Multifamily investors are finding a shortage of quality assets, particularly in the value-add category, according to a new report.
Strong market fundamentals, an abundance of capital, and an influx of investors continue to propel the U.S. multifamily investment market, according to Real Capital Markets’ 2018 Multifamily Investor Sentiment Report.
Experts interviewed by Real Capital Markets in July 2018 noted that underlying fundamentals shaping rental demand continue to draw a wide range of investors into the multifamily sector, despite upward movement in interest rates, according to a release.
“Overall, the commercial real estate market—and particularly the multifamily sector—remains strong, with significant capital, both domestic and foreign, looking to be placed,” Tina Lichens, COO, Real Capital Markets, said in the release.
“The challenge for many investors is finding quality assets at reasonable prices,” she said.
Statistics on rents per square foot, cap rates, sales prices and unit completions, aggregated by the National Multifamily Housing Council demonstrate the continued strength of the multifamily sector. Moreover, mid-year sales statistics reported by Real Capital Analytics showing $69.8 billion in mid-year multifamily sales underscore the findings of the RCM Report.
RCM surveyed its U.S. database of multifamily investors and conducted follow up interviews to gauge investor sentiment on various topics.
Multifamily investors sentiment report
Highlights of the Multifamily Investor Sentiment Report include:
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- Market Thrives with Capital Chasing Deals—According to experts interviewed for the report, there is at least $250 billion in capital already committed to commercial real estate, with much of it likely focused on the multifamily sector. This capital is coming from a range of investors including institutions, private equity, REITS, as well as private and public funds. The product types they are chasing most include garden and suburban style apartments, followed by urban style apartments.
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- Interest Rates are a Looming Threat—Most industry experts interviewed, and 69.7 percent of survey participants, ranked interest rates as a looming concern, as the market has already absorbed 12 to 18 months of increases and spreads are very thin. The consensus is that further rate hikes will be difficult for lenders to absorb. This increased cost may cause investors to modify strategies.
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- Value-Add Remains Hot, but Elusive—Approximately 58 percent of Investors are looking for 1970s and 80s rental properties that need upgrades but are finding fierce competition and an upward tick in pricing.
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- Job Growth is Driving Multifamily Activity—In many core and secondary markets across the country, strong employment, often from the tech sector, is fueling growth in the multifamily sector.
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- Fundamentals Look Strong—With national and individual market vacancy rates fluctuating as new supply is brought online, more than half the survey participants believe that further increases in vacancy rates are likely, but the level of increase will be only marginal. Nearly 65 percent believe that rents will increase at least marginally. Given these factors, while almost one third of investors see a slight slowing of the market, approximately 66 percent of investors believe the market will maintain at current levels and remain strong.
“Housing is one of the most fundamental needs, regardless of income level or socio-economic status,” Steve Shanahan, Executive Managing Director, Real Capital Markets, said in the release.
“Investors will continue to leverage those intrinsic needs, as well as strong market fundamentals, to create and take advantage of a steady stream of investment opportunities.”
Multifamily investor fundamentals remain strong
The report says the fundamentals of the market remain strong because fewer people want or are able to afford home ownership. Thus the demand for apartments remains high and as such, competition to invest in the market is equally strong.
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- Rents per square foot: Rents have increased for the seventh consecutive year to $1.44 per square foot nationally. This represents more than a 16 percent increase since 2014 when the rate was $1.24 per square foot.
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- Cap Rates: For the last four years the multifamily market has continued to see cap rate compression. While the rate of compression has slowed—year over year it declined by 10 basis points to 5.6 percent in 2017— the overall compression since 2014 is 70 basis points.
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- Sale prices: In each of the last eight years, the average sale price per square foot has increased, reaching a peak of $196 per square foot at year end 2017. During the eight consecutive increases, prices have jumped 56.8 percent, from $125 per square foot in 2009.
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- New product completions: Year-end completions in 2017 totaled 347,000 units, the sixth consecutive year that annual completions increased. During that run, a total of approximately 1.6 million units were completed.
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- Vacancy rate: The only metric that is not altogether positive for the sector was the national vacancy rate. At year end of 2017 the national vacancy was 8.6 percent, a sizable increase from 2015’s rate of 7.4 percent, but still lower than the 2013 rate of 9.1 percent. The increase in vacancy can be attributed to the significant level of new construction that has taken place
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To download a copy of the Real Capital Markets’ 2018 Multifamily Investor Sentiment Report, click here.
About Real Capital Markets:
Founded in 1999, Real Capital Markets (RCM) is the global marketplace for buying and selling CRE. RCM increases the speed, exposure, and security of CRE sales through its streamlined online platform. Solutions include integrated property marketing, transaction management, and business intelligence tools to unify broker-level and firm-level data and work flows. RCM has executed over 62,000 assignments with total consideration in excess of $2.1 trillion. Approximately 50% of all U.S. commercial assets sold, over $10 million, are brought to market using RCM’s online marketplace annually.
