Mark Halloran
Director, GRS Group
(732) 450-8960
[email protected]
Industrial might be commercial real estate’s hottest sector currently, but multifamily is apparently far from losing investor interest.
A recent survey by Real Capital Markets illustrates that there is still a lot of positive momentum happening in the apartment ownership and investment world.
Most of the sector’s fundamentals are very strong. The report says that rents per square foot rose for the seventh consecutive year as of July, hitting $1.44 per square foot nationally, a 16-percent increase since 2014, while cap rates have compressed by 70 basis points since then. On the sales-price front, transactions ended last year at a high point of $196 per square foot, a 56.8-percent jump since 2009. And construction continues to boom, with 347,000 units finished by the end of 2017, the sixth year in a row that there was an increase in completions.
The only sticking point fundamentally is vacancy rates, which hit 8.6 percent at last year’s end and was quite a big jump from 7.4 percent in 2015, likely to the boom in apartment construction.
But the vacancy jump hasn’t dissuaded investor in multifamily. Real Capital Analytics says that there was $69.8 billion in apartment transactions during the first half of this year, a 7.7-percent boost year over year. The problem in this area, according to the survey, is that pricing for assets is outpacing rent growth, which, noted above, is already strong. Here is a look at the largest apartment transactions during the first quarter, ranked by price per unit, as tallied by Real Estate Alert (scroll down).
The trends in pricing have led to a flight to value-add assets. While pricing is the issue for stable apartment complexes, scarcity and competition for older properties is a problem many investors are facing. But some of those surveyed said that you can find them if you look hard enough. Tyler Anderson, vice chairman of institutional properties at CBRE says: “With some 1,100 older properties that have 100 or more units, there are always properties well-suited for repositioning and a value-add approach.”
The biggest sticking point that seems to face multifamily investors, other than competition and high pricing, is interest rates. In the survey, 70 percent of respondents said that a further rise in interest rates would impact their future multifamily investment decisions. With a 60-basis-point rise in the last year, and a rate close to five percent, it gives them pause, even though lenders have so far found a way to adjust pricing to take the rate hikes into consideration. If rental rates continue to rise, it might not be as much of an issue, and we could reportedly see even more competition for value add. But as Vic Clark, a senior managing director at Hunt Real Estate Capital says: “So far, cap rates have held firm, but another 60-basis point hike will be difficult to absorb.”
About GRS Group:
GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.