Interesting Times

Rebounding Fundamentals Boost Multifamily Sales

By Commercial Real Estate Direct Staff Report, 9-22-10 

Wednesday, 22 September 2010

Commercial Real Estate Direct Staff Report A rebound in multifamily property fundamentals is spurring investment activity within the class, according to Marcus & Millichap. The multifamily sector posted $7.1 billion of sales in the second quarter, according to the brokerage firm. That was up 32 percent from the previous quarter, and the sector's highest sales volume since 2008. It noted that the second-quarter increase occurred in tandem with improving fundamentals, citing Reis Inc. findings that the national multifamily vacancy rate fell by 20 basis points to 7.8 percent in the quarter. Marcus's sales findings are based on individual transactions valued at $1 million and above. The Commercial Real Estate Direct Property Sales Database, which tracks larger transactions, shows a 27 percent increase from the first quarter. "A lot of buyers that have been out there understand that now is the time to take a position for the next run," said Linwood Thompson, managing director of Marcus' multifamily group, referring to a run-up in demand as the economy recovers. He also said that many markets will be under-supplied in the upcoming recovery because the amount of new multifamily units added annually over the past 10 years has averaged about 10 percent of the supply. By comparison, multifamily construction deliveries averaged 40 percent of the existing supply annually in the years preceding the last recovery. Other active buyers have included investors that had been on the sidelines waiting to opportunistically buy from sellers under financial distress due to poor property performance. However, performance in most markets has improved rather than deteriorated. The average effective monthly rent across the country rose 60 basis points to $946/unit in the quarter and occupancy levels improved in 70 percent of all major markets, according to Reis. What's more, the 46,000 multifamily units that were absorbed was the highest level recorded since 2000. "Investors have begun to accept that a wave of deeply discounted, distressed opportunities may never materialize," Thompson said. However, he also noted that owners will likely continue to have difficulty finding fresh debt to pay off maturing mortgages. Markets with Biggest Occupancy Rate Gains in 2Q Ranking Market 2Q Vacancy % Change from 1Q (bp) 1 Syracuse, N.Y. 5.8 140 2 Greenville, S.C. 9.8 110 3 Charleston, S.C. 10.6 100 4 Fort Lauderdale, Fla. 7.6 90 5 Kansas City, Mo. 9.4 90 6 Columbia, S.C. 11.2 80 7 Greensboro, N.C. 12.0 80 8 Birmingham, Ala. 9.6 80 Source: Reis Inc. The relative lack of construction has also helped boost pricing in the sector. Marcus reported that the average sales price for multifamily properties rose 9 percent to $83,600/unit during the 12 months ended June 30, bringing the sector's average capitalization rate down 10 bp to 7.3 percent. Thompson said cap rates for the highest quality properties in the best locations have dropped between 1 and 1.5 percentage points over the past year. Any real improvement in occupancy fundamentals depends largely on an economic recovery that creates jobs, Thompson said, noting that "job growth has been anemic." Indeed, the national unemployment rate last month rose 10 bp to 9.6 percent. Thompson said a big chunk of multifamily demand could come from the 2.2 million people aged 18 to 34 that had moved back in with their parents between 2005 and 2009. The thinking is that they would be able to move out to rental apartments upon finding jobs. Demand will also be driven by households forced to rent because they lost or will lose their homes to foreclosure, and those unable to buy homes because mortgage lenders have tightened underwriting in the wake of the subprime mortgage meltdown. The national home ownership rate during the first half dropped 40 bp to 66.9 percent, its lowest level since 1999. Meanwhile, the 29,200 newly-built apartment units added in the second quarter was up slightly from the first-quarter delivery count, but down 18 percent from the second quarter of 2009. Marcus projects that fewer than 30,000 additional units will be added through the second half of the year. The combination of increased demand from renters and limited new supply sets the stage for rents to drive to "above-average" levels beginning in 2012, Marcus said. The nationwide average monthly asking rent for multifamily properties during the second quarter rose 60 bp to $946/unit, while the average effective rent, which factors in concessions, rose only 40 bp to $1,021. The company expects landlords to wait until 2011 before raising rents substantially and to focus on filling up vacant units in the meantime.

Rebounding Fundamentals Boost Multifamily Sales

Wednesday, 22 September 2010

Commercial Real Estate Direct Staff Report A rebound in multifamily property fundamentals is spurring investment activity within the class, according to Marcus & Millichap. The multifamily sector posted $7.1 billion of sales in the second quarter, according to the brokerage firm. That was up 32 percent from the previous quarter, and the sector's highest sales volume since 2008. It noted that the second-quarter increase occurred in tandem with improving fundamentals, citing Reis Inc. findings that the national multifamily vacancy rate fell by 20 basis points to 7.8 percent in the quarter. Marcus's sales findings are based on individual transactions valued at $1 million and above. The Commercial Real Estate Direct Property Sales Database, which tracks larger transactions, shows a 27 percent increase from the first quarter. "A lot of buyers that have been out there understand that now is the time to take a position for the next run," said Linwood Thompson, managing director of Marcus' multifamily group, referring to a run-up in demand as the economy recovers. He also said that many markets will be under-supplied in the upcoming recovery because the amount of new multifamily units added annually over the past 10 years has averaged about 10 percent of the supply. By comparison, multifamily construction deliveries averaged 40 percent of the existing supply annually in the years preceding the last recovery. Other active buyers have included investors that had been on the sidelines waiting to opportunistically buy from sellers under financial distress due to poor property performance. However, performance in most markets has improved rather than deteriorated. The average effective monthly rent across the country rose 60 basis points to $946/unit in the quarter and occupancy levels improved in 70 percent of all major markets, according to Reis. What's more, the 46,000 multifamily units that were absorbed was the highest level recorded since 2000. "Investors have begun to accept that a wave of deeply discounted, distressed opportunities may never materialize," Thompson said. However, he also noted that owners will likely continue to have difficulty finding fresh debt to pay off maturing mortgages. Markets with Biggest Occupancy Rate Gains in 2Q Ranking Market 2Q Vacancy % Change from 1Q (bp) 1 Syracuse, N.Y. 5.8 140 2 Greenville, S.C. 9.8 110 3 Charleston, S.C. 10.6 100 4 Fort Lauderdale, Fla. 7.6 90 5 Kansas City, Mo. 9.4 90 6 Columbia, S.C. 11.2 80 7 Greensboro, N.C. 12.0 80 8 Birmingham, Ala. 9.6 80 Source: Reis Inc. The relative lack of construction has also helped boost pricing in the sector. Marcus reported that the average sales price for multifamily properties rose 9 percent to $83,600/unit during the 12 months ended June 30, bringing the sector's average capitalization rate down 10 bp to 7.3 percent. Thompson said cap rates for the highest quality properties in the best locations have dropped between 1 and 1.5 percentage points over the past year. Any real improvement in occupancy fundamentals depends largely on an economic recovery that creates jobs, Thompson said, noting that "job growth has been anemic." Indeed, the national unemployment rate last month rose 10 bp to 9.6 percent. Thompson said a big chunk of multifamily demand could come from the 2.2 million people aged 18 to 34 that had moved back in with their parents between 2005 and 2009. The thinking is that they would be able to move out to rental apartments upon finding jobs. Demand will also be driven by households forced to rent because they lost or will lose their homes to foreclosure, and those unable to buy homes because mortgage lenders have tightened underwriting in the wake of the subprime mortgage meltdown. The national home ownership rate during the first half dropped 40 bp to 66.9 percent, its lowest level since 1999. Meanwhile, the 29,200 newly-built apartment units added in the second quarter was up slightly from the first-quarter delivery count, but down 18 percent from the second quarter of 2009. Marcus projects that fewer than 30,000 additional units will be added through the second half of the year. The combination of increased demand from renters and limited new supply sets the stage for rents to drive to "above-average" levels beginning in 2012, Marcus said. The nationwide average monthly asking rent for multifamily properties during the second quarter rose 60 bp to $946/unit, while the average effective rent, which factors in concessions, rose only 40 bp to $1,021. The company expects landlords to wait until 2011 before raising rents substantially and to focus on filling up vacant units in the meantime.

A rebound in multifamily property fundamentals is spurring investment activity within the class, according to Marcus & Millichap.

The multifamily sector posted $7.1 billion of sales in the second quarter, according to the brokerage firm. That was up 32 percent from the previous quarter, and the sector's highest sales volume since 2008. It noted that the second-quarter increase occurred in tandem with improving fundamentals, citing Reis Inc. findings that the national multifamily vacancy rate fell by 20 basis points to 7.8 percent in the quarter.

Marcus's sales findings are based on individual transactions valued at $1 million and above. The Commercial Real Estate Direct Property Sales Database, which tracks larger transactions, shows a 27 percent increase from the first quarter.

"A lot of buyers that have been out there understand that now is the time to take a position for the next run," said Linwood Thompson, managing director of Marcus' multifamily group, referring to a run-up in demand as the economy recovers.

He also said that many markets will be under-supplied in the upcoming recovery because the amount of new multifamily units added annually over the past 10 years has averaged about 10 percent of the supply. By comparison, multifamily construction deliveries averaged 40 percent of the existing supply annually in the years preceding the last recovery.

Other active buyers have included investors that had been on the sidelines waiting to opportunistically buy from sellers under financial distress due to poor property performance. However, performance in most markets has improved rather than deteriorated.

The average effective monthly rent across the country rose 60 basis points to $946/unit in the quarter and occupancy levels improved in 70 percent of all major markets, according to Reis. What's more, the 46,000 multifamily units that were absorbed was the highest level recorded since 2000.

"Investors have begun to accept that a wave of deeply discounted, distressed opportunities may never materialize," Thompson said. However, he also noted that owners will likely continue to have difficulty finding fresh debt to pay off maturing mortgages.

Markets with Biggest Occupancy Rate Gains in 2Q
Ranking	Market	2Q Vacancy %	Change from 1Q (bp)
1	Syracuse, N.Y.	5.8	140
2	Greenville, S.C.	9.8	110
3	Charleston, S.C.	10.6	100
4	Fort Lauderdale, Fla.	7.6	90
5	Kansas City, Mo.	9.4	90
6	Columbia, S.C.	11.2	80
7	Greensboro, N.C.	12.0	80
8	Birmingham, Ala.	9.6	80

Source: Reis Inc.

The relative lack of construction has also helped boost pricing in the sector. Marcus reported that the average sales price for multifamily properties rose 9 percent to $83,600/unit during the 12 months ended June 30, bringing the sector's average capitalization rate down 10 bp to 7.3 percent.

Thompson said cap rates for the highest quality properties in the best locations have dropped between 1 and 1.5 percentage points over the past year.

Any real improvement in occupancy fundamentals depends largely on an economic recovery that creates jobs, Thompson said, noting that "job growth has been anemic." Indeed, the national unemployment rate last month rose 10 bp to 9.6 percent.

Thompson said a big chunk of multifamily demand could come from the 2.2 million people aged 18 to 34 that had moved back in with their parents between 2005 and 2009. The thinking is that they would be able to move out to rental apartments upon finding jobs.

Demand will also be driven by households forced to rent because they lost or will lose their homes to foreclosure, and those unable to buy homes because mortgage lenders have tightened underwriting in the wake of the subprime mortgage meltdown. The national home ownership rate during the first half dropped 40 bp to 66.9 percent, its lowest level since 1999.

Meanwhile, the 29,200 newly-built apartment units added in the second quarter was up slightly from the first-quarter delivery count, but down 18 percent from the second quarter of 2009. Marcus projects that fewer than 30,000 additional units will be added through the second half of the year.

The combination of increased demand from renters and limited new supply sets the stage for rents to drive to "above-average" levels beginning in 2012, Marcus said. The nationwide average monthly asking rent for multifamily properties during the second quarter rose 60 bp to $946/unit, while the average effective rent, which factors in concessions, rose only 40 bp to $1,021.

The company expects landlords to wait until 2011 before raising rents substantially and to focus on filling up vacant units in the meantime.