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

Single-Family Rental Portfolio Financing Trends

This article was originally published on Arbor Chatter: Single-Family Rental Portfolio Financing Trends, and all charts and images are from Arbor Chatter.

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As commercial real estate investors move further out on the yield spectrum, they are increasingly considering the single-family rental (SFR) asset class. Large portfolio transactions have made headlines in recent years, yet individual investors still own 80% of the SFR marketplace. Demand for debt financing in the sector is high and an enormous amount of capital is still waiting to be deployed.

 

Recently, the Federal Housing Finance Agency concluded its SFR pilot program for Fannie Mae and Freddie Mac. Despite its short run, the pilot revealed a strong demand for financing of this product and brought forward new investors into the space. It also resulted in increased lending competition and accelerated lending standardization.

Economic Factors

Forward-looking demographics remain favorable for single-family rentals. Homeownership has increased recently, rising to 64.6% by the end of 2018, as compared with the low of 63.7% in 2016, although below the historical high of 69.2% during 2004. However, homeownership is expected to remain inhibited by limited new supply, slow wage growth, and rising mortgage rates. Entry-level housing has become unattainable for many, so apartment renters who prefer more space are choosing to rent instead of buy single-family homes. A generation of would-be homebuyers that witnessed the Great Recession no longer view homeownership as an investment, and many prefer the flexibility of renting. 

 

It’s evident the economy has neared the mature end of this cycle and some economists have predicted a recession in 2020, citing trade policy and rising interest rates. However, expansions don’t die of old age and there are no major signals of a recession at this time. 

Rising interest rates haven’t begun to affect demand for SFR portfolio financing. As rates increase, single-family investors are protecting themselves by refinancing adjustable rate mortgages into four- to five-year fixed rate loans; considering adding value-add properties to their portfolios; and ensuring quality tenants to extend occupancy duration and maintain stabilized rental income.

Flexible Financing

The SFR market is rapidly evolving and investors are changing strategies, calling for new and adaptive financial products. Borrowers are looking for flexible financing, not only to deal with challenges, but also to take advantage of opportunities. Depending on their strategy, investors are looking for both short- and long-term financing to be available, as well as flexible pre-pay options.

Long-term borrowers want the flexibility to add or remove properties from their portfolio. This allows the borrower to keep the portfolio optimized over the course of the loan, by removing underperforming properties and adding better assets. Substitutions can affect the rating of the overall portfolio, so additions and removals should be only made after consideration of how they change the markets represented, the operating income, and the average school ratings of the homes in the portfolio. 

In this environment, lenders need to focus on more than just terms and rates. Lenders need to become a partner for the investor by focusing on the borrower relationship and better customer service during loan origination and loan servicing lifetime.

Build-to-Rent vs. Fix-and-Flip

While most borrowers of SFR debt tend to be long-term hold income investors, borrowers of short-term debt tend to have two main strategies: build-to-rent and fix-and-flip.  

Fix-and-flip projects, in which the investor buys and rehabs an existing property, then rents it out at a higher rental rate, tend to necessitate shorter-term financing. However, at this point in the cycle, fix-and-flip portfolios have become harder to find. As a result, these investors are becoming fix-and-hold investors by taking on longer-term debt. Fix-and-flip investors will be able to find new opportunities when the rates of foreclosure increase as the cycle turns. 

Because fix-and-flip investments have been a harder find, the build-to-rent strategy has gained in popularity. These investors generally want to start off with short-term financing for construction, then move into longer-term financing when the portfolio has stabilized occupancy. Build-to-rents can be done in one-off lots, within other master-planned communities, or even as their own self-contained rental communities. 

According to the U.S. Census Bureau and the National Association of Home Builders, the market share of built-for-rent single-family homes was 4.9% at the end of 2018, up from the historical average of 2.7% (1992-2012). This includes homes built and held for rental purposes and excludes homes built and sold to another party for rental purposes. 

Built-to-rent SFRs are attractive because they have lower construction costs than apartment buildings, mostly because they don’t have common area space like hallways, and because long-term maintenance costs can be optimized during construction by using more durable materials. They also can have lower costs than single-family, owner-occupied new construction by eliminating upgrade options and broker fees. Additionally, the one-year builder warranty eliminates all maintenance costs in the first year of occupancy.

Since these properties are newly built, they also tend to attract better tenants who stay in the property longer. The typical duration of occupancy for a new SFR is three to six years, which compares with a typical apartment occupancy of 18 months. Given the higher rents in new properties, tenants are usually of higher quality and tend to take better care of a new property than they would an older unit. 

Another significant piece of the build-to-rent model that’s gaining in popularity is building to sell. Portfolio investors may initially build the properties with a plan to rent them out when completed, but they also have the option of selling the properties to individual investors who are looking for a cash- flowing asset. 

SFRs continue to evolve as a legitimate commercial real estate asset class as new investors and lenders enter the fray. Although today’s economic uncertainties weigh heavily on nearly all investment types, favorable demographics are expected to support the SFR segment in the longer-run. Regardless of what strategy investors choose to build their SFR portfolio, maintaining financial flexibility should be a primary focus.  

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

U.S. Multifamily Market Snapshot — Q4 2018

The U.S. multifamily market further solidified itself as the premier real estate asset class in 2018. Rents increased for the third consecutive year, while vacancy rates remained low despite historically high levels of development activity. Low cap rates and rising prices didn’t restrain investment activity, which reached record-high volume levels. The economic cycle continued its strong and mature expansion, producing an eighth consecutive year of positive job growth.

Source: Arbor Chatter

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.