REACH RESEARCH RESULTS Multifamily Investing: Expectations, Realities, Assessment of Conventional Wisdoms July 2016 James Halliwell, Managing Director Principal Real Estate Investors
PROPERTY SALES VOLUME Multifamily holding steady in an otherwise declining transaction market $600 $500 $400 billions $ $300 $200 $100 $0 Office Apartment Retail Industrial Hotel 2 Note: YTD 2016 data has been annualized Source: Real Capital Analytics, June 2016
FROM ROCK STAR TO RELATIVE UNDERPERFORMER Apartment Sector Recent Return Trends Total Return 1Q2016 YTD 2015 2014 2013 2012 2011 2010 NCREIF Property Index 8.84% 13.33% 11.82% 10.98% 10.54% 14.26% 13.11% Apartment 7.48% 11.99% 10.29% 10.42% 11.23% 15.45% 18.21% Difference 1.36% 1.34% 1.53% 0.56% 0.69% 1.19% 5.10% Income Return 1Q2016 YTD 2015 2014 2013 2012 2011 2010 NCREIF Property Index 4.68% 5.01% 5.36% 5.61% 5.84% 6.11% 6.76% Apartment 4.56% 4.75% 4.94% 5.16% 5.36% 5.47% 5.93% Difference 0.12% 0.26% 0.42% 0.45% 0.48% 0.64% 0.83% (*) 12 bps is lowest differential in 15 years. Highest spread is 162 bps; average spread is 77 bps. Narrowing spreads may suggest pattern of under performance may soon change 3 Source: NCREIF 1Q2016
OVER THE PAST YEAR MULTIFAMILY HAS EXHIBITED LARGEST RETURN VARIABILITY AMONG LOCATIONS AND SUBTYPES 12.00% Apartment 1 Year 16.00% Office 1 Year 10.00% 8.00% 6.00% Apartment Std. Dev: 3.82% Range: 13.47% Series1 14.00% 12.00% 10.00% 8.00% Office Std. Dev: 2.65% Range: 10.10% Series1 6.00% 4.00% 4.00% 2.00% 2.00% 0.00% 0.00% 3.00% 6.00% 9.00% 12.00% 15.00% 18.00% 21.00% 24.00% 27.00% 30.00% 0.00% 0.00% 3.00% 6.00% 9.00% 12.00% 15.00% 18.00% 21.00% 24.00% 27.00% 30.00% Industrial 1 Year Retail 1 Year 16.000% 10.000% 14.000% 12.000% Industrial Std. Dev: 2.69% Range: 10.13% 9.000% 8.000% 7.000% Retail Std. Dev: 2.10% Range: 6.41% 10.000% 6.000% 8.000% Series1 5.000% Serie 6.000% 4.000% 3.000% 4.000% 2.000% 2.000% 1.000% 0.000% 0.00% 3.00% 6.00% 9.00% 12.00% 15.00% 18.00% 21.00% 24.00% 27.00% 30.00% 0.000% 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% 21.0% 24.0% 27.0% 30.0% 4 Data taken from 1 year NCREIF returns on the various property type Divisions (e.g. East North Central Garden Apartments, Northeast Central Business District (CBD) office). Overall returns for subject analysis are not weighted and will differ from published NCREIF numbers for the individual sectors. Source: NCREIF 1Q2016
MARKET OF HAVE AND HAVE NOTS Orlando Apartments 18.61% (*) Have Denver Garden 20.50% (*) Baltimore Apartments 4.46% (*) Houston High Rise 0.63% (*) 5 (*)1 Year NCREIF Returns Source: NCREIF 1Q2016
PRIMARY VS. SECONDARY MARKET RENT GROWTH PRIMARY MARKETS San Francisco Houston Dallas Boston Average* Seattle DC Chicago NYC L.A. 4 Yr Avg. Rent Growth 7.61% 4.66% 4.46% 4.05% 4.36% 5.80% 1.40% 3.35% 3.91% 3.99% Standard Deviation 0.68% 2.51% 1.57% 0.90% 1.25% 0.81% 1.99% 1.19% 0.92% 0.68% SECONDARY MARKETS Atlanta Austin Denver Charlotte Nashville Average* Tampa Orlando Phila Phoenix Baltimore Fort Lauderdale San Diego Orange County 4 Yr Avg. Rent Growth 4.88% 5.17% 5.99% 4.98% 4.63% 4.08% 3.72% 3.67% 2.30% 4.14% 1.92% 3.98% 3.65% 3.99% Standard Deviation 0.69% 2.22% 0.76% 2.51% 0.98% 1.24% 0.93% 1.32% 1.39% 1.82% 0.95% 0.41% 1.55% 0.65% (*) It is clear San Francisco is a large driver in the averages for primary markets. Eliminating San Francisco from the analysis produces the following averages: 3.95% for Primary Markets and 4.08% for Secondary Markets. 6 Source: 1Q2016 supplemental information to financial statements for AIMCO, Avalon Bay, Camden Property Trust, Equity Residential, Essex Property Trust, Mid America Apartment Communities, Post Properties, United Dominion Realty, and WRIT
PRIMARY VS. SECONDARY RETURNS Primary Markets Year San Francisco Houston Dallas Atlanta Boston Seattle DC Chicago NYC L.A. Average 1 16.62 1.89 9.37 12.49 9.11 13.01 5.16 9.56 9.90 11.11 9.82 3 15.64 9.70 11.32 15.52 9.98 11.23 4.86 10.28 10.22 9.96 10.87 5 17.32 11.4 12.73 14.37 12.74 12.86 7.01 11.99 10.71 11.70 12.28 10 12.56 8.36 9.07 7.86 8.82 6.76 8.43 4.18 6.20 8.03 Secondary Markets Year Austin Denver Portland Minneapolis Tampa Orlando Phoenix Baltimore Fort Lauderdale San Diego Average 1 10.28 18.12 17.95 8.89 12.33 18.61 12.28 4.46 12.54 12.98 12.84 3 10.42 15.60 13.91 10.09 11.83 9.86 7.40 11.14 11.04 11.25 5 11.53 15.80 12.07 11.76 11.04 11.55 11.09 12.12 10 8.94 10.23 8.02 6.72 5.12 7.47 7.75 7 Source: NCREIF 1Q2016
TOTAL RETURNS BY TYPE OF MULTIFAMILY I get no respect! Garden Apartment Low Rise Apartment High Rise Apartment 8 Source: NCREIF 1Q2016
SECONDARY MARKETS: TIME TO BUY OR SELL? 9 Source: CoStar Portfolio Strategy, June 2016
CBD VS. SUBURBAN SUPPLY Commonality in development strategies with market participants is causing greater supply in CBD markets 140,000 14% 120,000 12% Units Under Construction 100,000 80,000 60,000 40,000 10% 8% 6% 4% % UC of Inventory 20,000 2% 0 CBD Prime Suburban Suburban 0% Units Under Construction % UC of Inventory 10 Source: CoStar Portfolio Strategy, June 2016
CBD VS. SUBURBS: WHICH ONE HAS THE ADVANTAGE? The number of residential transactions that occur within suburban markets is nearly 5x of those that occur within city limits $25 Breakout of Sales Volume, CBD vs. Suburban Volume in $ Billions $20 $15 $10 Large, low cap urban transactions are seemingly more difficult to move in liquidity constrained periods $5 $0 08 09 10 11 12 13 14 15 16 Core Volume Suburban Volume 11 Source: CoStar Portfolio Strategy, June 2016
TAILWIND: GROWTH IN SINGLE PERSON HOUSEHOLDS 40 30% Single Person Households (millions) 35 30 25 20 15 10 5 25% 20% 15% 10% 5% % of Single Person Households 0 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Single Person Households Single Person HHS as % of Total Households 0% 12 Source: US Census Bureau; Current Population Survey, Annual Social and Economic Supplement; CoStar Portfolio Strategy, June 2016
TAILWIND: GROWTH IN STUDENT DEBT AN OBSTACLE TO HOME BUYING $1,400 11% Student Debt in $ Billions $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 55% Increase Since Q4 2010 10% 9% 8% 7% 6% 5% 4% Student Loan Debt as % of Household Debt $200 $100 3% $0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 2% Student Loan Debt Student Loan Debt as % of Total 13 Source: Federal Reserve Bank of NY, CoStar Portfolio Strategy, June 2016
TAILWIND: GROWTH IN OLDER RENTER HOUSEHOLDS (2006 2015) 2,500 Number of new renter households (000s) 2,000 1,500 1,000 500 0 Less Than 35 Years 35 44 Years 45 54 Years 55 64 Years 65 Years And Older Age Traunche 14 Source: U.S. Census Bureau, Moody s Analytics, CoStar Portfolio Strategy, June 2016
TAILWIND: BIFURCATED LABOR MARKET RECOVERY MID WAGE INDUSTRIES HAVE LAGGED, BUT ARE CATCHING UP 120 Bifurcation of the job market has meant that low wage jobs have outpaced higher paying jobs* Mid tier jobs have been largely absent from the recovery, but have more recently started to grow The dynamics of the labor market recovery have held back the singlefamily housing rebound Payroll Employment, Index (100=Q1 2007) 115 110 105 100 95 90 85 80 75 70 2007q1 2007q3 2008q1 2008q3 2009q1 2009q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1 2016q3 2017q1 2017q3 2018q1 2018q3 2019q1 2019q3 2020q1 2020q3 High Wage Mid Wage Low Wage 15 *Industries classified as follows: Low Wage Industries: Administrative Services, Educational Services, Leisure and Hospitality, Retail, and Other Services Mid Wage Industries: Construction, Health Services, Manufacturing, Real Estate, State Govt., Wholesale Trade, and Transportation High Wage Industries: Information, Financial & Insurance, Federal Govt., Mining, Management of Companies, Professional & Tech Services, and Utilities As of 31 December 2015 Source: Principal Real Estate Investors Research and Moody s Analytics
TAILWIND: HOME OWNERSHIP NEAR 20 YEAR LOW Home ownership reflects shape of the job market recovery and capital market conditions Lower income households remain priced out in many markets Credit standards have loosened, but underwriting is tight by pre crisis standards 16 As of 31 December 2015 Source: National Association of Realtors; U.S. Census Bureau
HEADWIND: GROWTH IN MULTIFAMILY SUPPLY 250,000 200,000 number of units 150,000 100,000 50,000 0 17 Source: REIS, Inc., Principal Real Estate Investors Research, June 2016
OTHER HEADWINDS Forms of competition chipping at demand around the edges Institutional Single Family For Rent competitors: American Homes 4 Rent, ColonyStarwood Homes, Altisource, Silver Bay Realty, Invitation Homes Supply from Niche sectors that target specific demand component: Age restricted housing, some senior housing, private student housing Proliferation of housing sites: Airbnb, Flipkey, Homeaway, VRBO, Roomarama, One Fine Stay Other internet sites providing rental options: Zillow, Realtor.com, Craigslist Potential shadow competition from new condo construction Other forms of housing competition: new hotel supply, WeLive and similar concepts Previous Investing themes becoming less compelling Rent to own comparisons being challenged in many sub markets, reversing in some Similarly, the delta to surrounding home values is less compelling in many submarkets than was traditionally the norm 18
PRICING THEN AND NOW 2009-2010 Sale 2015-2016 Sale Units 300 300 Square feet 255,000 255,000 Market rent $2.30 $2.30 Price $65,099,148 $91,800,000 Per unit $216,997 $306,000 Per foot $255 $360 Cap rate 5.75% 5.00% Gross market rent multiplier 9.25 13.04 Difference 41% 15.0% 41.0% If market rates are the same and the cap rate only 15% off, why is value and Gross Rent multiplier 41% off? 2009/2010 Sale has one month free in underwriting Other income sources have grown considerably: $70/unit/month Marketing expenses $25,000 higher in 2009/2010 Consequently, expense ratios have generally declined from the mid 40 s to mid 30 s Moral of the story: multiple ways to win on the way up and lose on the way down. 19 Note: The above examples do not represent actual transactions but exhibit similar metrics to those that transpired in the outlined time periods.
SUMMARY Recent relative underperformance should change and sector should soon perform in line or above overall index Wide diversity in returns between locations and product types expected to continue making selection of property types and locations increasingly important While less in vogue, well located suburban garden likely to continue to outperform its urban counterpart on a total return basis; but likely to a lesser extent As more supply is concentrated in top end CBD assets, this subset may face greater rental pressures Like other property types, multifamily will encounter a combination of tailwinds and headwinds; again, making specific selection more important Recent global volatility (e.g. Brexit) may place greater appeal on sector given its defensive nature, more granular income stream, and the greater appeal to debt capital. Accordingly, surprises on the upside from cap rate compression are possible 20
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