06 February 2015
Fears of a bubble overblown, according to JLL
Heather Filkins |
some pundits are warning of a bubble in the multifamily housing sector, the numbers tell a different story. According to
JLL research, released at the National Multifamily Housing Council (NMHC) conference in January, homeownership rates are down as more Americans choose to rent. That’s driving demand for apartment in many regions.
That should mean plenty of renters to soak up the considerable volume of multifamily units coming to market. In 2014, two-fifths of residential units under construction were multifamily, a 12.3 percent increase over last year and close to 2005’s peak. But rents are rising, especially on the West Coast and in cities like Miami and Boston. Rents in San Francisco jumped 6.9 percent in the third quarter of last year—after going up at 5 percent per year for the previous three years. In Denver rents were up 6.5 percent and in Miami they went up 5.6 percent.
Those powerful rental markets are why apartments still offer the best risk-adjusted return in real estate, according to
Jubeen Vaghefi, managing director and leader of JLL’s multifamily team. “I don’t have a crystal ball, but I do have visibility for what’s in the planning stages,” he says. “I just don’t think multifamily deliveries will outpace demand; we went for a protracted period of time without deliveries in most markets, and we’re not even at equilibrium for demand versus supply.” He says demand still outstrips supply in states like California and Arizona.
Vaghefi isn’t alone in viewing multifamily as a promising place for investments. Transaction volume broke records in 2014, up 15 percent to $110 billion.
That tops the 2007 peak—right before the bottom fell out of the real estate market. That may be why some are getting jumpy about the current growth trajectory. And there are definitely areas of concern. More than 70 percent of markets are actually seeing rent increases soften, notably in cities like Seattle (down 240 basis points to 4.9 percent growth) and Jacksonville (down 150 basis points to 2.3 percent growth).
In terms of capital flow, six markets garnered the lion’s share of the action in 2014. New York, Los Angeles, Atlanta, Dallas, Houston and Washington, D.C. drove nearly 50 percent of volume. Assets in those markets are trading at sub-5.0 cap rates, with some even pushing below 4.0. Markets like Seattle, Denver, San Francisco, Boston and South Florida are expected to draw significant investor interest as well in 2015.
While bigger markets were more active last year, some secondary markets, like Denver, Philadelphia and Memphis, also saw lots of activity in 2014 as buyers went looking for bargains—and higher potential returns.
“We’re finding it increasingly difficult to secure substantial yields in major markets, making secondary cities that much more attractive,” says
Lane Shea, managing director with Harbor Group International, a commercial real estate investment firm headquartered in Norfolk, Virginia. “Nashville, in particular, is receiving significant interest from the investment market.”
Experts say transaction volumes in the multifamily sector will remain strong in 2015, supported by strong investor interest and the increasing diversity of debt markets. The market share of the GSEs (Fannie Mae and Freddie Mac) has slipped to historic levels with life-insurance companies, banks and commercial mortgage-backed securities (CMBS) all stepping up their lending. Dave Borsos, VP Capital Markets at NMHC, says investors were helped last year by innovative products from Fannie and Freddie. In 2015, look for CMBS and banks to offer more creative solutions to help fund complex acquisitions, new development and renovations.
“Banks were the biggest stars of 2014,” says Borsos, “as they significantly increased their presence across the board on lending, not only for construction loans but for long-term permanent loans—an area [where] they have not historically been major players.”
Both Borsos and JLL point to a significant increase in interest by foreign investors in the multifamily space. International investors accounted for 4.1 percent of all purchases in 2014. The transparency of the U.S. market makes it appealing to more than just the Canadians, who claim the top spot amongst foreign investors. Political unrest in China and corruption in Mexico will continue to draw multifamily investment dollars in the U.S., with the Middle East, Japan and Australia also claiming a share, according to Borsos.
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