Multifamily Outlook. United States Fall 2014

Transcription

1 Multifamily Outlook United States Fall 2014

2 Markets continue to perform at peak levels... with nearterm, pocketed softening on the horizon On the heels of seven quarters of peak-level investment sale volumes, the multifamily market remains strong, posting annualized growth of 10.4 percent year-to-date. This has paralleled sustained domestic and foreign investor appetite for product, driving continued cap rate compression in an expanding subset of primary and secondary markets. As the overarching economic picture strengthens across markets, sectors and industries in 2014, the U.S. economy is catching up to the multifamily sector, which has seen evolving homeownership norms spur expansionary high occupancy levels of 95.8 percent and annualized rent growth north of 6.0 percent in the high growth technology markets at mid-year. While select leading markets have seen new deliveries exceed net absorption, the majority of markets have seen new product absorbed, and markets such as New York, Seattle and Boston which have seen recent deliveries exceed the national average remain confident in demand for new product, a trend evidenced by continued above average rent growth. However, with vacancy stabilizing and the market average of inventory under construction at 4.4 percent and growing, the pace of multifamily tightening is softening with projected rent growth between 2.0 and 3.0 percent over the next 18 months. JLL United States Multifamily Outlook Fall

3 United States multifamily Economic overview U.S. economy seeing an evening of job growth with consumer confidence and spending on the rise The U.S. economy has demonstrated notable signs of growth in As homeownership rates fell to the lowest level since 1995 in the second quarter, recording at 64.7 percent, an evening of job growth across geographies, sectors, industries and indicators is facilitating a more diversified recovery with the majority of indicators consistently pointing up rather than faltering. More importantly, however, has been the rapid increase in job creation across almost all geographies throughout the United States. Outside of Texas, employment is ramping up in Raleigh- Durham, South Florida, Denver, Portland and Charlotte, all of which are seeing growth exceed 3.0 percent. Secondary, and even tertiary markets, have been solid performers in recent months and quarters. As a result, the vast majority of major multifamily markets saw year-over-year employment gains exceed 2.0 percent. Consumer spending is up year-over-year. This is reflected in growing, albeit somewhat unsteady, consumer confidence, which is growing considerably and month-after-month now scores above 85.0 points. The consumer confidence index reached a recovery high of 93.4 percent in July, and while dropping somewhat in August, remains strong at 86.0 percent. Since bottoming in 2009, the consumer confidence index has more than tripled, and is expected to improve further heading into GDP grew 4.6 percent during the second quarter with improvements notably driven by business investment and personal consumption expenditures. By far the largest piece of national output, personal spending has been a net contributor to change in real GDP since the first quarter of 2010 and will remain so for the foreseeable future. Housing sector performance highlights continued structural shifts Since peak homeownership of 69.2 percent in 2004, millennial and generation X homeownership declines have outpaced the country-atlarge. The millennial segment, defined as those under the age of 35, has seen declines every quarter of the past decade outside of three, bringing current homeownership to 35.9 percent 400 basis points below its 20- year average. However, following a higher velocity of declines postrecession, the 35 to 44 year, generation X segment saw recent gains for the first time since 2005 with growth in two of the past three quarters, pushing homeownership to 60.2 percent. While well below the 20-year average, this represents modest yet noteworthy growth relative to the prior decade. While the 10-year pace of declines highlight structural shifts in residential markets, the declining rate of change suggests the potential for stabilized homeownership rates at a new norm. The continued decline of homeownership is further reflected in the below-average performance of the housing sector, which is still growing in segments. Since bottoming in early 2012, the Case-Shiller Index is slowly recovering with growth of 23.4 percent, yet still 17.9 percent below its previous peak. Tightening conditions do exist in many parts of the housing market, particularly in core, multifamily property. As a result, multifamily represents more than one-third of new starts throughout 2014 and 13.6 percent higher in terms of starts than year-to-date The ability for multifamily starts to occur 3.5 times faster than the overall market is due to the combination of higher oversupply of single-family homes throughout the United States, a marked preference for multi-unit buildings and residential development in core submarkets, which continue to post high occupancy rates. Declining rate of change and modest, generation X uptick suggest the potential for stabilized homeownership rates at a new norm Homeownership rate annual change (bps) % (2004 Q4) % (2014 Q2) Q Q Q Q Q Q2 Source: JLL Research; U.S. Census Bureau, non-seasonally adjusted *Millennials defined as those under 35 years old; generation X those between 35 and 54 years old U.S. Under 35 years 35 to 44 years 45 to 54 years JLL United States Multifamily Outlook Fall

4 United States multifamily Market conditions Occupancy and rent growth continue at a softened pace Economic growth and evolving demographics continue to bring strong demand levels to the multifamily segment boosting the sector to high expansion occupancy levels of 95.8 percent and enabling strong 12- month rent growth of 3.3 percent. Strong rent growth has particularly been the case in growing tech markets San Francisco and Seattle, which led the country with annualized growth of 6.4 and 6.3 percent, respectively. However, from an absorption perspective, robust sunbelt population growth is driving Raleigh-Durham, Austin, Jacksonville and San Antonio to see four of the five highest absorption rates nationally all absorbing in excess of 3.0 percent of inventory over the prior 12 months. These dynamics are representative of continued tight rental market conditions, particularly in the Northeast and Southwest markets, the majority of which currently sit at sub-4.0 vacancies. However, with occupancy growing at its lowest annualized rate (+ 30 bps) in 12 quarters, the pace of multifamily tightening is softening nationally. U.S. absorption continues to outpace deliveries with strong yearover-year rent growth, but vacancy is stabilizing Absorption and deliveries (units) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: JLL Research, REIS Deliveries (units) 12-month effective rent growth Net Absorption (units) Vacancy New inventory impacting near-term performance of select markets 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% As nearly 60.0 percent of markets have seen trailing 12-month net absorption exceed new deliveries, and U.S. absorption has outpaced new deliveries, select leading markets in the multifamily cycle notably, Washington, DC have seen new supply outpace absorption. Markets such as Austin, Raleigh, Seattle, New York and Charlotte which saw the largest increases in inventory year-over-year, exceeding 3.0 percent, additionally fall under this category. However, despite the near-term increase in vacancy, markets New York, Austin, Seattle and Boston Vancancy and rent growth maintain confidence in demand for new product, evidenced by above average rent growth with New York, specifically, continuing to retain one of the highest occupancies across the U.S., exceeding 97.0 percent. However, the multifamily supply pipeline nationally is gaining steam with the market average of inventory under construction at 4.4 percent. With vacancy holding relatively flat at 4.1 percent nationally, as the volume of new deliveries increases over the next 6 to 18 months, vacancy is projected to increase with new deliveries. However, while softened relative to the prior two years, rent growth should persist at 2.0 to 3.0 percent levels during this period. Majority of U.S. markets seeing current absorption levels exceed new deliveries Las Vegas Orange County Atlanta Phoenix Houston Philadelphia Richmond Los Angeles Tampa-St. Petersburg Dallas-Ft. Worth Orlando San Fran-San Jose-Oakland Chicago United States Nashville San Antonio Jacksonville Portland Baltimore Denver South Florida Charlotte Seattle Raleigh-Durham San Diego Austin Wash-NoVa-MD New York Boston Northern New Jersey Memphis Source: JLL Research, REIS 375.3% 305.9% 198.1% 177.1% 155.3% 153.4% 148.1% 146.2% 127.3% 122.4% 115.3% 113.2% 112.5% 112.1% 107.3% 104.3% 101.3% 101.2% 98.9% Select markets saw 98.4% 12-month 96.4% deliveries exceed 89.6% 3.0 percent, 88.4% leading the U.S. 87.0% 86.9% 83.2% 79.2% 78.4% 76.0% 73.1% 62.5% 0% 100% 200% 300% 400% 12-month absorption (as a % of 12-month deliveries) JLL United States Multifamily Outlook Fall

5 United States multifamily Investment landscape Investment sale activity on the rise with year-end volume expected to surpass 10.0 percent year-over-year Liquidity in the multifamily segment remains strong, bringing third quarter investment sales to $73.5 billion year-to-date, a 10.4 percent increase over comparable deal flow last year. While two-thirds of multifamily markets are seeing growth in deal flow this year, the top ten markets all of which are seeing sales exceed $2.0b year-to-date are driving 67.1 percent of national transaction volumes with noteworthy growth in Seattle (+ 78.8%), Denver (+ 52.5%) and New York (+ 32.9%). Select secondary markets are experiencing an uptick in sales velocities with Philadelphia, Orange County and Portland, respectively, seeing annualized gains exceed percent. As a result, these markets have already surpassed 2013 transaction volumes. Cap rate compression persists with pocketed stabilization likely With sales volumes having held at prior peak levels for seven consecutive quarters, cap rates have continued to compress, now sitting on average at 5.8 percent nationally. However, top assets in a broadening subset of primary and secondary markets are demanding sub-5.0 percent levels with select assets in primary markets trading as low as sub-3.0 percent. This compression has been facilitated by condo conversion trends in select markets, notably in New York. Given shifts in supply, projected occupancy losses and stabilizing rents, cap rates are likely to stabilize at these levels nationally. Any growth in interest rates would further support this, especially in secondary and tertiary markets. Investment sales up 10.4 percent annually in the third quarter with momentum anticipated to surpass 2013 volumes Billions $120 $100 $80 $60 $40 $20 $0 $23.7 $31.1 $50.6 Source: JLL Research, Real Capital Analytics $99.4 $89.3 $90.6 $38.3 $15.4 $34.5 $53.5 $81.5 $105.4 $73.5 The strong multifamily investment sale ecosystem continues to spur growth in two-third of markets in 2014 year-to-date New York Los Angeles San Francisco Dallas Atlanta Seattle Houston Washington, DC Phoenix Denver Chicago San Diego South Florida Tampa Bay Austin Orange County Northern New Jersey Philadelphia Boston Portland Orlando Raleigh-Durham Nashville San Antonio Baltimore Las Vegas San Bernardino Jacksonville Charlotte Memphis Richmond Source: JLL Research, Real Capital Analytics $4.9 $3.8 $3.4 $3.3 $3.1 $3.0 $2.9 $2.3 $2.3 $1.6 $1.6 $1.4 $1.3 $1.2 $1.2 $1.1 $1.1 $1.0 $1.0 $0.9 $0.9 $0.8 $0.8 $0.7 $0.7 $0.7 $0.6 $0.5 $0.3 $0.0 $10.4 $0.0 $5.0 $10.0 $ Billions JLL United States Multifamily Outlook Fall

6 United States multifamily Investment landscape Buyers continue to diversify investment strategies Apartment operators continue to dominate buyer composition in the multifamily sector this year: Related Companies, Stellar Management and TruAmerica Multifamily have each spent in excess of $400.0 million. In addition to Related s noteworthy, 21-community portfolio acquisition from Pivotal Group in West Texas, both Related and Stellar Management have expanded their New York portfolios in the Boroughs and Upper Manhattan, respectively. On the West Coast, TruAmerica has remained focused on diversifying its portfolio with additional acquisitions in Seattle and new entrances into the Denver and Phoenix markets. Other top buyers were principally investment managers and REITs. Noteworthy is Essex Property Trust s $6.2 billion acquisition of BRE Properties, expanding its portfolio to 233 properties. The discussed portfolio transactions demonstrate the continued impact of portfolio sales in boosting overall multifamily sales volumes, having accounted for 31.5 percent of 2014 deal flow to-date. However, relative to large deals by Equity Residential / Avalon Bay and Mid-America Apartment Communities last year, portfolio activity has declined year-over-year. Led by Canadian capital, foreign inflows persist in 2014 with investment volumes highest in New York Foreign capital has continued to flow into the multifamily segment at levels higher than prior peaks. Year-to-date, it has accounted for 4.1 percent of total buyer activity, an increase over On par with recent years, Canada has been the most active foreign player with additional capital flowing from Saudi Arabia ($0.3b), Japan ($0.3b) and Switzerland ($0.3b). The Canadians have invested $1.4 billion into U.S. multifamily assets in 2014 to-date with large investments in the Texas markets, Phoenix and Atlanta. In contract to 2013, during which the primary destination markets were Texas and select sunbelt markets, the New York multifamily sector has seen the highest volume of foreign inflows this year with buyer composition heavily comprised of Asian and Canadian investors. Outside of New York, Phoenix, Houston, Atlanta and Los Angeles, respectively, have seen the largest quantity of foreign investment. Operators dominate buyer activity with 60.2 percent of deal flow, followed by investment managers (11.2%) and REITs (11.1%) Operator Investment Manager REIT Equity fund Foreign Non Traded REIT Pension Fund User/Other Insurance REOC Bank Foreign investors continue to invest into the multifamily sector at levels higher than prior peaks 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% $882 $499 $306 $74 $59 $2,512 $1,607 Top buyers of 2014 YTD 2.9% 2.3% 1.7% 1.9% 1.8% Top sellers of 2014 YTD Company Volume Company Volume Essex Property Trust $4.8b BRE Properties $4.4b Berkshire $0.7b AvalonBay $0.9b Related Companies $0.7b Broad Street $0.6b Blackstone $0.6b Berkshire $0.6b Invesco $0.6b Essex Property Trust $0.6b Stellar Management $0.6b Hudson Realty Capital $0.5b Source: JLL Research, Real Capital Analytics $6,901 $6,871 $4,837 $37,131 $0 $10,000 $20,000 $30,000 $40,000 Millions 4.6% 4.8% 4.0% 4.2% 4.3% 3.9% 4.1% 3.4% 3.0% 0.0% Source: JLL Research, Real Capital Analytics Cross-border multifamily acquisition (as a % of total volume) JLL United States Multifamily Outlook Fall

7 Appendix JLL United States Multifamily Outlook Fall

8 United States Multifamily clock Washington, DC Boston, New York, San Francisco Baltimore, Chicago, Northern New Jersey, Philadelphia, Raleigh, Seattle Austin, Charlotte, Minneapolis, Richmond, San Jose, United States Dallas, Denver, Houston, Los Angeles, Nashville, Portland, San Antonio Atlanta, Inland Empire, Orange County, Phoenix, San Diego, South Florida Peaking market Falling market Las Vegas, Orlando, Tampa Bay Rising market Bottoming market Jacksonville, Memphis Clock description This diagram illustrates where Jones Lang LaSalle estimates each prime multifamily market is within its individual rental cycle at the end of the quarter. Markets can move around the clock at different speeds and directions. The diagram is a convenient method of comparing the relative position of markets in their rental cycle. The position is not necessarily representative of investment or development market prospects. The position refers to prime face rental values positions All markets experienced rent growth in 2014 year-to-date, averaging 3.3 percent across the country. On a year-over-year basis, San Francisco, Seattle, Nashville, Denver and Houston have led, respectfully, with annual rent growth between 6.4 and 4.6 percent San Francisco led in rent growth with 6.4 percent growth over the last 12 months. Across the U.S., occupancy increased 20 basis points over the last 12 months. Inland Empire, Orange County, San Diego, San Francisco and New York are the nation s tightest markets, respectively, with occupancy at or above 97.0 percent. Austin, Raleigh, Seattle, New York, Charlotte and Jacksonville have seen the largest increases in inventory, more than 3.0 percent, over the last 12 months. The strongest growth within fundamentals over the last 12 months has occurred within the Sunbelt and specifically in Raleigh, Jacksonville, San Antonio, Charlotte and Houston, respectively. JLL United States Multifamily Outlook Fall

9 Multifamily vacancy across the U.S. Seattle Portland Boston San Francisco San Jose Los Angeles Orange County San Diego I.E. Las Vegas Phoenix Denver Dallas Memphis Chicago New York Northern NJ Philadelphia Baltimore Washington, DC Richmond-Tidewater Raleigh Charlotte Atlanta Nashville Austin Houston San Antonio Tampa Jacksonville Orlando South FL Vacancy meter 7.0% + 6.0% to 6.9% 4.0% to 5.9% 3.0% to 3.9% < 3.0% Source: REIS, JLL Research Top YOY rent growth Top YOY occupancy growth San Fran-San Jose- Oakland 6.4% Raleigh-Durham 3.3% Seattle 6.3% Austin 3.2% Nashville 4.8% Seattle 3.1% Denver 4.7% Jacksonville 3.0% Houston 4.6% San Antonio 3.0% South Florida 4.1% Charlotte 2.9% Atlanta 4.1% Houston 2.9% Boston 4.0% New York 2.6% Dallas-Ft. Worth 3.8% South Florida 2.3% New York 3.8% Dallas-Ft. Worth 2.3% JLL United States Multifamily Outlook Fall

10 United States multifamily metrics Market Units under construction % under construction Occupancy YOY% change in occupancy Effective rent YOY% change in effective rent 12-month $ volume % Change YOY $ vol. Atlanta 12, % 94.3% 0.8% $ % $4,377,565, % Austin 12, % 95.1% -0.5% $ % $1,979,809, % Baltimore 5, % 96.3% 0.1% $1, % $1,020,054, % Boston 6, % 96.0% -0.3% $1, % $1,572,993, % Charlotte 11, % 95.3% 0.0% $ % $1,135,798, % Chicago 5, % 96.5% 0.1% $1, % $2,301,984, % Dallas-Ft. Worth 23, % 95.4% 0.5% $ % $5,418,702, % Denver 11, % 96.2% 0.0% $ % $2,857,957, % Houston 25, % 94.6% 1.1% $ % $4,826,917, % Jacksonville 2, % 93.5% 0.2% $ % $789,872, % Las Vegas 2, % 94.5% 0.9% $ % $1,266,160, % Los Angeles 14, % 96.9% 0.2% $1, % $5,850,375, % Memphis 2, % 91.2% -0.4% $ % $350,950, % Nashville 7, % 95.9% 0.2% $ % $1,095,971, % New York 13, % 97.3% -0.6% $3, % $15,456,531, % Northern New Jersey 8, % 96.1% -0.3% $1, % $1,459,910, % Orange County 1, % 97.5% 0.6% $1, % $1,428,997, % Orlando 7, % 95.1% 0.4% $ % $1,615,801, % Philadelphia 6, % 96.7% 0.4% $1, % $1,392,634, % Phoenix 7, % 95.3% 0.9% $ % $2,979,990, % Portland 6, % 96.9% 0.1% $ % $1,358,642, % Raleigh-Durham 9, % 95.5% -0.3% $ % $1,472,628, % Richmond 4, % 95.7% 0.5% $ % $119,423, % San Antonio 7, % 94.6% 0.3% $ % $1,144,455, % San Bernardino/Riverside 2, % 97.5% 1.1% $1, % $1,089,579, % San Diego 3, % 97.4% -0.1% $1, % $2,225,599, % San Fran-San Jose-Oakland 14, % 97.3% 0.3% $1, % $4,487,057, % Seattle 9, % 95.8% -0.3% $1, % $3,969,269, % South Florida 13, % 95.8% 0.1% $1, % $1,910,505, % Tampa-St. Petersburg 6, % 95.5% 0.4% $ % $1,797,664, % Wash-NoVa-MD 20, % 95.7% -0.4% $1, % $3,650,315, % United States 286, % 95.9% 0.2% $1, % $102,470,882, % Source: REIS, U.S. Census Bureau, Real Capital Analytics, JLL Research JLL United States Multifamily Outlook Fall

11 For more information, please contact: Jubeen Vaghefi International Director National Multifamily Practice Leader David Young Managing Director West Coast Leader Sean Coghlan Manager Capital Markets Research About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without prior written consent of Jones Lang LaSalle IP, Inc. COPYRIGHT JONES LANG LASALLE IP, INC. 2014