Each month the Sperry Van Ness Multifamily brokers, hold a National Multifamily Product Council Call. There is a dial in number and the calls are led by Reid Bennett, CCIM of Sperry Van Ness | Chicago | National Council Chair of Multifamily Properties | SVN International.
Reid contacted us and asked how we can take this valuable call and perhaps turn it into a blog post that can be shared and distributed to so many of our members who would love to hear a national call with this depth of information. We thought it was awful generous of Reid to offer a glimpse into the presentation held for those unable to listen to the call. Maybe we will eventually be able to broadcast the audio of this call, but for now, we are trying to at least share the information.
The call was broken up into 2 parts. In Part 1 we recapped 2014 and in Part 2 we discussed what is to be expected in 2015.
Part 1: 2014
2014 has been considered by many to be the YEAR of The Apartment Market
Third quarter information that was available this month saw $27.5 billion in apartment transactions across the country which was a 28 % increase over the third quarter of 2013 and the second straight quarter of sales exceeding $26 billion according to RCA
Rents and occupancies have grown stronger each of the past five years and that combined with the weakness in other CRE sectors brought a flood of investors from foreign capital – not only from oversees as Doug Wright will explain today about a closing he had last week but from American office owners and single family builders into the apartment market. Also, returns have been shrinking as I will discuss a little later.
The fall season usually has a bit of a dip in rent growth but not the year of the apartment market. National annual effective rent growth was 4.33% in October, a slight increase from September and the highest point of the year to date. October marked the eighth straight month in which effective rent growth has increased.
This continued strong growth indicates that the national apartment market is likely to finish the year above the 4% mark, which blows away many of the expectations from economists and industry specialists across the board.
YTD effective growth was 5.2% for the first 10 months of 2014, down slightly from September
Class A, B, and C
Annual effective rent growth in all basic asset classes has increased for the most part, but the strength of the market is in the Class B and suburban assets, which were closer to 5% annual effective rent growth.
In fact, Class B rent growth was exactly 5.0% in October, and came in first place among the asset classes from Class C in April, and has widened its lead ever since.
Class C annual effective rent growth, even though it was above October 2013 levels, had a slight decrease in October. Still, it is higher than the 3.7% recorded one year ago. Class C has had the steadiest rent-growth trend among the three basic asset classes since December 2012.
This is all very positive news for many of us at SVN across the country considering many are operating in class B secondary and tertiary markets.
At 3.9% in October, Class A annual effective rent growth was the strongest it had been in the past two years and continues an upward trend that has lasted throughout most of 2014. Class A’s October number is up from September’s as well as of October of last year. Should the trend continue into November, Class A could surpass Class C for second place behind Class B.
The national occupancy rate dropped to 94.9% in October, the first time it has been below 95% since April, but still fantastic overall as October 2014 occupancy is higher than any other October since at least 2008, when Axiometrics started reporting monthly, and occupancy is 95% on a same-store, annual basis.
Part 2: Looking forward in 2015
The Four Trends
Four trends keep popping up – Who is your primary market (young vs. old), where is the job growth, what are the financing options and cap rates going to be and is the condo market going to play a roll.
Seems that developers and operators are paying attention to the age of the population and what is affecting these age groups:
It seems that in the future developers of rental housing in the future are going to have to decide which type of projects to build or how they are going to market.
The Old or the Young, Who is your target?
It is probably the most important factor that drives the apartment market and rent growth correlates to job growth over 80% of the time. Markets like those in Texas such as Dallas, Houston and Austin had job growth from 3.8% to 4% which led do rent growth above the national average of 4.4-5.2%. Denver, San Jose and Oakland also had job growth well above the national average and had huge effective rent growth percentages of 9.3, 9.8 and 10.8 respectively.
In places like Raleigh, NC apartment delivery has outpaced demand where the year to date delivery of apartment units is more than twice the long-term average.
This shows that in 2015 markets that have an excess in supply will have to have extremely strong job markets to absorb the new product without negatively affecting rent growth while markets that are lacking in supply will continue to have strong rent growth.
So the strongest partnership of continued success in the apartment market in 2015 will be Rent Growth and Job Growth. It’s not really rocket science.
THERE IS A DISPROPORTIONATE SHARE OF NEW CONSTRUCTION THAT IS AT THE HIGH END.
This makes sense in urban high rise properties Multifamily has benefited from the artificially low interest rates and I have talked with many clients that have submitted multiple offers across the country only to be beat out by cap rate buyers that are blowing them out of the water. One client submitted 60 offers this year and was only able to purchase one deal.
Many of these buyers are now pushing to secondary and even tertiary markets to chase yield. This along with the significant new supply of high end primary deals has led to the pricing in primary markets decelerating while the secondary markets are remaining strong and gaining momentum. Secondary market prices are holding up because the supply of the new buildings is typically more limited in these locations. Look to see this trend continue into 2015.
Financing is going to play a huge role in 2015. The interest is huge right now when looking to finance deals and money is plentiful. Transaction volume increased 40% year over year in the second quarter of 2014 and is not looking to slow. Value add with a good story is going to be the best bet in 2015. CAP RATES hovered around 6 percent at the midpoint of 2014 and fell to an all time low of 5.9% in Q3 with the continued flood of capital in the market many believe that these cap rates might continue to compress a bit before they ultimately expand. Many believe that we are in the midpoint of a cycle so keeping your LTV as reasonable as possible coupled with mindful terms will be important in the next few years. While most believe there will not be an end of the world event like 2008 some apartment owners and investors are starting to believe that some buyers may be getting too aggressive. There is also a concern that buyers are floating everything and even looking at multiple I O terms on their loans opening themselves up for greater risk. The problem we are seeing is that many buyers are getting deals done at prices where if there is an blip in performance or an unforeseen expense their acquisition would be underwater.
Another thing to watch in the coming year is the fact that $350 billion in CMBS loans are contractually slated to mature from now through 2017 which represents about 2/3 of the entire CMBS market. The peak of these maturities will be in 2016 and 2017 so we have the coming year to get our clients ready to sell.
As far as Rental rates are concerned, it seems they are going to be the slowest in class a and the highest in class b and c. There was a huge apartment boom in the 1980’s and many of these are very well located in areas where the median income is around 50k . These opportunities where you can do a significant rehab and up the rents from 800 or 900 dollars today to 12 or 1300 will be the sweet spot across the country.
CHICAGO – Suburban occupancies are the highest level since 2007 at 95.2%. the median suburban net rent rose to $1.27 a foot an all time high. A lot of this has to do with the job market that is steadily improving. Predictions in to 2015 is that this number will continue to rise 3-3.5 percent. When occupancies are at 95 percent it is considered “full” which allows owners to continue to raise rents.
Return to Condo’s
It appears that some markets are going to be making a long awaited return to condos and condo conversions. I know for my own practice here in Chicago that was the only game in town from about 2002-2007 as income and expenses did not matter a bit when selling an apartment building or complex and it was all a matter of unit size and what they would sell for on the back end.
Well, it looks like developers are beginning to jump back in like they did in the mid 2000’s in places like Washington D.D where the pipeline has increased for the first time since 2005 and condo prices have jumped 12 percent year over year. Miami will also see a huge jump with the Wall Street Journal reporting that more than 1,800 units would be completed downtown in 2015. New York has shown strong growth as well and places like Charleston South Carolina and San Fran have seen a number of smaller projects coming to market in the 50-100 unit range.
I know the trend is definitely emerging here in downtown Chicago as my development committee in River North has had virtually all of our meetings with developers switching over to condo projects as opposed to apartment projects. I believe that this is due to a 3 main reasons,
- 1. There is now a significant shortage in many markets of well located condominiums and single family homes due to the extreme lack of new product brought to the market over the past five years
- 2. The rental rates in many of the markets are have reached such a high price per square foot that it is now making many would be renters thinking of switching over to home ownership again.
- 3. The lending markets have loosened enough to allow many to obtain loans.
The key thing to watch here is that the vast majority of the new condo developments or conversions are taking place now in top tier and elite markets so I would imagine as financing loosens up a little more over the year that condo developers and converters will once again push the boundaries and move into second tier markets.
Meet Your Multifamily Colleagues
Each month we highlight one or two individuals to get a better feel of our regional specialists and what they are doing to focus on the multifamily niche in their market. As over 65% of deals are taking place across state lines knowledge of the specialists in the various markets across the country will become more and more important to our business.
Today we have Brian Heller and Michael Chang who work together on the multifamily team out of our Los Angeles, California office. Michael is relatively new to the business but as his managing broker mentioned he is the epitome of the SVN culture and has rapidly become successful adhering to the fundamentals of brokerage. Brian is a senior advisor and has consistently been a top producer in the multifamily world and is proficient in property management overseeing multifamily units in West Hollywood.
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