposed LIBOR’s major flaw: it relied on self-reported data, which did not always reflect actual transactions, and left it vulnerable to malfeasance.

Another flaw that has since been observed is the lack of meaningful data to ensure LIBOR’s reliability. The volume of transactions contributing to LIBOR has declined; the rate is now based on only a handful of transactions.

By 2017, as it had become clear that LIBOR was no longer a reliable index, financial regulators announced that they would not support LIBOR after 2021. The Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed, was established to explore reference rate alternatives as concerns grew over LIBOR. The Committee recommended the Secured Overnight Financing Rate (SOFR) as the preferred alternative to replace LIBOR.

SOFR as an Alternative to LIBOR

Several characteristics of SOFR differentiate it from LIBOR. SOFR is calculated based on actual transactions, not self-reports or speculative estimates. Additionally, the volume of transactions upon which SOFR is based is larger than that of any other U.S. money market. This ensures transparency and prevents manipulation. Furthermore, SOFR is not at risk of being discontinued, as it is derived from the U.S. Treasury market.

ARRC has recommended that the mortgage industry transition to SOFR, and Fannie Mae and Freddie Mac have started the process. However, representatives have stated that the transition could take 12 to 18 months. Additionally, several large institutions have already issued debt using SOFR, which reflects early confidence in the new benchmark. Fannie Mae issued three floating-rate notes valued at $6 billion in July 2018, which were the market’s first-ever securities priced to SOFR.

Lenders Prepare

Although it’s yet to be specifically determined how rates on existing adjustable-rate mortgages tied to LIBOR will be calculated going forward, lenders are working to insure a smooth transition. A recent Mortgage Bankers Association (MBA) survey found that 92% of commercial and multifamily mortgage lenders are already planning for the LIBOR transition. Additionally, 77% responded that all their new loan documents contain fallback language addressing LIBOR alternatives.

The LIBOR transition will be an enormous, industry-wide undertaking. Although guidance has been given, there is still significant work to be done. In the meantime, lenders and borrowers should remain aware of any changes that could impact their investments. With communication and awareness, the industry should be positioned to successfully navigate the transition with little disruption.

Cincinnati Multifamily Market Snapshot —Q1 2019

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. The multifamily market is experiencing record investment activity and rent growth. This is coupled with low vacancy and high demand. Employment levels are at all-time highs and unemployment is at historical lows.

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.

-----

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.

U.S. Multifamily Market Snapshot — Q1 2019

The first quarter of 2019 marked the 37th consecutive quarter of positive rent growth for the U.S. multifamily market. Vacancy remained below long-term historical averages, amid high levels of development activity that haven’t been seen since the 1980s. Cap rates continued their downward trend and measures of value outpaced other property types. Demographics remain favorable for the sector as the economic expansion continues.

Source: Arbor Chatter

Las Vegas Multifamily Market Snapshot — Q4 2018

The Las Vegas multifamily market posted the highest rent growth in the nation during 2018, bolstered by strong migration trends and a high concentration of prime-age workers. The vacancy rate increased slightly, driven by a rise in new construction, yet it remained among the lowest nationally. Investment activity continued at a robust pace, although it fell slightly short of 2017’s record level.

Source: Arbor Chatter