Saturday, July 7, 2018

Multifamily Investors Are Getting Used to 'Normal'

It may sound like bad news for the apartment sector: rent growth may stay relatively flat in the second half as vacancies and interest rates climb.

But multifamily analysts insist the sector is going to remain strong over the long-term as investors search for properties to buy. The performance in apartments only seems disappointing, according to sector forecasters, when compared to the astounding numbers in recent years: razor-thin vacancy rates, double-digit annual rent increases, and an economy seemingly producing more well-heeled renters every month.

"There’s no question fundamentals are softening, but this is a return to a more normal market. With rent increases of 2 percent to 3 percent and vacancies rising to 5 percent from 3 percent, "everyone reacts as if that’s problematic. But it’s relative."

Preliminary sales numbers for the first half show that trades of large apartment properties nationwide dipped 7 percent to $67.5 billion from $72.7 billion for the first six months of 2017. Sales across all asset classes combined fell 13 percent.

In terms of pure dollars, sales volume would be expected to fall as investors turn away from high-priced core assets in urban downtown submarkets to smaller, Class-B suburban properties.

Those swank downtown developments have dragged down average occupancy and rent growth nationally in the past year or so. That wave of development is cresting this year, according to CoStar, and most markets are absorbing the new units, if slowly.

"Supply will certainly affect some submarkets, Long Island City, for example, but broadly, housing construction at large in the U.S. remains low, and still trails population growth. Ongoing deliveries of highly-amenitized, high-rent product will limit rent growth at the high end of the market, but older and more suburban product will continue to outperform."

Rents will rise at a modest rate similar to the national average of 2.6 percent in 2017, according to Affleck.

Investors in apartments seem to be making peace with the changed reality.

"At this point, it’s in everybody’s calculations. Multifamily is more stable and has better net cash flow than any other asset class. Investors are looking for that, not necessarily looking for a home run. They’re looking for reasonable, predictable returns and a long-term investment."

Investors still see the opportunity to pump a few thousand dollars into upgrades to apartment interiors and be able to boost monthly rents by $75 to $100.

The apartment sector has benefited in recent years from an influx of new money from large domestic and foreign investors who previously focused on other asset classes. Newcomers such as Singapore’s GIC, the APG Group of Amsterdam, and several Canadian pension funds have all become major players in apartments during this cycle.

Blake Okland, the head of brokerage Newmark’s Apartment Realty Advisors arm, said those investors will help drive sales in the second half.

"I wouldn’t be surprised at all if it was more like 2016."

He anticipates that by the end of 2018, sales of apartments will match or exceed last year’s total.

He said that’s partly because a large number of big-ticket portfolio deals that hit the market in the first half have yet to trade, but he expects those will close in the third quarter.

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