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.
Welcome to the January 2015 National Multifamily Call
A) National Multifamily Updates –
As I mentioned in December with the wrap-up, 2014 was considered by many to be “The year of the Apartment”. Going into 2015 it is looking like it is going to be “The year of the builder”.
Apartment construction and permits are at the highest level since the late 1980’s and there are no signs of it slowing down in 2015.
To wrap up 2014 numbers I thought it would be helpful to go over some of the multifamily permitting activity taking place across the country from data calculated through the last months of 2014. And look at top 5 rankings taken from top markets that issued permits for 3,000 units or more of multifamily in 2014 as compared to 2013 numbers.
1. Las Vegas – 3,164 permits up over 132% from 2013 REBOUND YEAR
a. still 25% below the peak
b. and only in top areas that can absorb with very low levels of vacancy
2. San Antonio – 4,048 permits up over 88% from 2013
a. this is unusually high as the fundamentals are not as high and there has been a lot of activity in this market. My college roommate bought a 52 unit deal in San Antonio in a trade in 2012 and has been offered double the price, which he is considering taking at this point so be cautious of this market.
3. Phoenix – 8,312 permits up over 85% from 2013
a. another rebound year like Vegas but the rebound started much earlier and the permits are back to levels of the early 2000’s so this might be a bit of concern as development is moving from the better performing submarkets like Scottsdale to some of the less desirable submarkets that got them into trouble last time. The thing to note here is that fundamentals like job growth are not as strong as they were in the 2000’s.
4. San Jose – 8,776 permits up 76% from 2013
a. totally has blown away all of the records going back 30 years.
b. it also is showing no slowdown here in a market that once was considered an extremely high barrier to entry market.
5. Nashville – 6071 permits up over 75% from 2013
a. seems to be the new flavor of the market.
b. it is leading the nation currently with ongoing construction totaling 7.5% of the existing apartment base, which indicates ridiculous growth and not slowing down.
Now let’s look at 5 markets that are heading in the opposite direction:
1. Ft. Lauderdale – 1,152 permits down 63% from 2013
a. along with Miami that tied for 5th is showing that south Florida is slowing a bit due to some construction surges over the past years but the condo market is coming back in these areas and we should see an upward trend in these markets.
2. Virginia Beach / Norfolk – 1,404 down just shy of 58%
a. lost out on the military’s base realignment program which caused a substantial shift in housing so occupancy levels here are far below the prerecession normal rates.
3. San Francisco – 3,502 permits down 34% from 2013
a. unlike San Jose, the barrier to entry theory keeps this market in check
4. Baltimore – 1,875 permits down 27% from 2013
5. (tie)Raleigh Durham – 4,684 permits down 25.8% from 2013
a. Baltimore and Raleigh saw construction levels return very quickly when the apartment market rebounded and the were the earliest to see significant construction levels. Apartment activity is trending downwards in both spots which will allow for some substantial occupancy records and rent growth to take place.
6. (tie)Miami – 6,017 permits down 25.8% from 2013
What is the reason for all of the positive activity?
In the last 18 months, we have seen an influx of capital into the US real estate market—and as a result, the cost of borrowing has been cut in half which is the primary reason for the rapid increase in positive activity.
The lending environment has experienced a substantial change due mostly to the recovered housing market and low interest rates. Traditional banks have returned significantly to capital markets and are getting much more aggressive as I mentioned in my December post. In 2012 and 2013, lenders were hesitant to provide financing for commercial real estate construction, even in top markets, often limiting loans to less than 65% of total costs. Banks are providing term sheets for more than 80 percent of total costs, including in many secondary and tertiary markets.
An eye opening way to analyze this is using this example – whereas a $30 million multifamily housing project previously required $10 million of equity from the borrower, now banks are willing to lend at much higher levels and asking for only $5 million of equity. On top of that, bank financing continues to be as cheap as ever during the construction process.
As a result, a developer could borrow $25 million for that same $30 million development and only pay about $750,000 in annual interest to the bank which is much less than what they would have paid 3 years ago in the same scenario.
Simply put, banks will give real estate companies nearly all the money needed for a project (around 83%), and get paid less in total than the equity (17%).
This is the main reason that apartment developers are trying to get their projects to the table quickly, pushing more and more into the secondary markets.
The Urban Land Institute predicts that, despite the construction increases expected this year, there will still be a lack of supply to meet demand—which will continue to fuel development.
We expect to see a lot of new construction in the coming year and a push into new markets. This lending arena has contributed to the prediction of “The year of the builder”.
As the supply of new apartments has been climbing to its peak, the price per unit in the primary markets is actually decelerating. Although Chicago just set a record this month with the sale of a downtown apartment building at 111 W. Wacker for $651,000 a unit, the most ever paid for an apartment building in Chicago’s history.
This contradicts the trends across the country. Typically, at the beginning of the cycle, developers easily find buyers that bid up prices, expecting strong returns. As the cycle continues, prices gradually slow down even while sales of newly developed buildings grow. In primary markets, the average price per unit grew by more than 50 percent from 2009 to 2012 and then when construction levels increased and more developers were selling their developments, prices in the primary markets actually decreased by about 10 percent in 2013 and another 10 percent in 2014.
In secondary markets, we are seeing a different trend. While the jump in price per unit during the same period of 2009-2012 was almost just as substantial at 40%, there has been virtually no decline that occurred in 2013 and 2014. The prices in these secondary markets seem to be holding up because the supply of new buildings has typically been more limited in these locations. The groups that are not able to secure the deals in the primary markets are now looking for opportunities in secondary and even tertiary markets.
New York and Miami are typically the strongest condo markets due to foreign investors, earning the title of “gateway cities”. Many other markets such as Boston, Philadelphia, D.C., Atlanta, Austin, Chicago, and Northern California and Southern California are seeing a resurgence of condos.
According to the National Association of Realtors, the supply of existing condos dropped from 9.7 months in 2011 to 4.7 months in 2013 and last year averaged about the same. In the River North and West Loop markets of Chicago the supply has dwindled and market time for those deals is significantly lower than normal at about 60 days. In downtown Chicago there are over 3,100 new for-rent apartments coming online in 2015 and 2016 is threatening to have as many as 6,400 units come online. At the same time, the condo inventory is at the lowest it’s been since 1997 with just 133 units added from 2010 to 2014.
One reason for the trend is that the rental rates have gone up so drastically in the past few years that it makes more sense for some of the renters to buy. Another reason is the large influx of empty nest baby boomers looking for a no maintenance way of life are moving back in to rentals.
NMHC held its annual Apartment conference last week in Palm Springs.
According to Globestreet’s Carrie Rossenfeld many in Palm Springs expect continued demand for apartments in 2015 because national vacancy has been at or below 5.8% since 2012.
Continuing the trend I have discussed in pervious posts, much of the strength has come from the Millennials’ shift toward delaying marriage and homeownership which continues to be one of the main fundamentals keeping the market strong. As referenced in December, the age bracket of 21-25 is the largest growing demographic and one that is focused on moving into apartments.
Nationally, supply does not seem to be a problem for multifamily and most of the opinions are that “Oversupply is not happening since permitting numbers are half of what they were in the ’80s.”
The panelists divided the country into five regions and spoke about the strength of multifamily in each region. In the West, the San Francisco Bay area is strong because of its high wage industries, with the East Bay and San Jose active in construction. Panelists speculate the West will continue to perform well and even outperformed their expectations of 2014. Axiometrics Inc., said most areas of the West will lead the country in terms of rent growth.
The Pacific Northwest has a lot of supply coming online and is anticipated to see 3.5% to 4% rent growth. The Inland Empire is making a comeback with its relationship to strong employment growth and San Diego will be one to watch, with many jobs in the high wage category.
In the Southwest, many are talking about the effect of lower gas prices on this area. Denver and Dallas benefit from lower oil prices, but in Houston there has been a big slowdown.
There are a lot of “good stories” in the Midwest. Detroit, is now back in the auto business but has no new supply, while Indianapolis and Columbus are seeing some new construction. Metro Chicago seems to be the outlier according to one panelist that said Chicago is “head and shoulders above the rest in liquidity for the Midwest.”
In the Southeast, Charlotte, NC and Nashville were early leaders in the comeback so they might lag behind other Southeast markets in 2015. As Raleigh, NC is feeling pressure from the supply, Atlanta was lagging but is now a top performer and expected to remain as such throughout 2015 and beyond. South Florida has a large pipeline but is projected to remain solid. The same applies to Central Florida, including Tampa and Orlando. The prediction is positive for Florida with a focus on new condo developments in the best locations.
On the East Coast, 2015 will be a better year for places like Boston and New York, but not as strong for Washington DC and the MidAtlantic. There seems to be great interest in the Northeast with high demand but not a lot of product to be completed.
Rent growth has been weak on the East Coast, but some submarkets are strong and will continue to be for 2015. The entire MidAtlantic and Northeast regions are difficult to broadly pinpoint due to varying markets and pockets.
To summarize, the overall consensus of the conference is that the apartment industry should remain strong for the next 5 years which is great news for all of us focused in the space.
Meet Your Multifamily Colleagues
I am highlighting one or two individuals each month in order to get a better feel for 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, familiarity with the specialists in the various markets across the country will become more and more important to our business.
This month I am highlighting Todd Franks, Managing Director of Sperry Van Ness – TJF Investments in the Dallas / Fort Worth market. Todd is a 15-year veteran in the multifamily brokerage space and has been a top producer throughout his career. He is currently marketing a number of multifamily opportunities. Not only does he broker multifamily transactions but he also develops and owns multifamily showing the depth of his expertise in the space. His bio can be found here.
Photo Credit: “Laptop With Business Graph” by jscreationzs Source: freedigitalphotos.net