Despite concerns about potentially slowing economic growth and new rent control laws around the country, investors continue to go after apartment properties.
The volume of U.S. multifamily acquisitions in the first nine months of 2019 was higher than during any other comparable period since this expansion cycle began a decade ago. In fact, this year might set a record for multifamily sales volume, says Alexis Maltin, manager of analytics with New York City-based research firm Real Capital Analytics (RCA). Investors spent $130.6 billion on multifamily acquisitions in the first three quarters of 2019, according to RCA.
Investors continue to be drawn to multifamily properties because of strong demand that has kept rents growing and occupancy levels well above 90 percent.
Prime apartment leasing season in 2019 proved to be strong across the country, RealPage reports.
When is prime leasing season? For most renters, especially those in warmer climates, they tend to prefer to move when it is warmer during the second quarter and third quarter. In areas where it’s colder, peaking moving season takes place between April and September.
According to new analysis from RealPage, this year was the second highest apartment leasing season ever, with 281,800 units absorbed (or rented).
The highest leasing season was in 1997 during the tech boom.
Although high rental rates were seen across the nation, it was the Southern markets that saw record-setting seasons.
Borrowers have been enjoying a low interest rate environment for some time. Yet the further drop in interest rates this year has stoked a surge in refinancing activity.
The Federal Reserve kicked off the first of three rate cuts in late July, which subsequently pulled commercial real estate lending rates lower in the third quarter. Notably, the 10-year Treasury dropped by 50 basis points in August to a near cyclical record low of 1.47 percent. The favorable rates have unleashed a fresh wave of refinancing activity. “You are seeing a lot of borrowers paying off loans early to take advantage of the low rates,” says Peter Norrie, managing director, capital markets, at Cohen Financial in Portland, Ore.
For example, some of the 10-year loans that were done seven years ago were done at 5.5 percent, whereas borrowers now have an opportunity to refinance at sub-4 percent. So, the math on that works very well for some borrowers, even if they have to pay a penalty for an early exit, notes Norrie.
According to the report, in the third quarter of 2019, 14.4 million residential properties in the U.S. were considered equity rich, meaning the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value. The count of equity rich properties in Q3 represented 26.7 percent, or about one in four, of 54 million mortgaged homes.
ATTOM’s Chief Product Officer Todd Teta stated in the report, “There are notable equity gaps between regions and market segments. But as home values keep climbing, homeowners are seeing their equity building more and more, while those with properties still worth a lot less than their mortgages represent just a small segment of the market.”
The report primarily focused on the equity rich areas; however, the report also noted that just 3.5 million, or one in 15, mortgaged homes in Q3 2019 were considered seriously underwater, with a combined estimated balance of loans secured by the property at least 25 percent more than the property’s estimated market value. That figure represented 6.5 percent of all properties with a mortgage.
Demographic shifts happening across the country are raising the profile of multifamily investments. Properties in need of upgrades near transit, schools, and in areas where affordability is a key issue are getting a hard review from companies specializing in the upgrade process. What are they looking for, what must be fixed, and how much of a return is possible by delving into the world of value-add multifamily fixer-uppers? Here are three real-world examples of what’s possible.
Originally developed in the late 1980s, the Villages at Montpelier, a 520-unit community in Laurel, Md., was in need of a serious makeover. Morgan Properties, an owner of value-add properties, deemed the outdated community a worthy candidate for fresh upgrades and new amenities to serve its diverse renter portfolio.
Cities like Los Angeles, San Francisco and New York City are often top of mind when thinking about our nation’s affordable housing crisis. But the affordable and workforce housing shortage isn’t limited to the country’s primary markets. Secondary and tertiary markets such as Austin, Texas, Charleston, S.C., and Raleigh, N.C. are also experiencing a significant need for more supply as residents struggle to find an affordable place to live. These supply-constrained markets are spread throughout the country and represent unprecedented demand for more affordable multifamily units, presenting a prime opportunity for multifamily owners and buyers to help fill this gap while capitalizing on a promising investment opportunity.
The statistics surrounding affordable housing in our country are staggering. The U.S. has a shortage of more than 7 million affordable homes for the country’s 11 million lowest income families, and only 37 affordable homes exist for every 100 extremely low-income households. Since 1990, the private market has lost more than 2.5 million low-cost rental units and rent increases have outpaced income growth. In short, it is an extremely supply-constrained product with significant demand, creating ample opportunity for multifamily investors to help meet this need while benefiting their own bottom line.
The performance of student housing properties in the lease-up for the fall 2019 semester varied more widely than usual, according to industry sources, including Carl Whitaker, who manages the market analytics team for RealPage Inc., a provider of property management software and services. Some student housing assets performed very well, while others struggled.
Developers continue to open tens of thousands of new student housing beds every year. But it is getting increasingly difficult for them to get the numbers just right—especially since so many of the new student housing properties are so expensive that only a fraction of students can afford them.
“Much of the new supply in recent years has been at a significant rent premium to existing properties,” says William Talbot, executive vice president and chief investment officer at American Campus Communities, a student housing REIT. “The new developments have generally leased up well in their inaugural year, despite the higher rents, but frequently struggle to maintain those rents.”
The prices of many construction materials may rise again in 2020.
“I think the lull in materials cost increases is close to ending,” says Ken Simonson, chief economist for the Associated General Contractors of America (AGC).
Despite trade tensions between the U.S. and nearly all of its major trading partners, the cost of many materials used to build apartments has remained relatively stable in 2019 (though subcontractors have been raising their bids in anticipation of materials prices rising). Even the cost of labor has been relatively stable, despite an extreme shortage of construction workers.
Troubled co-working operator WeWork has structured some leases under LLCs that are not guaranteed by its holding company, which will leave those landlords holding the bag for the free rent and TIs they provided to help get the spaces up and running. The landlords will also be left with vacant spaces, which may be backfilled with former WeWork tenants or another co-working operator at a lower price.
“WeWork (founders) attempted a paradigm shift in the tenant-landlord relationship,” says David R. Pascale, Jr., senior vice president with Los Angeles-based real estate advisory and brokerage firm George Smith Partners. “I believe they overreached.”
WeWork’s unprofitability and its derailed IPO reflect management’s failure to focus on the profitability of the core real estate business, Pascale notes.
It’s getting harder and harder to find an available unit in multifamily real estate.
In the third quarter of this year, multifamily vacancy fell to 3.6%, down 40 basis points from 2018, to the lowest level since 2000, according to a report from CBRE.
On average, rent rose 2.9% year over year, slightly higher than the historical average of 2.6%.
In Q3, builders completed 66,300 new units.
But, the net absorption of 307,600 units outpaced the completion of the 256,000 units for the year, meaning the high levels of multifamily demand nationwide sustained throughout the year.
According to CBRE’s report, this quarter marks the seventh in a row in which construction starts exceeded 100,000 units. This means that deliveries will remain high through at least 2020.