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 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.

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.

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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.

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.

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• 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.

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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.

Las Vegas Posts Highest Multifamily Rent Growth in U.S. in 2018

This article was originally published on Arbor Chatter: Las Vegas Posts Highest Multifamily Rent Growth in U.S. in 2018, and all charts and images are from Arbor Chatter.

Las Vegas experienced the fastest rent growth in the U.S. during 2018, with an 8.6% year-over-year increase in asking rent, according to Reis.

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

Multifamily demand is expected to remain high in 2019, as the local economy expands further into the cycle, especially given that the rapid increase in home prices has reduced homeownership demand.

Rental Market

According to Reis, the asking rent in Las Vegas averaged $1,097/unit at the end of 2018, an increase of 8.6% year-over-year, and the fastest growth in the U.S. Additionally, rent has risen in every quarter since third-quarter 2011. Class A rent increased 9.2% during the year, while Class B/C increased 6.7%. Overall, Reis forecasts rent to increase 5.0% during 2019, then slow into the 3.4% range through 2023.

Driven by the addition of new supply, the market vacancy rate increased to 4.0%, up from 3.2% at the end of 2017, yet it remained among the 20 lowest nationally. Class A vacancy climbed to 5.0%, up from 3.7% one year ago, while Class B/C increased to 2.9%, from 2.7%.

The pace of construction continued to accelerate, with more than 3,800 units coming online during the year. This surpassed the 2017 total of 2,900 units, and marked the highest annual total for the market since 2001. Absorption edged higher, although it was unable to keep pace with new supply, totaling just over 2,500 units.

Reis forecasts indicate that 2018 was the likely peak for apartment construction in the market, with 1,100 units expected to be completed during 2019. Demand is also expected to overtake new supply, as absorption is forecasted at more than 1,300 units for the year.

Sales Market

Multifamily investment has increased substantially in Las Vegas over the last three years. Real Capital Analytics reported that sales volume totaled $2.2 billion during 2018, double the 10-year average of $1.1 billion, although momentum was down compared to 2016 and 2017.

Real Capital Analytics also reported that apartment cap rates in Vegas averaged 5.5% during the year, down from 5.7% at the end of 2017, and the lowest level on record. The average sales price was $122,388/unit for 2018 sales, the highest since 2007.

Economic Overview

The Las Vegas economy has traditionally been dictated by its well-known gaming and entertainment industry. However, the area’s strong migration trends and high concentration of prime-age workers have driven the current cycle.

According to the U.S. Bureau of Labor Statistics, total nonfarm employment in the Las Vegas-Henderson-Paradise, NV, metro increased 3.9% during 2018, as compared with 3.2% during 2017, and 1.8% for the U.S. overall. The largest gains were reported in the manufacturing (up 15.0%) and construction (up 12.3%) sectors, with no major sectors reporting losses.

Vegas-area home prices continued their rapid increase, raising affordability concerns and reducing homeownership demand. The S&P CoreLogic Case-Shiller Las Vegas Home Price NSA Index increased 12.1% during the 12 months ending in November, which was the highest among the 20 cities covered in the index. As a comparison, the U.S. National Home Price Index registered a 5.8% gain.

For more multifamily trends and insights, view our U.S. multifamily market update.