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.

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• 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.

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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.

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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.

Market Spotlight: Charlotte Outperforms in 2019

This article was originally published on Arbor Chatter: Market Spotlight: Charlotte Outperforms in 2019, and all charts and images are from Arbor Chatter.

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• Charlotte's rent growth has been among the highest nationally in 2019, up 6.5% year over year in the third quarter.
• The market has seen a flurry of investment activity, with sales volume this year expected to beat 2018's record high of $2.8 billion.
• Employment growth in the metro was greater than the national average, with significant gains in the technology sector.

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Charlotte Multifamily Market Comes Out on Top

As 2019’s prime leasing season comes to an end, it’s a good time to examine the Charlotte multifamily market, which has been one of the nation’s top performers so far this year. The area’s low taxes, diverse employers, affordable housing and high quality of life have made the area attractive for residents, as well as investors and businesses.

Rent growth in Charlotte has been on par with national leaders, amid record-high levels of investment volume and new development. The local economy and housing market are also thriving, in part boosted by the growing technology sector.

ULI and PwC recently named Charlotte one of the top markets for real estate investment and development in their Emerging Trends in Real Estate 2020® report. The metro area also ranked high in a recent study by COMMERCIALCafé as a popular destination for in-migration, citing the Queen City’s popularity with the younger generation and its position as the nation’s second-largest banking center.

The Charlotte multifamily market is likely to remain attractive to investors, as the local economy continues to draw new employers and skilled workers to the area.

Rental Market

Charlotte posted the third-highest multifamily rent growth rate in the country over the last 12 months, behind only Miami and Phoenix. According to the latest data from Reis, the average asking rent finished the third quarter at $1,183/unit, up 6.5% year over year and significantly higher than the 3.8% growth rate for the U.S. overall. Rent for Class A properties averaged $1,351/unit, up 6.2% year over year. Rent for Class B/C properties increased 4.7%, to $865/unit. Reis forecasts rent to grow at 4.7% in 2020, and slow to 2.6% by 2023.

The vacancy rate was 5.7% at the end of the quarter, up slightly from 5.4% as of the third quarter of 2018. The increase in vacancy has mostly been at the bottom of the market. The vacancy rate for Class A properties was 6.3%, an improvement from 6.4% one year ago, despite the addition of new supply to the market. The Class B/C vacancy rate was 4.5%, up from 3.6%. The U.S. overall vacancy rate was 4.7%, unchanged year over year.

Multifamily development in Charlotte remains active, with 9,000 units forecasted to come online this year. This surpasses the previous record high of 6,600 units added during 2018. An additional 12,800 units are expected to be added to the market through 2023, ranking Charlotte third nationally based on share of existing inventory, trailing only Charleston and New York City.

Investment Sales

The appeal of the Charlotte market has led to a flurry of investment activity. According to Real Capital Analytics, sales volume reached a record high of $2.8 billion in 2018, and is on pace to surpass that high in 2019. Through the first nine months of the year, $2.5 billion in transactions were recorded, as compared with $2.3 billion for the same period last year.

The weighted average cap rate for transactions so far this year was 5.4%, down from 5.6% for 2018, which was the lowest annual average on record. The year-to-date cap rate was in line with the U.S. national average and slightly lower than the Southeast regional average of 5.7%.

The average sales price through the first nine months of the year was $131,000/unit, up from $123,800/unit for 2018 transactions. In comparison, the U.S. average sales price was $164,700/unit for the first nine months of 2019.

Economic Overview

According to the U.S. Bureau of Labor Statistics, the Charlotte-Concord-Gastonia, NC-SC metro area registered 2.3% employment growth for the 12 months ending in October 2019, resulting from the addition of 26,900 new jobs. This was higher than the 1.4% growth rate for the U.S. overall during the same period. Charlotte sectors experiencing the largest employment growth were leisure and hospitality (up 4.9%), financial services (up 4.6%), and education and health services (up 3.6%). Only one private sector recorded a loss (logging, mining, and construction was down 3.4%).

Charlotte’s technology industry has been a standout performer during the current expansion. The industry employs an estimated 55,000 workers in the region, up more than 30% from 2014, according to the Charlotte Regional Business Alliance. The area’s low cost of doing business and skilled workforce have attracted employers to the area. Charlotte was also recently ranked the top emerging tech hub for software engineers to buy a home.

Housing Market

Driven by economic growth that has outpaced the availability of for-sale single-family homes, Charlotte’s home price gains are among the highest in the nation. The S&P CoreLogic Case-Shiller Charlotte Home Price Index increased 4.6% for the 12 months ending in September, behind only Phoenix. However, this rate was lower than the 5.2% increase reported at the same time last year. For comparison, the 20-City Composite gained 2.1% over the last 12 months.

Despite the recent run-up on pricing, home prices still remain affordable, at more than 20% below the U.S. average. This trend combined with limited supply has led to Charlotte having one of the nation’s highest homeownership rates. The area’s homeownership rate of 72.3% at the end 2018 ranked fifth among the nation’s 75 largest metropolitan statistical areas, significantly higher than the U.S. overall rate of 64.8%, according to the U.S. Census Bureau.

Charlotte Multifamily Market Snapshot — Q3 2019

The Charlotte multifamily market has been one of the top performers in 2019, with strong rent growth and record-high investment volume. The metro’s growing technology sector has also boosted the local economy and job market.

Source: Arbor Chatter