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.

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.

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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.

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 Market Update — Q3 2016

This article was originally published on ALEX Chatter: Multifamily Market Update — Q3 2016 and all images are from ALEX Chatter.

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The U.S. multifamily market continued to be boosted by the strong national economy during Q3 2016, as the job market posted steady gains and home prices approached pre-recession levels, although uncertainty remained around interest rates and added supply.

Rent Growth

According to Reis, the average asking rent reached $1,272/unit, a 3.9% increase over the $1,224/unit average one year ago, and has risen in every quarter since Q1 2010. The Class A average was $1,473/unit, up 3.8% year-over-year, while Class B/C properties increased 3.4% to $1,030/unit. Among primary markets, New York City posted the highest rent nationally, at $3,499/unit, followed by San Francisco, at $2,548/unit. Overall, Reis forecasts rents to grow 3.7% during 2016, and slow to 2.3% by 2020.

The strongest performing multifamily market in the U.S. over the last 12 months was Seattle, where average asking rent increased 9.3%, climbing to $1,491/unit, from $1,364/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.

Portland posted the second largest increase in the nation, boosted by high-tech job growth, including renewable energy business and tech start-ups. The area’s strong local economy built on port distribution, strong tourism, and affordability compared to the Bay Area, should help Portland remain a strong performer in the long run.

One of the fastest movers year-to-date has been Atlanta, where asking rents increased 7.2%, to $1,067/unit from $995/unit. The market moved to #3 from #15 at the end of 2015. Atlanta has shown signs of its pre-recession past, with a strong housing market and inward-migration amid steady job growth.

Markets in the Bay Area have slipped. At the end of the third quarter, San Francisco came in at #75 out of 75 markets, with a 0.5% increase (the market was ranked #2 at the end of 2015) and Oakland-East Bay ranked #46 with a 3.2% increase (previously #7).

Vacancy Rate

The vacancy rate finished at 4.4%, an increase compared with 4.3% one year ago, although slightly higher than the most recent low of 4.2% reported in Q2 2015. The Class A vacancy rate was 6.2%, while Class B/C properties finished the quarter at 3.0%. Detroit had the lowest vacancy rate at 2.5%. Development of Class A properties is expected to exert upward pressure on the vacancy rate for the high-end market, while demand for Class B/C rentals is expected to remain high amid tighter supply conditions. Overall, Reis forecasts vacancy to increase to 5.1% by the end of 2020.

Nearly 46,000 new multifamily units were completed in the U.S. through the first nine months of 2016, compared to 206,000 units for all of 2015. Reis forecasts 218,000 new units to come online during 2016, representing 2.1% of the existing inventory, and would be the highest annual total on record. Absorption is forecast to reach 179,000 units for the year, falling short of the 2015 total of 188,000. An additional 492,000 units are expected to be completed through 2020, increasing inventory by 4.6%, with absorption expected to total 414,000 units during that time.

Multifamily Investment Sales

According to Real Capital Analytics, sales volume for U.S. multifamily properties totaled $35.0 billion during Q3 2016, higher than the three-year quarterly average of $32.9 billion, and brought the year-to-date total to $111.3 billion. Annual sales volume was on pace to reach $148.4 billion, which would nearly match 2015’s record-high total of $151.3 billion.

Real Capital Analytics also reported that cross-border capital investment represented 5.6% of total volume through the first nine months of the year, down from 12.8% for all of 2015. These transactions accounted for $6.2 billion in volume, one third the 2015 total of $19.6 billion.

Employment Growth

On the economic front, the U.S. Bureau of Labor Statistics reported that employment in United States increased 1.6%, or 2.4 million jobs, during the 12 months ending in October 2016.

Job growth averaged 181,000 per month year-to-date, compared with an average of 229,000 per month in 2015. The largest gains over the last 12 months were in the professional and business services (up 2.7%), construction (up 2.6%), and education and health services (up 2.6%) sectors.

The largest year-over-year increases in employment among metropolitan divisions were Fort Lauderdale-Pompano Beach-Deerfield Beach, FL (up 4.4%), Dallas-Plano-Irving, TX (up 4.2%), and Haverhill-Newburyport-Amesbury Town, MA-NH (up 4.2%).