Multifamily investment in H1 2015

Originally posted by NATALIE DOLCE | Jan. 15, 2016 discussing Top MF markets

WASHINGTON, DC—In preparation for the multifamily quarterly feature in Real Estate Forum magazine, we sat down with many multifamily experts from around the country. In the first part of this series, we talked about whether or not apartment vacancy will tick upward in 2016. In part two of the series, we reviewed whether or not the market could digest the new supply pipeline. In part three, we talk about rent growth, demand, and whether or not we can expect it to implode in the coming years. And in the most recent article, we asked sources what trends they are forecasting for 2016 that should be on our radar. In this final question of the series, we asked about pricing and about hot markets for transactional activity. On the buy side, what are the top markets you are seeing as hot for transactional activity and why? What do you think investors’ concerns are? Is pricing too high perhaps? Are they widening their investment criteria?

Josh Dix, SVP in Trammell Crow Co.’s MidAtlantic Business Unit and National Practice:

Due in part to a perception of oversupply in 2014, Washington, DC underperformed in contrast to its peer markets in the first half of 2015. Now, the DC apartment market has rebounded and is turning the corner as vacancy declines and rents moderately increase. With the balance of supply and demand tipping back in favor of owners and investors, Washington, D.C.’s multifamily fundamentals are garnering interest from diverse capital sources. Investor attention is rising in response and the sales volume increased nearly 50% Y-o-Y. Washington, DC attracted the third-most multifamily investment in H1 2015, behind Los Angeles/SoCal and Dallas/Ft. Worth and while domestic buyers represent the majority, foreign capital is gaining ground. With new development expected to stay within a healthy range, the DC area will carry on with appreciating rental rates and stable vacancy rates in 2016.

Obviously investors will continue to be motivated by returns and owning strong assets in strong markets. Is pricing too high? We don’t necessarily believe that to be the case as the pricing reflects the supply/demand fundamentals of the overall market.  In terms of concerns, continued rent growth and low vacancy are paramount to achieve investors’ underwriting.

Philip Martin, VP of market research at Chicago-based Waterton:

Investor concerns are largely centered around increasing supply, and relative affordability of the apartment product, as compared to other housing alternatives. Investor interest in suburban and/or secondary markets has begun to increase as competitiveness and asset pricing have been driven higher within larger and/or urban locations.

Bryan Sullivan, VP of acquisitions and investment at the Habitat Co.: 

The investment market is extremely efficient right now. Value add opportunities are still highly sought after but it makes you question the real “value” in many cases. With some of the feeding frenzy that has taken place throughout the year, it does appear that some institutions have hit their allocations and may be on the sidelines until new allocations open up next year.

Almost all markets (primary, secondary, tertiary) have experienced strong multifamily performance during the recovery but certain markets have seen much heavier concentrations of investment activity. The major markets of NY, DC, Miami and San Francisco continue to get traditional levels of institutional and foreign capital allocations.  Markets like Denver, Chicago, Atlanta, Charlotte, Nashville, and the major Texas Markets have seen a new interchangeable dynamic between young professionals and companies that are leading and following each other to certain markets.  In areas like the West Loop of Chicago, this dynamic feeds off itself as both participants (young professionals and companies) continue to legitimize and accelerate the growth of the submarket.

Gary Goodman, SVP of Acquisitions at Passco Cos.:

Southeastern markets like Atlanta, Nashville and Tampa are good examples of markets we like. They offer great environments to Millennials who seek work within a vibrant lifestyle environment. Many of the submarkets of these cities have high barriers to entry so the supply demand factors offer good risk reward returns to the astute apartment investor.

I believe that investors who are not knowledgeable about the subtleties and nuances of the various micro environments of the multifamily industry are concerned about “irrational exuberance”.  This is why it is important for them to seek the advice of sponsors who have a long track record of success in apartment investing.

Steve Patterson, president and CEO of Related Development LLC (the multifamily division of The Related Group):

Apartments will continue to be a preferred investment even in light of low cap rates because investors believe in the fundamentals for the long term. Institutions, like coastal cities, primary markets and walkable locations but will ultimately venture into tertiary markets in search of yields, as land prices and construction costs outpace rent growth in primary markets.

They are concerned about the prolonged MF expansion and lack of opportunities in other sectors, but can’t deny that demand dynamics remain strong going forward.  They remain willing to pay low cap rates that require future rent growth to achieve their metrics.

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