Multifamily Research. Market Report Fourth Quarter 2017 South Florida Metros. Robust Rental Demand Keeps Market Strong In the Face of Rising Headwinds

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Britton Willis
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1 Multifamily Research Market Report Fourth Quarter 2017 South Florida s Robust Rental Demand Keeps Market Strong In the Face of Rising Headwinds Positive in-migration trends and sturdy single-family home appreciation ensure steady demand for rentals. Supported by one of the strongest labor markets in the country right now, South Florida s economy is performing markedly well. The tightening job market and an infl ux of new residents are spurring demand for housing, which remains limited due to rising construction and land costs. With nearly 55,000 households anticipated to be formed across the region this year, housing demand is rapidly increasing the cost of a single-family home, driving more residents to the rental lifestyle. While tenant demand remains high, a substantial increase to supply is beginning to slow rent growth and will boost vacancy in the short term as new complexes are in a period of lease-up. Supply pressures beginning to mount, though demand remains in place to fill new units. Development hits a new high this year as more than,500 apartments are slated for completion, outpacing last year s deliveries by roughly 3,000 units. The Boynton Beach/Delray Beach submarket will experience the greatest infl ux of rentals this year at nearly 1,900 doors, led by The District Boynton, which accounts for 350 rentals. Marketwide, construction is most concentrated in the urban centers that appeal to many young professionals who are priced out of the single-family home market. Average Rate 12% 9% 6% 3% Local Apartment Yield Trends Apartment Cap Rate Year Treasury Rate * Cap rates trailing 12 months through 3Q17; 10-year Treasury rate through Oct. 20. Sources: CoStar Group, Inc.; Real Capital Analytics Multifamily 2017 Outlook Miami 3.8% 0 $1, % Fort Lauderdale 5.1% 120 $1, % West Palm Beach Investment Trends Miami 6.8% 240 $1, % Rising interest rates and increasing insurance expenses are extending closing times as buyers take more time to evaluate assets. A pricing disconnect is also slowing deal flow. There has been a substantial reduction in investment from international buyers, returning dominance to domestic players. New construction is in high demand, though listings remain limited. Fort Lauderdale Vacancy Going-in cap rates for Class A properties are in the low- to mid- 5 percent range while Class C assets generally trade with an initial yield in the low-6 to mid-7 percent band. The shortage of properties to trade into is putting a strain on 1031-exchange investors, resulting in some owners holding longer. West Palm Beach Basis Point Effective Rent Less competition than larger markets and first-year yields that are on average the highest in South Florida will hold investor interest in Palm Beach County elevated. Suburban assets with little competition from other complexes are in high demand due to greater pricing power. Rent growth in these areas can far exceed the metro average.

2 Miami 3Q17 12-MONTH PERIOD Employment Trends EMPLOYMENT: Year-over-Year 4% 3% 2% 1% United States 0.1% increase in total employment In September,,300 jobs were lost in the wake of Hurricane Irma, dropping year-over-year employment gains to 1,600. The trade, transportation and utilities sector led job growth so far this year, hiring just over 5,000 workers. The jobless rate fell 90 basis points over the year ended in September to 4.5 percent, the lowest reading since As the labor market tightens, job growth will slow. Completions and Absorption CONSTRUCTION: Completions Absorption 4,965 units completed Units (thousands) Following the completion of 1,8 units in the third quarter, delivery totals over the past year exceeded the 4,346 rentals opened during the prior period. The largest complex to open in the third quarter was Gables Aventura, a 400-door, market-rate garden complex located in Northeast Miami. The Coral Gables/South Miami submarket received the most units at 1,247. Vacancy Rate Trends VACANCY: Vacancy Rate % % United States 200 basis point increase in vacancy The vacancy rate climbed to 3.8 percent in the third quarter from a year ago, erasing a 120-basis-point drop that occurred last year. Class A complexes posted the highest vacancy rate following an infl ux of supply, up 300 basis points from last year to 6.3 percent. The tightest rate was in the Class C segment, resting at 0.8 percent. Monthly Rent Rent Trends Rent RENTS: 11.3% increase in effective rents Monthly Effective Rent $1,500 $1,375 $1,250 $1,125 $1, % % Year-over-Year The average rent surged 11.3 percent annually to $1,483 per month in the third quarter, eclipsing the 1.6 percent increase posted a year earlier. Class B complexes experienced annual rent growth of.9 percent in the third quarter, reaching $1,481 per square foot. Rent at Class A units grew 6.7 percent and Class C rent climbed 9.7 percent over the past year. * Forecast

3 Multifamily Research Market Report DEMOGRAPHIC HIGHLIGHTS FIVE-YEAR POPULATION GROWTH* 190,500 3Q17 POPULATION AGE (Percent of total population) 21% U.S. 21% $$ 3Q17 MEDIAN HOUSEHOLD INCOME $47,298 U.S. Median $58,218 2Q17 TOTAL HOUSEHOLDS* FIVE-YEAR HOUSEHOLD GROWTH* 89,000 * POPULATION OF AGE 25+ PERCENT WITH BACHELOR DEGREE+** 29% U.S. Average 29% **20 43% Rent 57% Own Miami-Fort Lauderdale-West Palm Beach, FL politan Statistical Area Lowest Vacancy Rates 3Q17 Sales Take a Sharp Drop as Listings Become Limited Submarket Vacancy Rate Basis Point Effective Rents % North Central Miami 0.5% 20 $ % Transaction velocity slowed 20 percent over the past 12 months from the prior period as more owners elected to hold onto their properties. Buyers were most active in the Bal Harbor /South Beach and Miami Gardens/Opa-Locka submarkets. SUBMARKET TRENDS Homestead/South Dade County 0.6% -10 $1, % Hialeah/Miami Lakes $1, % Miami Gardens 3.1% 0 $1,0 6.1% Westchester/Kendall 3.7% 220 $1, % Downtown Miami/South Beach 4.1% 0 $2, % Northeast Miami 4.9% 0 $1, % Coral Gables/South Miami 6.5% 470 $1, % West Miami/Doral $1, % Overall 3.8% 200 $1, % SALES TRENDS As buyers expanded their search parameters, the average price dipped roughly 10 percent to $0,400 per unit. First-year cap rates held stable, falling in the upper-5 percent band. Outlook: Investors will broaden search criteria as the number of preferred properties listed is limited. Average Price per Unit (000s) $180 $0 $0 $120 $100 Pricing Trends * Trailing 12 months through 3Q17 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

4 Fort Lauderdale 3Q17 12-MONTH PERIOD Employment Trends EMPLOYMENT: Year-over-Year 4% 3% 2% 1% United States 1.5% increase in total employment Broward County led job growth in the region over the past year with employment growth of 12,800, even as 10,200 jobs were shed in September from the storm. The education and health services sector added 4,700 jobs over the past year, the greatest contribution to the overall workforce. At 3.8 percent, Broward County posted the lowest unemployment rate in South Florida, down 80 basis points. Completions and Absorption CONSTRUCTION: Completions Absorption 3,995 units completed Units (thousands) So far this year 3,246 apartments have been delivered, bringing completions over the past four quarters above the 2,2 units completed during the prior year. The Modera Port Royale opened in August in Fort Lauderdale and was the largest completion in South Florida over the past 12 months at 555 units. Luzano in Pompano Beach followed with 404 rentals. Vacancy Rate Trends VACANCY: Vacancy Rate % % United States 0 basis point increase in vacancy Net absorption of more than 1,000 units trailed a robust period of deliveries to raise the vacancy rate to 5.3 percent in September, adding to a 40-basis-point rise a year earlier. Vacancy increased the most in the Class B segment as a 270-basis-point rise to 6.3 percent was marked in the third quarter. Class A vacancy rose to 6.1 percent. Monthly Rent Rent Trends Rent RENTS: 1.8% increase in effective rents Monthly Effective Rent $1,500 $1,375 $1,250 $1,125 $1, % % Year-over-Year Effective rent maintained an upward trajectory, climbing to $1,490 per month in the third quarter, rising at a slower pace than the 4.2 percent rise registered a year ago. Class A rentals posted an increase in effective rent of 5.8 percent annually to $1,884 per month. Class B and Class C apartment rent was up 2.1 percent to $1,479 per month and 2.5 percent to $1,069 per month, respectively. * Forecast

5 Multifamily Research Market Report DEMOGRAPHIC HIGHLIGHTS FIVE-YEAR POPULATION GROWTH* 172,800 3Q17 POPULATION AGE (Percent of total population) 2 U.S. 21% $$ 3Q17 MEDIAN HOUSEHOLD INCOME $58,422 U.S. Median $58,218 2Q17 TOTAL HOUSEHOLDS* FIVE-YEAR HOUSEHOLD,GROWTH* 90,000 * POPULATION OF AGE 25+ PERCENT WITH BACHELOR DEGREE+** 29% U.S. Average 29% **20 43% Rent 57% Own Miami-Fort Lauderdale-West Palm Beach, FL politan Statistical Area Lowest Vacancy Rates 3Q17 Deal Flow Maintained as Investors Expand Reach to Smaller Submarkets Submarket Vacancy Rate Basis Point Effective Rents % Apartment sales inched up 3 percent during the past four quarters, supported by a sharp rise in transactions in the Pompano Beach/Deerfield Beach submarkets. SUBMARKET TRENDS Pompano Beach/Deerfi eld Beach 3.8% 0 $1, % Hollywood 4. 0 $1, % Pembroke Pines/Miramar 4.6% 30 $1, % Fort Lauderdale 4.9% 40 $1, % Margate/Coconut Creek/ North Lauderdale 5.1% 80 $1, % Coral Springs 5.8% 260 $1, % Plantation/Davie/Weston 5.9% 0 $1, % Sunrise/Lauderhill 6.8% 300 $1, % Overall 5.3% 0 $1, % SALES TRENDS Asset values rose 1 percent from the prior yearlong stretch to $0,900 per unit. Complexes in the Pompano Beach/Deerfi eld Beach area traded for $121,300 per unit on average. Outlook: Job growth and increased development in West Broward County will attract more investors to the area as more investment opportunities become available. Average Price per Unit (000s) $0 $0 $120 $100 $80 Pricing Trends * Trailing 12 months through 3Q17 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

6 West Palm Beach Year-over-Year Employment Trends United States % % 3Q17 12-MONTH PERIOD EMPLOYMENT: 0.9% increase in total employment Following the loss of 6,300 jobs in September from Hurricane Irma, year-over-year employment gains fell to 5,400. Over the past year, the construction sector expanded at the greatest degree, adding 2,750 workers to payrolls. The unemployment rate dropped to 4.0 percent in September, a 100-basis-point reduction from a year ago and the lowest level since Completions and Absorption Completions Absorption CONSTRUCTION: 4,173 units completed Units (thousands) In the third quarter, eight projects comprising 1,917 units were completed, pushing annual deliveries well above the 2,128 rentals opened during the previous year. The four largest projects to fi nish over the past 12 months were all in Boca Raton: The Altis Boca Raton, Palmetto Promenade, 850 Boca and 101 Via Minzer. They range from 366 units to 398 units. Vacancy Rate 8% 6% 4% 2% Vacancy Rate Trends United States VACANCY: 110 basis point increase vacancy The largest supply infl ux of the cycle pushed the vacancy rate up to 6.0 percent in the third quarter, adding to a 40-basis-point rise from a year earlier. Boca Raton posted the highest rate at 7.4 percent, up 300 basis points from a year earlier while the only submarket to register a drop was the Boynton Beach/Delray Beach area, down 20 basis points to 5.7 percent. Monthly Rent Rent Trends Rent RENTS: 3.2% increase in effective rents Monthly Effective Rent $1,600 $1,450 $1,300 $1,0 $1, % % Year-over-Year Apartment rents grew 3.2 percent annually in the third quarter to $1,495 per month, down from a 4.9 percent increase last year. Class C properties recorded a 10.8 percent rise in the average effective rent, reaching $1,095 per month in the third quarter. A 1.8 percent drop was posted in the Class A segment to average $1,850 a month. * Forecast

7 Multifamily Research Market Report DEMOGRAPHIC HIGHLIGHTS FIVE-YEAR POPULATION GROWTH* 206,900 3Q17 POPULATION AGE (Percent of total population) 17% U.S. 21% $$ 3Q17 MEDIAN HOUSEHOLD INCOME $61,808 U.S. Median $58,218 2Q17 TOTAL HOUSEHOLDS* FIVE-YEAR HOUSEHOLD GROWTH* 109,000 * POPULATION OF AGE 25+ PERCENT WITH BACHELOR DEGREE+** 38% U.S. Average 29% **2Q 43% Rent 57% Own Miami-Fort Lauderdale-West Palm Beach, FL politan Statistical Area Lowest Vacancy Rates 3Q17 Yield-Chasing Investors Remain Focused On Palm Beach County Submarket Vacancy Rate Basis Point Effective Rents % Robust appreciation and economic uncertainties limited listings in the county, slowing deal flow over the past year by roughly 11 percent. Prices remained relatively unchanged at $3,300 per unit. SUBMARKET TRENDS Lake Worth/Greenacres/ Wellington Boynton Beach/Delray Beach 4.6% 120 $1, % 5.7% -20 $1, % West Palm Beach 5.9% 100 $1, % North Palm Beach County 6.3% 100 $1, % Boca Raton 7.4% 300 $1, % Overall $1, % SALES TRENDS Sales were centered in West Palm Beach where fi rstyear yields were the highest in South Florida, averaging in the low-6 to mid-7 percent range. Buyers also focused on Boynton Beach where the average price per unit was $0,000. Outlook: While higher yields drive sales in the county, a rising bid/ask gap could slow sales even further. Average Price per Unit (000s) $0 $0 $0 $0 $120 Pricing Trends * Trailing 12 months through 3Q17 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

8 Multifamily Research Market Report Percent of Dollar Volume Private, 64% 10 75% 5 25% Apartment Acquisitions By Buyer Type* Apartment Mortgage Originations By Lender National Multi Housing Group Visit John Sebree First Vice President, National Director National Multi Housing Group Tel: (312) john.sebree@marcusmillichap.com Other, 1% Cross-Border, 6% 12 * * Trailing 12 months through 2Q17 ** Through first half 2017 Include sales $2.5 million and greater Sources: CoStar Group, Inc.; Real Capital Analytics Equity Fund & Institutions, 23% Listed/REITs, 6% Gov't Agency Financial/Insurance Reg'l/Local Bank Nat'l Bank/Int'l Bank CMBS Pvt/Other CAPITAL MARKETS By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation Monetary policy in transition. Despite the Fed raising its benchmark short-term rate three times in seven months and signaling another rise before the end of the year, long-term rates have remained stable. The yield on the 10-year U.S. Treasury bond remained in the low- to mid-2 percent range throughout the third quarter of The Federal Reserve wants to normalize monetary policy and, in addition to raising its funds (or overnight lending) rate, has announced it will begin to taper its balance sheet by allowing an initial $10 billion in securities to mature without reinvestment. By reducing its acquisitions of securities, 10-year Treasury rates should drift upward, thereby widening the spread between short- and long-term rates. Increase in interest rates over the course of the year, pushing up the cost of capital. While commercial real estate fundamentals remain strong, rising costs associated with debt financing will tighten the spread between cap rates and lending benchmarks. This environment could weigh on transaction activity as investors evaluate their yield options. Cap rates have remained relatively stable over the last year, but upward movement in Treasury rates has amplified the expectation gap between buyers and sellers. The capital markets environment continues to be highly competitive. Government agencies continue to consume the lion s share, just slightly over 50 percent, of the apartment lending market. National and regional banks control approximately a quarter of the market. Growing uncertainty about federal policy and global geopolitical concerns are keeping long-term interest rates down with pricing residing in the 4 percent realm with maximum leverage of 80 percent. Portfolio lenders will typically require loan-to-value ratios closer to 75 percent with interest rates in the high-3 to mid-4 percent range. As uncertainty remains regarding the possibility of tax policy revision, rental demand remains strong with the national apartment vacancy at 4.5 percent. Prepared and edited by Michael Murphy Research Analyst Research Services For information on national apartment trends, contact: John Chang First Vice President Research Services Tel: (602) john.chang@marcusmillichap.com Price: $750 Marcus & Millichap Miami: Scott Lunine Regional Manager 5201 Blue Lagoon Drive, Suite 100 Miami, FL (786) scott.lunine@marcusmillichap.com Fort Lauderdale: Ryan Nee First Vice President Regional Manager 5900 North Andrews Ave., Suite 100 Fort Lauderdale, FL (954) ryan.nee@marcusmillichap.com The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: -level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specifi c investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody s Analytics; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau

Multifamily Research. Market Report Fourth Quarter South Florida Metros

Multifamily Research. Market Report Fourth Quarter South Florida Metros Multifamily Research Market Report Fourth Quarter 2018 South Florida s Investors Chase Yields, Rent Growth in South Florida s Emerging Submarkets Chronic shortage of entry-level housing keeps the renter