Multifamily Investment Outlook. United States Q3 2015

Transcription

1 Multifamily Investment Outlook United States Q3 2015

2 Multifamily With strongest quarter of cycle to-date, robust leasing market fundamentals supporting continued investment strength although, select markets beginning to soften U.S. Multifamily investment $95.5 Investment sales (YTD, billions of $US) 11.5% 12-month change in pricing (unit) U.S. primary multifamily market investment 12.6% -12 bps U.S. secondary multifamily market investment 19.9% YTD investment sale growth (%) 31.8% YTD investment sale growth (%) -9 bps YTD change in cap rate (bp) YTD change in cap rate (bp) -1 bps YTD change in cap rate (bp) Multifamily investment sales up 15.7 percent year-over-year, on track for yet another historic high in 2015 Multifamily investment sale volumes (billions of $US) $150.0 $100.0 $50.0 $0.0 Q1 Q2 Q3 Q4 Source: JLL Research, Real Capital Analytics (Transactions greater than $5.0m) Multifamily cap rates continue to compress with core multifamily product now still trading 20 basis points above 2007 peak 8.0% 6.0% 4.0% 2.0% 0.0% YTD investment sale growth (%) 10-Year Treasury Primary cap rates Secondary cap rates Source: JLL Research, NCREIF, Board of Governors of Federal Reserve 4.9% 4.3% 2.0% Single family supply constraints, healthy pricing accretive to continued multifamily strength. The recent 10.9 percent uptick in single family construction starts has yet to approach previous cycle highs, currently 55.8 percent below prior peak levels. Current vacancy rates continue to outperform historic averages and remain steadfast in spite of recent deliveries. U.S. vacancy remains at 4.2 percent, owing in part to unprecedented absorption for this cycle. Deliveries beginning to impact select leading markets, countered to-date by strength in asset pricing and rental dynamics. The sustained rate of multifamily completions are beginning to affect leasing fundamentals in select markets; despite recent shifts, absorption rates and rent growth remain strong notably, in this subset of markets. With strongest quarter of the cycle to-date, multifamily sector on pace for yet another record year. With $35.2 billion of deal activity in the third quarter, total multifamily investment sale volumes year-to-date have increased 31.8 percent. Third quarter activity was the strongest in the current cycle thus far. Growth driven by mid- and high-rise investment in West region, Dallas. Activity in mid- and high-rise properties rose an impressive 10.7 percent year-to-date. Primary multifamily markets saw $6.1 billion of mid- and high-rise sales this quarter. Secondary market growth driven by suburban, garden-style investment in West, Southeastern regions. Secondary market performance remains strong, demonstrating 19.9 percent growth year-to-date. Denver, Portland and Phoenix comprised 26.6 percent of investment volumes this quarter, up 7.5 percent from first half of This paralleled an uptick in activity in Raleigh-Durham, Charlotte and Nashville in the Southeast. Renewed REIT activity spurred by expansion into secondary markets and entity-level transactions. While the REITs at-large are underperforming the markets in 2015, multifamily REITs continue to outperform, achieving year-to-date total returns of 7.5 percent. A notable quarterly uptick in REIT acquisitions is credited to a resurgence in entity-level transactions, which comprised 77.0 percent of activity for the quarter. 1

3 Supply-side constraints, rapid single family home value appreciation blend to spur continue multifamily strength The most recent reading of two separate measures of single family house prices, the FHFA house price index and the Case-Shiller 20 City Home Price Index, exhibited 5.8 and 5.0 percent appreciation, respectively, year-over-year. House price appreciation has occurred throughout the nation, led by increases in excess of 8.7 percent in San Francisco, Denver and Dallas. These gains are partly predicated on a constrained property supply, as listings on a national level fell 4.7 percent over the previous year, according to the National Association of Realtors. Home price appreciation has occurred while wages have stayed relatively flat since These elements have the potential to compound the relative inability of the renting population to purchase a home. The diminished supply of homes available for purchase has only just begun to ease through new construction, as total housing starts have increased 11.2 percent year-to-date compared to 2014 levels. The overall figure is supported by both single family and multifamily starts, at a rate of 10.9 and 12.9 percent, respectively. In spite of these impressive short-run gains, year-to-date single family housing starts trail previous cycle highs by 55.8 percent. While the pace of multifamily starts has accelerated somewhat in comparison, it trails the pace of the previous cycle s high by 27.7 percent. A gradual escalation in housing market fundamentals has only gently eased supply-side constraints for both single family and multifamily construction. The most recent reading of the NAHB s index of single family builder confidence rose 1.6 percent, further indicating the perception of tailwinds in the housing market. In spite of this, several factors have the potential to mute the incremental progress of the housing market, including builders concerns about the availability of land, raw materials and labor. In spite of consistent words of caution as to the increased inflow of multifamily supply that have echoed through the markets, several structural elements have coalesced to act as a barrier to entry for the majority of those who would otherwise consider purchasing a home. Single family housing starts, yearly percent change 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% Single family housing starts House price index -8.0% Q Q Q Q Q Q Q Q Q % 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% House price index, yearly percent change Source: JLL Research, U.S. Census Bureau, Federal Housing Finance Agency Current vacancy rates continue to outperform historic averages, remain steadfast in spite of recent deliveries National vacancy rates remained unchanged quarter-over-quarter, still holding at 4.2 percent. This represents the current cycle s peak, which has sustained for four of the last six quarters. Overall, market fundamentals in leasing remain robust, owing in large part to unprecedented absorption for this cycle. Year-to-date absorption is up over 7.5 percent compared to 2014 s figures. This sustained run of absorption has supported sustained rent growth figures as effective rents have risen by 3.7 percent year-over-year, maintaining the pace of rent growth s strength in 2014 with anticipated further strength into For the most recent quarter, effective rent growth in West region markets with a local economic emphasis on knowledge and technology were the strongest performers: San Francisco, Seattle and Oakland all experienced rent growth of at least 5.6 percent. Over the current cycle, rents have grown nationally by 17.5 percent. This sustained run of rent growth across all major tracked markets dating back to 2011 has spurred strong income appreciation in the sector, accretive to strong returns in high growth markets. The thus far pervasive strength of leasing market fundamentals serves as an additional driver of sustained growth alongside structural shifts in the economic and demographic profile of the U.S. market. Vacancy (%) 8.0% 6.0% 4.0% 2.0% 0.0% U.S. vacancy: 4.2% Source: JLL Research, Reis 2

4 Deliveries beginning to impact leading markets, balanced by continued strength in pricing, rental dynamics Washington, DC Boston Raleigh-Durham Austin San Francisco Northern New Jersey Orlando Charlotte Portland Denver Tampa U.S. Pittsburgh Miami Los Angeles Houston Fort Lauderdale Atlanta Source: JLL Research, Reis Consecutive quarters of deliveries exceeding absorption The sustained rate of multifamily completions is beginning to affect leasing fundamentals in select markets. The influx of new development into the Boston, Washington, DC, Austin and Raleigh-Durham markets has impacted near-term performance with quarterly deliveries besting absorption rates for 7+ quarters, softening overall vacancy between 10 (Washington, DC) and 60 (Boston) basis points since year-end Yet asset pricing remains strong and stable; and absorption rates positive overall on the year. While down from recent peak growth rates of approximately 5.0 percent, rents in Boston and Raleigh-Durham have maintained growth at or above 4.0 percent on the year, and Austin rent growth is actually accelerating, most recently increasing 70 basis points since year-end to 4.9 percent. Increased household formation spurred by job growth and controlled near-term development remain key for these metros to absorb new supply. The most recent Census Bureau estimates of metro area growth show the vigor of Austin and Raleigh, as both metros rank amongst the fifteen fastest-growing nationally. These markets are driven by above average job growth beating the 12-month national average of 2.0 percent by 60 basis points or more. These figures remain positive in both Boston and Washington, DC, although lagging Austin and Raleigh s gains. While the development pace is projected to continue at a brisk pace into 2016, the rental sector overall continues to exceed forecasted expectations. Nevertheless, sustained new development could curb the elasticity of select markets, especially those without diverse local economies. With strongest quarter of the cycle to-date, multifamily sector on pace for yet another record year With $35.2 billion of deal flow in the third quarter, total multifamily investment sale volumes year-to-date have increased 31.8 percent. Third quarter activity was the strongest in the current cycle thus far, bringing year-to-date volumes to $95.5 billion and validating confidence in sustained leasing and demographic momentum despite ongoing development concerns. These factors are likely to carry multifamily investment sales to yet another historic high for the sector at year-end, surpassing full-year 2014 activity. Cap rates have seen further compression in primary markets, down 20 basis points from year-end 2014 to 4.3 percent and 20 basis points above the prior cycle peak. Of primary multifamily markets, Houston is leading year-to-date compression, down 30 basis points. Secondary markets are lagging primary counterparts, having compressed only 10 basis points in this period led by the Phoenix, Austin and Orlando markets. With recent compression, a strong core and expanding core-plus buyer pool remains robust. Looking forward, despite development concerns and softening in select markets, investor sentiment remains cautious yet positive with expectations of less cyclical volatility relative to the prior downturn. Seattle-Bellevue 4.0 WA 4.5% Portland % OR Northern California % NV CA Las Vegas % Southern California % San Diego % AZ Phoenix % Source: JLL Research; October 2015 ID UT MT WY Denver 4.5 CO 5.5% Albuquerque 5.8 NM 6.3% ND SD NE KS OK Dallas-Fort Worth % AustinTX % Houston % San Antonio % MN Minneapolis % IA MO AR LA VT NH Boston WI NY MA % Philly New CT York Chicago MI RI % % % Columbus Pittsburgh New NJ Jersey 6.0 IL IN OH 7.0% % % PA DE Cincinnati Washington, DC WV % 4.3 MD 5.3% Raleigh VA KY % Nashville Charlotte NC TN % % MS AL SC Atlanta 4.3 GA 5.3% Central-North Florida 4.5 FL 5.5% South Florida % ME U.S. core Class A Multifamily cap rates % % % 3

5 Growth driven by mid- and high-rise investment in West region, Dallas-Ft. Worth New York Lost Angeles Dallas Atlanta Washington, DC Houston Seattle Chicago Boston San Francisco YTD 2014 YTD 2015 Miami $0.0 $2.0 $4.0 $6.0 $8.0 Multifamily investment sale volumes (billions of $US) Activity in mid- and high-rise properties rose an impressive 10.7 percent year-to-date. Primary multifamily markets saw $6.1 billion of mid- and high-rise sales this quarter. Dallas, San Francisco and Seattle each saw upward trending activity levels, but for varying reasons: A strong third quarter eclipsed first half 2015 volumes in Dallas. REITs comprised 35.3 percent of activity in the market on the quarter, acquiring urban, non-cbd properties, primarily through entity-level transactions. Investment sale volumes in San Francisco were primarily driven of acquisitions by private investors. The marquee single asset transaction for the quarter was the joint acquisition by Rockpoint Group and Maximus Real Estate Partners of the 298-unit Tower Two at One Rincon Hill in the South Beach submarket. The luxury tower was acquired for $410.0 million, or nearly $1.4 million per unit, with the intention of converting the rental units into condominiums ahead of the approximately 35 planned condo developments in San Francisco s pipeline. Seattle maintained its steady, robust pace of investment sales with year-to-date 2015 outpacing full-year 2014 volumes by 8.3 percent. This quarter, Heitman, drove nearly two-thirds of quarterly activity with its acquisitions of two urban, Class A towers: Dimension and Premiere on Pine. The 298-unit Dimension, found in the Belltown submarket, was acquired for $144.0 million, or over $483,000 per unit, while Premiere on Pine, a 386-unit tower in Seattle s CBD was acquired for $241.7 million. The per-unit pricing of over $626,000 set a record for the city. Acquisitions in San Francisco and Seattle, alongside the $51.1 million acquisition of the 110-unit AQ Rittenhouse in Philadelphia one of the most active secondary urban markets, exhibit strong liquidity for best-in-class, core new development dispositions, notably those in prime locations. Source: JLL Research, Real Capital Analytics (Transactions greater than $5.0m) 4

6 Secondary market growth primarily driven by suburban, garden-style investment in West, Southeastern regions Secondary markets, notably in the West region, remain strong, demonstrating 19.9 percent growth year-to-date. Denver, Portland and Phoenix comprised 26.6 percent of investment volumes this quarter, up 7.5 percent from first half of 2015 aggregate activity. Investors continue to flock to offerings in these markets, as 12-month employment growth for all three markets have consistently outperformed national averages, spurring strong rent growth and absorption percent of acquisitions across the three markets for the quarter were mid- and high-rise, up modestly from the second quarter. Growing Sun Belt markets have similarly attracted heightened investor interest, as Nashville, Charlotte and Raleigh-Durham saw aggregate third quarter investment activity increase 6.3 percent from the first half of The trio accounted for 17.8 percent of quarterly secondary market volumes. With $486.7 million of investment sales this quarter, activity in Charlotte was especially strong. Activity in these markets has focused on single asset, garden-style acquisitions developed since Garden-style transactions, specifically, represented 74.0 percent of volumes for these three markets during the quarter. With cap rates continuing to compress in primary markets, investors are seeking assets in markets that have demonstrated consistent, outsized labor market performance. As payrolls expand across these regional economies, the favorable economic conditions continue to spur positive metrics across leasing indicators, specifically rent growth and absorption. Investors would be wise to pay attention to the continued developments of macroeconomic trends beyond gateway markets to capitalize on lagging market appreciation. Multifamily investment sale volumes (millions of $US) $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Comprised 26.6 percent of Q3, secondary market volumes Comprised 17.8 percent of Q3, secondary market volumes YTD 2014 YTD 2015 Denver Phoenix Portland Raleigh-Durham Charlotte Nashville Source: JLL Research, Real Capital Analytics (Transactions greater than $5.0m) Renewed REIT activity spurred by expansion into secondary markets and entity-level transactions REIT acquisition activity in the third quarter comprised 47.7 percent of total REIT activity in 2015 thus far. $3.8 billion of quarterly acquisitions represented the buyer type s most active in five quarters. REIT activity for the third quarter comprised 20.9 percent of total buyer composition, the highest amount since constituting an anomalous 59.3 percent of investment activity in the first quarter of While the REITs at-large are underperforming the markets in 2015, multifamily REITs continue to outperform, achieving year-to-date total returns of 7.5 percent. Outside of noteworthy activity in Dallas, acquisitions were concentrated across secondary markets, comprising 62.2 percent of quarterly activity. In Dallas, Steadfast Apartment REIT acquired over 1,100 units for $169.5 million. Steadfast acquired a single, Class A suburban asset, Monticello by the Vineyard, for $52.2 million, or $147,458 per unit as well as a portfolio of suburban properties for $117.3 million, or $151,550 per unit. This quarter, there additionally was a notable resurgence in entity-level transactions, which comprised 77.0 percent of activity for the quarter. This represented the largest amount of entity-level acquisitions by REITs since the fourth quarter of In noteworthy deals, Brookfield Asset Management acquired a 51-asset, national portfolio from Associated Estates, and Independence Realty Trust acquired a regional portfolio of 4,989 units across 20 properties throughout the Sun Belt region, including Dallas and Atlanta. As multifamily REITs strive to maintain outsized performance, groups will continue to diversify exposure to high growth, new portfolio markets outside of traditionally favored markets. Multifamily investment sale volumes by buyer type 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 6.1% 9.1% 12.9% 8.6% 10.0% 4.1% 9.3% 10.4% 16.5% 12.7% 14.8% 16.2% 16.7% 26.2% 16.9% 10.0% 23.4% 10.2% 7.6% 5.9% 20.9% 65.8% 0% Q Corporate / User Equity Fund REIT / REOC 53.3% 60.1% 65.5% 56.8% Q Q Q HNW Q % Q % Q Institution / Advisor Developer / Property Company Source: JLL Research, Real Capital Analytics (Transactions greater than $5.0m) 5

7 transactions, Q Property Buyer Seller Market Price Size (units) Associated Estates Buyout Caiola Family Residential Independence Realty Trust Equus US Apartment Broad Street New York Apartment Brookfield Asset Management Price (per unit) Associated Estates National $2,500,000,000 1,114 $104,129 Blackstone Fairstead Capital New York $693,300, $695,386 Independence Realty Trust TruAmerica Multifamily / Guardian Life Insurance Co Stone Street Properties / Prudential RE Advisors Trade Street Residential National $434,717,958 4,989 $87,135 Equus Capital Partners Broad Street Development LLC / Crow Holdings National (West Coast) $255,000,000 1,829 $139,420 New York $123,000, $591,346 Mack Urban Apartment Ares/Wood Apartment Bascom Group Apartment Greystar Real Estate Partners Steadfast Apartment REIT Nexpoint Residential Trust / BH Equities Mack Urban / Carlyle Group Seattle-Bellevue $119,500, $372,274 Ares Management / Wood Partners Dallas $117,300, $151,550 Bascom Group Phoenix $116,000,000 1,114 $104,129 Tabak Apartment Brook Hill Properties Morton Tabak & Co New York $97,000, $322,962 Holland Residential Apartment Starwood Capital Group Holland Residential Denver $93,100, $138,542 Notable single asset transactions, Q Property Buyer Seller Market Price Size (units) Price (per unit) Tower Two at One Rincon Hill Rockpoint Group / Maximus Real Estate Partners Principal Real Estate Investors San Francisco $410,000, $1,375,839 Premiere on Pine Heitman Holland Partner Group Seattle-Bellevue $241,731, $626,248 Trilogy NoMa JBG Cos. / CBRE Global Investors Twenty/20 NorthPoint Prudential Real Estate Investors 416 West 52 nd Street Gaia Real Estate Mill Creek Residential Washington, DC $213,000, $353,233 Canyon Partners Boston $197,000, $554,930 Tessler Developments / Chetrit Group New York $156,500, $978,125 Manor at Flagler Village TIAA-CREF Related Companies Ft. Lauderdale $148,886, $389,754 Dimension by Alta Heitman Wood Partners Seattle $144,000, $483, Chestnut CBRE Global Investors John Buck Company Philadelphia $116,464, $362,818 Slate Creek at Johnson Ranch Avalon Lyndhurst Mesirow Financial AvalonBay Kennedy Wilson DiNapoli Capital Partners Sacramento $100,000, $163,399 Northern New Jersey $99,000, $301,829 6

8 For more information, please contact: Investor Sean Coghlan Director, Investor Research Multifamily Michael Morrone Analyst, Multifamily Research Click for more Multifamily research, or to learn more about our Multifamily Group. 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. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $57.2 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 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.