Buyers battle and sellers win as investors fight for apartment properties.
properties have been a hot commodity in recent years. And potential threats on
the horizon in terms of looming interest rate hikes and a growing development
pipeline have yet to cool investor enthusiasm.
talk to any multifamily specialist across the country, particularly in the
Sunbelt and on the coasts as well as in Chicago, the demand is through the
roof,” says T.
Sean Lance, CCIM, ALC, a founding partner at Vertica Partners in Tampa, Fla.
That is certainly the case in Florida where capital is flowing into the state
from domestic buyers as well as foreign investors from South America, Europe,
fundamentals and positive economic and demographic trends that support renter
demand have stoked buyer interest. “Multifamily investment and transaction activity is still extremely
strong throughout Florida, especially in all the major MSAs and with all asset
says. Occupancy rates in most major metros in Florida are hovering at or above
95 percent and rents continue to push higher across the board. The same
scenario is playing out in cities across the country.
of factors are bolstering occupancy, including a downward trend in home
ownership since its peak in 2004. The national home ownership rate stood at
64.7 percent in second quarter 2014, its lowest level in nearly two decades,
according to the U.S. Census Bureau.
the industry believe there is a shift, particularly among the millennial
generation, that favors renting over home ownership. Younger people who saw
their parents’ nest
eggs evaporate when home prices went south are now less interested in home ownership,
notes Jim Young, CCIM, an agent at KW Commercial in Austin, Texas. Other people
are finding it more challenging to purchase homes due to the new lending
guidelines for single-family homes. That shift is driving more demand — not
just for high-end, resort-style apartment complexes — but all across
multifamily property types, Young says.
Construction vs. Demand
strong demand coupled with minimal new construction between 2009 and 2012 has
created historically low vacancy rates and strong rental rate growth. The national
apartment vacancy rate remains extremely tight at 4.1 percent, well below the
long-term national vacancy rate of 5.4 percent, according to data from Reis
Inc. On a year-over-year basis, asking rents and effective rents grew by 3.2
percent and 3.4 percent respectively in 2Q14, according to Reis.
trends, combined with the abundant capital in the market and historically low
interest rates, have created a recipe for tremendous buyer demand for
multifamily properties, Young says. For example, a value-add class C property
near downtown Austin received 17 offers when it was listed for sale earlier
this year. In order to be considered, buyers had to put down $100,000 in
nonrefundable funds that went hard on day one. “I don’t recommend that my clients go after those deals, but there are
certainly a lot of those deals going around,” Young says.
about greater investment risk due to the spike in construction does not seem to
be deterring investors. Between 180,000 and 200,000 new units are expected to
be completed in 2014, according to Reis. That volume is well above the
historical long-term average of roughly 120,000 units per year, which is based
on data Reis has collected since 1999. As such, Reis is predicting that
occupancies will likely begin to rise as early as third or fourth quarter this
year. Meanwhile, rent growth is expected to stabilize at around 3 percent.
“Although there is not as much upside in multifamily, we are still
looking at positive growth trends,” Lance says. Markets such as Florida are seeing both population
growth from in-migration as well as new job growth, which bodes well for the
housing market overall. Younger people appear to have a greater desire to rent
rather than own a home, and homeownership rates are the lowest they have been
in years, Lance notes. “I think
those are all important metrics that people are taking a look at,” he says.
though the returns are starting to get a bit more meager as increases to rents
and net operating income have declined, apartments are still viewed as a
relatively safe place for people to park dollars compared to alternative
investments, says William G. Leffew, CCIM, a senior vice president in the
Louisville office of Bellwether Enterprise, a mortgage banking company. One of
the challenges that exist in many markets is a limited supply of available
properties for sale. “The
deals are almost a little picked over here in Louisville,” Leffew says. In particular, value-add
situations where buyers could pick up a property at a lower price, make
improvements, and then raise rents are more difficult to find.
many would agree that investment properties are in short supply across the
spectrum, from large institutional-quality properties down to small mom-and-pop
rentals. Case in point is Amherst, N.Y. The market is very hot and very tough
for buyers to get into, notes Robert A. Liebeck, CCIM, a broker associate at MJ
Peterson Commercial Real Estate in Amherst. Liebeck specializes primarily in
selling four-unit to 40-unit apartment buildings. “There is a complete shortage on the supply
side. There are no really good
properties actively on the market, and most of our sales are going
privately with off-market transactions,” he says.
recently brokered the sale of a four-unit property in Amherst. He had 25
showings and four solid offers within a week of the
WANTED: APARTMENT SELLERS
One of the biggest complaints for apartment investors
and brokers alike these days is that there is not enough
for-sale property to satisfy buyer demand.
According to data from Real Capital Analytics, apartment
transactions through the fi rst half of 2014 reached
$45.6 billion, which is actually a 9 percent drop in activity
compared to the same period a year ago. “The level of
sales activity is not necessarily refl ective of the demand
for the product. I think it is more a refl ection of the supply
in the marketplace,” says T. Sean Lance, CCIM, ALC, a
founding partner at Vertica Partners in Tampa, Fla.
Finding willing sellers has become a bigger challenge
in markets such as Texas where the apartment
market has attracted out-of-state investors, as well as
international buyers from China, Japan, and Canada.
Many sellers see both the rental rate increase and the
continued capitalization rate compression as reasons
not to sell, notes Jim Young, CCIM, an agent at KW
Commercial in Austin, Texas.
“It becomes diffi cult in the class A market to fi nd buyers
who can meet some of the demands of the sellers
in Austin,” Young says. He was recently contacted by a
developer that is building a large class A property near
downtown Austin. The group plans to put the property on
the market at a 3.5 percent cap rate, he says. Whether or
not anyone is willing to pay that rate remains to be seen.
If the developer doesn’t get the premium asking price, the
group is content to hold the property, he adds.
Some investors have adjusted their return expectations
in the past year, while others are expanding their
search to look at secondary cities. For example, the
aggressive buying and very low cap rates on the East
and West coasts have pushed some buyers into the
Midwest in search of more favorable pricing. Buyers are
looking at cities such as Louisville, Ky., Nashville, Tenn.,
and Indianapolis where they can get a better yield for
their dollar compared to New York or Los Angeles.
In Florida, investors are looking outside of major
metros such as Miami, Orlando, and Tampa to smaller
markets such as Sarasota, Bradenton, and Ft. Myers.
“More than ever the market is at an interesting infl ux
as investors debate whether now is the best time to
sell, while demand and fundamentals are so strong, or
to continue to press their luck to squeeze even more
returns from their current investments,” Lance says.
property hitting the
market. The sale of the property closed in two months at $60,000 per unit —
$10,000 per unit above the asking price and well above the 2006 sale price of
$48,500 per unit. “There
are very few sellers willing to sell unless they get a very good price,” he adds.
has created pricing pressure in many markets across the country. “The Los Angeles multifamily market remains
extremely hot with ever-increasing cap rate compression and tight inventory,” says Wolf Baschung, CCIM, CPM, president of MW
Real Estate Group and director at KW Commercial in Los Angeles. Buyer appetite
far outpaces supply. On the west side of Los Angeles, for example, a 5 percent
cap rate or higher seems a thing of the past, notes Baschung. In most primary
areas of Los Angeles rent-controlled B product is now trading at about 4.5
percent. Non-rent-controlled newer construction properties are rare and trading
at cap rates of about 3.5 percent.
August, Baschung sold a 1950s-built eight-unit property in the West Side Palms
submarket for $1,685,000 or a cap rate of 4.34 percent. The seller owned the
property free and clear and opted to roll the proceeds from the sale into a
1031 exchange. The seller ended up buying a seven-unit building in the El
Segundo submarket of Los Angeles, which was priced at $2,540,000 or a 2.9 cap
rate. This was probably the lowest cap rate on record, Baschung notes. In this
particular case, the buyer bought all cash. “The investment mindset was that hard assets are
a safe harbor in view of perceived future dollar weakness from Federal Reserve
dilution of the monetary supply,” he adds.
apartment cap rates have been hovering at an average of about 6.2 percent for
the past year, according to Real Capital Analytics.
Supply vs. Fundamentals
spike in new construction has many in the industry wondering how it will impact
key fundamentals, and ultimately investor returns in the near term. So far, the
impact of that new development varies from market to market. Texas, for
example, has experienced a surge in new construction in key cities such as
Dallas, Houston, and Austin. However, those cities also are seeing robust job
and population growth that are helping to absorb the additional supply.
momentum markets such as Dallas, Atlanta, and Phoenix, I don’t think you are going to see as much impact on
rent, because you have all of this job growth,” Leffew says. “However, in a middle market like Louisville
where year-over-year job growth was 1,900 — you add 4,000 units to that mix and
you are going to see some impact.”
example, Louisville has nearly 1,000 units being built within a 2-mile radius
in the city’s east
end area. Those developments include the 360-unit Idlewild Apartments, 304
units at the Meridian on Shelbyville and 242 units at Claiborne Crossings. The
good news is there is a two- to three-month lag period between completions.
Claiborne Crossings has opened and is leasing well, while the other two are
still under construction. This tempered delivery has kept lease-up at a good
pace, Leffew adds.
also has seen development come roaring back. Many of the new projects are
infill in nature and are commanding record high rents. “The question remains as to whether or not the
market can sustain all of these units and how this will affect renter demand
and rent growth,” Lance
says. Time will tell, but the absorption rates and effective rents at this
stage for projects already delivered have been very good — thanks in part to
the pent-up demand from the the lack of new construction that occurred during
the recession. “The next
wave of deliveries through 2015 will be a much better indicator of sustainability
of rents and occupancy,” he
the surge of development is actually providing fresh inventory for investors.
The newly built class A product is being scooped up by institutions such as
pension funds, equity funds, and real estate investment trusts — sometimes
before construction is even completed and properties are stabilized. Buyers are
purchasing newly completed projects, as well as stepping in as joint venture
equity partners on developments. “There are a lot of people with a lot of capital and not a lot of
opportunities to deploy that capital,” Lance adds.
Mattson-Teig is a freelance writer in Minneapolis, Minn.