Looking Ahead: Midyear Multifamily Investment Landscape

Fogelman Properties’ Mike Aiken provides five insights for the future.

According to CBRE, 2019 multifamily investment activity will reach peak volumes with the forecast exceeding $150 billion for the year. While whispers of a slowing economy and higher interest rates concerned many in the first quarter, buyer demand continued to dominate early this year as it did in 2018. The first quarter is historically the most competitive period for multifamily acquisitions. Moving into the third quarter, there’s little indication activity will let up as many are wondering if multifamily investment will remain the “darling of deal making” this year or if appetites will taper as financing becomes more challenging. Here are five considerations in looking ahead at the multifamily investment landscape:

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Investors Are Showing Greater Interest in Nursing Home Acquisitions

More capital is now chasing nursing home deals.

Investors, especially private equity players, see increasing value in a nursing home portfolios, according to the National Investment Center for Seniors Housing & Care (NIC) research.

Nursing homes are increasingly becoming a target for commercial real estate investors, especially if they can achieve economies of scale, according to Zach Bowyer, senior managing director at real estate services firm CBRE. According to a summer 2019 CBRE U.S. Seniors Housing & Care survey, investor interest increased in the nursing care sector.
Investors, especially private equity players, see increasing value in a nursing home portfolios, according to the National Investment Center for Seniors Housing & Care (NIC) research.

Nursing homes are increasingly becoming a target for commercial real estate investors, especially if they can achieve economies of scale, according to Zach Bowyer, senior managing director at real estate services firm CBRE. According to a summer 2019 CBRE U.S. Seniors Housing & Care survey, investor interest increased in the nursing care sector.

“The sector is still extremely fragmented, with the 10 largest nursing care operators comprising only 14 percent of total supply,” says Bowyer. “We see considerable opportunity in this sector, but only under a very advanced lens.”

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Only half of Americans can afford an entry-level home

This spells major opportunity for the rental market

Just over half of Americans can afford an entry-level home as affordability issues continue to plague the nation’s housing market, and the situation is creating a robust opportunity for rentals.

Only 54% of Americans can afford a home priced at 20% of the median home price in their area, according to a study of 130 metros by John Burns Real Estate Consulting, which called that benchmark a reasonable proxy for an entry-level home.

But while this figure seems bleak, the report noted that affordability is improving, increasing 3% thanks to a recent drop in mortgage rates.

“The plunge in mortgage rates has created homeownership possibilities for 2.7 million more households as well as move-up possibilities for current homeowners with enough equity,” the analysts wrote. “This will spur home-buying activity this year, possibly averting the decline in volume we have been forecasting.”

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NYC Apartment Building Sales Plummet as New Rent Law Poses Risk

Multifamily sales came to a standstill in New York after new rent control regulations.

(Bloomberg)—Things looked promising for the sellers of a collection of Harlem apartment buildings, listed in April for $260 million. Almost immediately, 150 would-be buyers requested financial details on the 789 units, nearly all rent stabilized. About a dozen investors made offers.

Then the New York state legislature rewrote the rules on stabilized rents, capping the potential for increases, and slashing the property values overnight. Suddenly the suitors of the 28-building “Harlem Ensemble” disappeared faster than they came.

“They called us every day — and then we couldn’t reach them,” said David Chase, partner at B6 Real Estate Advisors, whose team marketed the portfolio. The listing, still unsold, will expire at the end of the month, he said.

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Future markets indicate a 0.25% cut at July Fed meeting

Trump’s intended Fed nominee pushes for bigger reduction

Traders in futures markets have signaled a 77.5% probability of a quarter percentage point cut at next week’s Federal Reserve meeting and a 22.5% chance of a half percentage point cut, according to the CME’s FedWatch tool.

Mortgage investors closely monitor the actions and statements of the Fed’s policy-setting Federal Open Market Committee, or FOMC, when deciding the coupon rates they’ll accept – effectively, what mortgage rates people pay for their homes.

An unlikely voice weighed in on Monday advocating for the bigger cut: Judy Shelton, President Donald Trump’s intended nominee for the Fed’s Board of Governors, whose members vote on monetary policy as part of the FOMC.

While her name hasn’t been officially submitted to the Senate for confirmation, Trump said in a tweet three weeks ago that he planned to nominate Shelton and Christopher Waller for the Fed board’s two empty seats.

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Liquid Assets

Conserving water in apartments yields lower expenses, more rent.

Richard Lamondin wants apartment operators to stop flushing money down the toilet.

As CEO and co-founder of Miami-based EcoSystems, which focuses on water saving strategies in the multifamily industry, he’s had a hand in replacing 70,000 toilets in apartment buildings across the country to save his clients a cumulative $15 million in water fees.

“For multifamily owners and operators, their highest utility expense is often the water bill,” Lamondin says. “Even if they pass that on to residents, there’s still a lot of economic benefit, in addition to the environmental impact, of focusing on water conservation.”

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Apartment Buildings in the U.S. Keep Getting Bigger

Last year broke records for number of new apartments completed in buildings with 50 units or more.

(Bloomberg Opinion) –Last year, developers in the U.S. completed 211,000 new housing units in buildings of 50 units or more, the biggest number on record. The total number of new apartments constructed didn’t come close to setting any records, though.

These numbers are from Characteristics of New Housing, an annual Census Bureau data release that is so chock-full of interesting information (for example: 88% of apartments completed in 2018 had in-unit laundry facilities) that I briefly contemplated interrupting my vacation to write about it when it came out two weeks ago. I resisted then, but now I’m back at my desk and the new numbers don’t seem to have gotten much attention. They should!

Characteristics of New Housing data go back to 1971 at the earliest, but other, less-detailed census data from before the 1970s indicate that those 211,000 new units in 50-plus-unit apartment buildings in 2018 almost certainly represent an all-time annual high. The construction of multifamily housing in the U.S. used to be skewed much more toward smaller structures. In the 1920s, for example, more than a million new housing units were constructed in two-unit buildings. From 1999 to 2018 — twice as long a period — only 83,000 such units were built. As recently as the mid-1980s, more than one-quarter of all new housing units constructed in the U.S. were in buildings of two to 19 units. In 2018, that share was just 4%, a new low.

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Matrix Monthly: Multifamily Rent Rises $12 to $1,465 in June

Year-over-year growth rises to 3.2%.

Following some months of moderate rent growth, the average U.S. multifamily rent rose by $12 in June 2019 to $1,465, according to the latest Matrix Monthly report by Yardi Matrix. At the same time, year-over-year rent growth rose to 3.2%, up by 40 basis points from May’s seasonally adjusted 2.9% year-over-year rent growth.

Rents have risen 2% so far in the second quarter, and 2.6% overall this year. The number of renter households rose to an all-time high in the first quarter of 2019, rising by more than 600,000 to 43.8 million, and Yardi does not anticipate demand for multifamily will slow any time soon.

The economy has added 172,000 jobs per month this year, below the average of 200,000 jobs per month that has held since 2010. However, Yardi still considers this solid growth given the lateness of the economic cycle and an unemployment rate below 4%.

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Fannie Mae lowers mortgage rate forecast and says home-price growth will accelerate

Mortgage giant predicts 30-year fixed rate will average 3.7% in 2019’s second half

Fannie Mae issued a new forecast that predicts the average U.S. rate for a 30-year fixed mortgage will be 3.7% in the second half of 2019, down from the 3.9% the mortgage financier called for a month ago. That compares to a 4.4% average rate in the first quarter and 4% in the second quarter.

Cheaper mortgage rates will cause a heat-up in home prices, according to the forecast. Last month, Fannie Mae said it expected home prices to grow 4.6% in 2019. In the new forecast, it called for a 5.4% increase.

“With lower mortgage rates taking effect, the deceleration in house price growth that was so prominent over the past year may be pausing,” Fannie said in commentary that accompanied the new forecast.

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Midsize Tenants Dominate Demand for Industrial Space

Midsize tenants drive a significant portion of demand for industrial space in cities.

E-commerce and last mile logistics tenants are fueling additional demand for industrial space expansion in the U.S., spurring midsize space users to dominate the industrial market.

Midsize industrial tenants—those who occupy 50,000-sq.-ft. to 300,000-sq.-ft. boxes, are driving industrial demand in key markets, including Indianapolis, Chicago, Atlanta and Dallas, according to a report from real estate services firm Avison Young.

For example, between January 2017 to June 2019, tenants in Chicago signed 872 industrial leases totaling 97.3 million sq. ft., with an average size of 111,629 sq. ft. Tenants in Atlanta signed 320 industrial leases totaling 36.2 million sq. ft., with an average size of 113,243 sq. ft. Dallas tenants signed 490 leases totaling 52.5 million sq. ft., with an average size of 107,265 sq. ft. Tenants in Indianapolis signed 41 leases totaling 52.5 million sq. ft., with an average size of 146,341 sq. ft., according to Avison Young.

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