Category: Multifamily

Can the Apartment Market Sustain its Momentum?

Occupancy is at the highest level in years, but an economic downturn combined with high level of construction might be a threat.

The apartment sector is the strongest it’s been in years, according to industry experts.

“Terrific absorption has pushed occupancy upward to highs for this economic cycle,” say Greg Willett, chief economist for RealPage Inc., a provider of property management software and services.

That might seem strange. The occupancy rate in the U.S. has already been high for a very long time. Economists and apartment experts have been expecting more apartment units to become vacant for years, as more developers open new buildings. But demand from renters remain strong, despite growing worries that the U.S. economy may be weakening.

“You would think that the market would be mature… We’ve had 10 years now of really strong multifamily demand,” says Jeanette Rice, Americas head of multifamily research with real estate services firm CBRE. “It’s still positive as it has been for many years; in some ways, it is more positive.”

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Multifamily Midyear Review Shows Good News, Bad News

Renting remains strong, but deal activity is down.

Recent reports chronicling the economic condition of the multifamily marketplace at midyear shows a mix of good and bad news. According to Berkadia’s National Trends Multifamily Report for Second Quarter 2019, the current occupancy rate is 95.7%, which is up 30 basis points as compared with 2Q 2018 while effective rent is up 3.1% for the same period. Berkadia attributes the multifamily good news to the high cost of homeownership.

“As the cost of homeownership continued to rise across the United States, renting remained the preferred housing option. At $280,200 in May 2019, the median sales price of existing single-family homes advanced 4.6% year over year. At the same time, home sales velocity decelerated 1.1%, suggesting many Americans were priced out of homeownership.”

Berkadia also notes a rise in leasing activity as residents newly occupied 330,531 net units since mid-2018, up from 323,064 units absorbed during the year prior. Developers have been responding to the need for more apartments by adding nearly 290,000 new units to the nation’s multifamily housing stock, a rise of 3.6% higher than the number of units added during the previous five years.

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What Can AI Do for Commercial Real Estate Investors?

Emerging AI tools can help investors access property data and manage properties more efficiently.

As we approach the top of the real estate market cycle, commercial real estate investors are being forced to look at the bigger picture and become more adaptable to maximize their portfolios and stay ahead of the competition. The good news? Tech-enabled solutions are helping to drive strong returns and create new opportunities for investors to get the most out of their properties and access the data necessary for strong valuations.

Just looking at the sea of change being driven by new technologies across industries, it’s no surprise that artificial intelligence (AI) has quickly become the biggest disruptor in the commercial real estate industry. Numerous software platforms now use machine learning and predictive analytics to help investors ensure the profitability and sustainability of their portfolios, while reducing the often high level risk factor of top-tier investments. Unfortunately, only those who are willing to adopt these new tools will see maximized returns in a shifting real estate market. In short, staying ahead of the competition is now predicated on staying ahead of the technology curve.

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Multifamily occupancy rates keep rising

More Millennials opt to rent instead of own

Apartment occupancy rates climbed in July to their highest level since in since 2000, according to a report from RealPage, which revealed that occupancy rates rose 0.4% from last year to reach 96.2% last month.

Meanwhile, rent growth held firm in July at 3.1%, as average rent prices across the U.S. rose to $1,414.

Of the nation’s 50 markets, each one saw at least 1% growth, RealPage said. Of the nation’s 150 major markets, 91 of them met or exceeded the national norm for occupancy and hit the effectively full mark of 95%.

Rental occupancy rates in the Northeast hit 97% last month, followed by the Western region at 96.5% and the Midwest at 96.4%. In all, each region saw their occupatncy rates rise by 0.2 to 0.5 points from a year ago.

“Millennials are a large reason why the current rental market is thriving,” said Ten-X Chief Economist Peter Muoio. “Though we expect homeownership in this important age group to increase over the long term, so far they remain focused on renting.

“At the same time, there continues to be new rental properties hitting the market,” Muoio added. “However, construction is expected to scale down next year, causing vacancies to rise to a predicted 5.7% before quickly being absorbed due to the continuing increase of household formations.”

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Yardi Matrix Outlook: Rents Rise 3% by Midyear 2019

Despite strong fundamentals, Yardi notes a rise in trade tensions and slowing economic growth.

Rent growth has stabilized at 2.6% in the first half of 2019 and 3.3% year-over-year, with 2.6% rent growth expected over the full year, according to the Yardi Matrix Multifamily Outlook for summer 2019.

Based on this prediction, 2019 would mark the seventh year in a row that rents have risen above the 2.5% long-term average.

South and Southwest metros are leading the nation in rent growth, due to their fast-growing economies and existing affordable housing, but most metros are seeing strong gains. Rent growth is strong across most markets as of midyear; only a handful saw rent growth of 2.5% or less. Apartments aimed at the middle and lower end continue to lead in rent growth, as new supply is still concentrated in the luxury sector.

However, with the national average rent rising to $1,465 as of June 2019, cost burdens have led to accelerated migrations from high-cost metros in the Northeast and Midwest out to the Southeast and Southwest. According to U.S. Census data, the populations of Austin, Texas; Dallas; California’s Inland Empire; Las Vegas; Orlando, Fla.; and Phoenix have risen at least 300% since 1970. Rents in many of these markets are among the fastest growing in recent years; Las Vegas tops the nation in rent growth at 8.4% YOY, followed by Phoenix at 8.1%.

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Apartment Turnover Rate Continues to Fall

Fresh data shows tenants staying put longer.

A recent brief published by CBRE shows the turnover rate for multifamily housing has fallen to 47.5%, which is the lowest level in two decades. CBRE quotes numbers from RealPage that show a drop of 80 basis points. The decline is confirmed by additional evidence culled from six major real estate investment trusts (REITs). AvalonBay, Camden, Equity Residential (EQR), MAA, and UDR all show a lower turnover rate in Q1 2019 as compared with 2018 with an annual average drop of 2% to 42%. Essex showed a 1-point rise to 41%.

The drop represents an overall trend that has been happening since at least 2000, when the rate was clocked at 65%. According to CBRE, “lower turnover rates are generally interpreted as positives for the industry and a sign of favorable market strength at this point in the cycle.” Turnover ticked up a bit in the mid-2000s but then tumbled again during the Great Recession.

CBRE quotes the National Apartment Association’s estimates that turnover costs are at least $1,000 per unit and can easily rise to over $3,000. Yet owners often achieve more rent growth when units turn. Short-lived seasonal effects on the turnover rate take effect in fall and winter months as the rate trends down. The highest rates happen in the second and third quarters of the year.

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Apartment Cap Rates Creep Higher in the Country’s Top Markets

Cap rates on apartment buildings in the nation’s top markets have been creeping higher, but lower interest rates might yet change the trend.

Multifamily investors continue to pay high prices for new acquisitions and accept historically low yields. Average multifamily cap rates have been historically low for some time and fell even further in the first half of 2019.

There are a handful of markets, however—New York City, San Francisco, Los Angeles and Chicago—where multifamily cap rates have inched higher. These are some of the same markets where developers have built the most new apartment units in recent years. Housing advocates have also pressed lawmakers to pass new rent control laws in New York City, California and Chicago, worrying some investors.

Cap rates are definitely moving up in some of the top markets of the country,” says Jim Costello, senior vice president with research firm Real Capital Analytics (RCA).

Lower interest rates may have already begun to push cap rates back down—even in these top markets.

“Cap rates did move up move up in the latter part of 2018 and early part of 2019 in prime urban submarkets in the top six markets… But CoStar data shows a decrease in multifamily cap rates since the first quarter of the year, for all markets, including the top six,” says Andrew Rybczynski, senior consultant with research firm CoStar Portfolio Strategy.

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Smaller Unit Occupancy Outperforms All Others, Especially in Core Submarkets

A recent CoStar analysis shows renters are sacrificing size for the sake of location.

Occupancy rates are on the rise for the nation’s smallest apartments, according to a recent CoStar Group analysis, outperforming larger units. This is especially true in high-demand submarkets where soaring rental rates and strong job growth lead renters to prioritize location over total living space.

Overall, demand for rental housing has outpaced supply in 2019, and the average apartment rent has been 24% above pre-recession highs. At the same time, total student debt has risen to $1.49 trillion, and household incomes have only risen by 2.9% each year—far from enough to keep up with the pace of rent growth, at 4% each year.

The national average vacancy rate for the smallest one-bedroom apartments has fallen by 40 basis points since 2015, or 30 basis points below the vacancy rate for the largest. In core submarkets, the spread is wider, with the vacancy rate for the smallest apartments falling 120 basis points over the same period.

Given this trend, and developers’ desire to fit more units, the size of new one-bedroom apartments has declined significantly over the past decade, down 6.5% from 800 square feet in 2007 to 755 in 2018. In urban submarkets, one-bedroom sizes have fallen 9.4% in the same period.

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Homeownership Rate in the U.S. Falls to the Lowest Since 2017

The share of Americans who own their homes fell to 64.1 percent in the second quarter of 2019.

(Bloomberg)—The U.S. homeownership rate fell to the lowest level in more than a year as rising prices and a tight supply of starter homes put buying out of reach for many renters.

The share of Americans who own their homes was 64.1% in the second quarter, the lowest since the third quarter of 2017, according to a Census Bureau report Thursday. It was the second straight decrease, down from 64.2% in the previous three months and 64.3% a year earlier.

This year’s drop in mortgage rates and the strong job market have only added to competition for entry-level homes, driving up prices for a limited supply of properties and slowing sales. The median price of a previously owned U.S. home rose 4.3% from a year earlier to a record of $285,700, while sales dropped 2.2%, the National Association of Realtors said this week.

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Garden-Style Apartment Projects Allow Developers to Expand in the Suburbs

With many prime suburbs restricting high-rise construction, garden-style apartment complexes remain popular.

Developers in the U.S. continue to build more low-rise apartment buildings than any other type of construction. That includes a high volume of new garden-style apartment buildings—often three-story “breezeway” apartments.

“The ‘same old breezeway’ apartments are still getting built in the same old way,” says Walter Hughes, chief innovation officer with Humphreys & Partners Architects, based in Dallas, Texas.

In recent years, multifamily developers have come to vastly prefer mid-rise and high-rise buildings that squeeze more apartment units onto an average acre. But in many parts of the country, and especially in suburban submarkets, local officials refuse to allow developers to build mid-rise or high-rise structures.

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