Category Archives: Market Updates

Oversupply Not an Option In These Markets

By Sule Aygoren –

BOCA RATON, FL—Too many apartments, not enough renters? Will an oversupply of development saturate newly recovering markets? How much is too much? Those are the questions that still hit home for multifamily investors in 2014. But are the worries legitimate? For some markets, perhaps. But Jones Lang LaSalle predicts 14 cities will overcome oversupply issues, with Sunbelt markets such as Tampa, Jacksonville and Phoenix shining brightly in the year ahead.

The markets JLL expects to shine into 2017 include: Phoenix, Atlanta, Jacksonville, Tampa, San Diego, Dallas-Fort Worth, San Antonio, Houston, Philadelphia, Orange County, the Inland Empire, Palm Beach, Las Vegas and Memphis.

“Besides construction levels, it’s all about job growth and household growth—those are the two critical demand factors that will determine how metros will perform through the current development cycle,” said Jubeen Vaghefi, international director and leader of the firm’s Multifamily Capital Markets group. “The surprising news to many will be the resurgence of the sunbelt markets over the tech-heavy regions. After some very tough years, that’s where we’re seeing a significant rise in new households as a result of improving economic conditions.”

According to JLL’s Multifamily Outlook report, released last week at the National Multi Housing Council’s Annual Meeting here, the national apartment sector expansion continued in 2013 as occupancy reached a 10-year high of 95.8% and gains averaged 13 basis points a quarter. In addition, as expected, 2013 turned out to be a record-breaking year for multifamily sales as volumes totaled more than $100 billion—outpacing 2012’s velocity by nearly 30% and surpassing the 2007 record by nearly $6 billion. New York, the greater Washington, DC area and Los Angeles led in sales volumes with a combined total of more than $30 billion. Dallas and Houston rounded out the top five, followed by San Francisco, Atlanta and Phoenix.

“A large component of these record volumes was needle-moving portfolio sales, ownership entity transfers and mergers of major apartment operators,” explained Brady Titcomb, vice president and director of US Multifamily Research at JLL. “In addition, the US recovery over the past 12 months, rising consumer confidence and still historically low interest rates played a critical role in aiding growth by propelling the housing market recovery.”

The JLL report showed that the housing recovery is causing expansion nationwide. In addition, tightening market conditions brought US quarterly rent increases for 2013, averaging 75 basis points a quarter with high-tech and STEM employment centric markets driving the most notable rent growth.

On a year-over-year basis, the JLL report showed that Seattle, Nashville, San Francisco, Denver and Houston have led in annual rental growth averaging between 4.5% and 7%.

The report also showed that since 2012, uncertainty overseas has driven demand for US multifamily product back to pre-recessionary levels. While international capital has found its way to nearly all of the major metros, Dallas, New York, Chicago, Houston and South Florida each saw more than $300 million in cross-border capital since the start of 2012.

According to the NMHC’s quarterly survey of apartment market conditions released in October, following four years of almost continuous growth, apartment markets have begun to slow. NMHC’s vice president of research and chief economist, Mark Obrinsky, says, “Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital, though more on the equity than the debt side.”

But overall, the strength of the fundamentals will continue to propel the sector, according to Vaghefi, “We expect multifamily performance to remain strong for the foreseeable future. While there are some supply concerns that will slow the pace of occupancy and rent growth, overall the anticipated increase in job growth and household formation will help to mitigate the threat of oversupply and keep conditions balanced across the country.”

With continued improving economic conditions nationally, JLL anticipates US occupancy gains to average 40-60 basis points annually over the next three years. Assets located in secondary markets and value-add opportunities will be in higher demand as the search for yield becomes increasingly difficult.

San Diego Apartment Market Emerges as a Top Performer in 2013

by  –

San Diego’s apartment market has historically been reliably steady, but rarely a top performer in terms of rent growth. But in 2013, rent growth in San Diego topped the levels seen for the U.S. overall and for most other Southern California markets.

San Diego Performance Highlights Q4 2013

San Diego is one the nation’s more steady and reliable apartment markets; in good times it doesn’t post especially good revenue growth but in bad times it doesn’t post especially bad losses.

But at the end of 2013, San Diego is starting to see some pretty good momentum just as the U.S. average rent growth change has started to cool. As of Q4 2013,San Diego registered 3.6% rent growth while the U.S. apartment market as a whole registered 2.9%.

One of the driving factors for this growth has been a strong economy. In 2012, employment hit a decade high in the metro and while job numbers cooled slightly in 2013, the market experienced a 1.8% job expansion rate, good enough for second best in Southern California. San Diego is also the first Southern California market to return to pre-recession employment levels.

With solid rent growth and a strong economy, it’s no surprise to see occupancy performing well. As of Q4 2013, occupancy is at a healthy 96.4%, a level the metro has sustained for the past three years.

Despite the good news, there are two potential market factors that could change this momentum. One, the metro’s job growth has been primarily fueled by lower paying jobs, when traditionally limits rent growth; and two, construction is up to decade-high levels (a potential 1.9% expansion rate). But given these factors, MPF Research expects occupancy to hold steady in 2014 while rent growth cools slightly to 2.9%.

Demand in Houston Still Strong as Economy Prospers

By Amalia Otet, Associate Editor –

Strongly supported by a thriving energy sector as well as a robust multi-family industry, Houston’s economy is expected to experience further growth throughout 2014. Employment gains are projected to come from a wide array of industries, including manufacturing and professional services as well as corporate expansions, which will yield 111.700 jobs in 2014 and a 3.9 percent jump in payrolls, according to research data from Marcus & Millichap.

Investor interest in the Houston apartment market remains strong, with all property size tranches having recorded an increase in deals during the past year. While the number of properties sold with more than 100 units increased more than 40 percent, transactions involving assets with fewer than 50 apartments doubled from one year earlier. Marcus & Millichap further reports that Class A assets trade at cap rates of less than 6 percent, while Class B/C properties elicit bids at first-year returns starting near 7 percent.

Vacancy Rate Trends courtesy of Marcus&Millichap

The Houston metro has become an important target market for many out-of-state investors, such as Boston-based Intercontinental Real Estate Corp., which was drawn to the city specifically due to “its impressive commercial resiliency, its vibrancy and diverse economic engine.” The company parted with $61.6 million to acquire the Sawyer Heights Lofts, a 326-unit apartment community in Houston’s Downtown/West Inner Loop.

Rent Trends

Construction activity is also on the rise as the multi-family market tries to accommodate an influx of new residents, particularly young professionals, to the area. Last year, the local market saw the addition of 9,200 units. Despite the considerable completions, all areas of Greater Houston had positive absorption and vacancy remained unchanged in the third quarter of 2013 at 6.4 percent. In the same period, average rents rose 1.8 percent to $903 per month, or roughly $1.02 per square foot. Properties completed in the third quarter were reportedly spread across nine projects and six submarkets. Approximately 657 rental units have been delivered to the fast-developing Greenway Plaza/Upper Kirby submarkets, driving inventory up 4.8 percent.

Marcus & Millichap’s Market Forecast report indicates that residents will occupy an additional 10,000 units in 2014, bringing the overall vacancy rate down to 7.0 percent. Additionally, the pace of rent growth is expected to rise, with average rental rates climbing 3.6 percent to $941 per month.

More than 10,900 new apartments are projected to come online in 2014. Nearly 1,300 rentals will be placed in service in Galleria/Uptown, including ZOM’s latest development, The Hudson. The 431-unit luxury residential community will be located on a 5.3 acre site on Fountain View Drive at San Felipe Drive near a planned retail center that will be anchored by an upscale HEB Market, as reported by Multi-Housing News Online.

Houston marked an important milestone last year with the re-launch of the Mid-Main project, the city’s first transit-oriented development (TOD). Seven years in the making, the compound will feature 363 apartment homes alongside 30,000 square feet of retail space, in close proximity the METRORail light-rail system.

Charts courtesy of Marcus & Millichap, Apartment Research Market Report, Fourth Quarter 2013

2014 Top Mortgage Banking Firms

Cautious Optimism

By Mike Ratliff and Jack Kern –

Mortgage bankers continue to see good things coming for 2014. This optimism is bolstered in part by increased certainty in the lending environment. More than 60 percent of the firms that responded to the 2014 MHN-CPE Top Mortgage Banking Firms survey anticipate an increase in business for the new calendar year, while nearly a quarter expect to see a significant increase in business—somewhere in the 21 to 41 percent range.

While this year’s business is heavily weighted toward multifamily, we anticipate that lending will continue to diversify throughout 2014. We believe that the industrial and retail sectors will both see a marked increase in activity when we re-examine these firms next year.


Transaction levels are expected to rise in 2014, though refinancing volume should remain in the “trough” until 2016 and 2017, when CMBS loan maturities realize a sharp uptick. That said, properties across all sectors are seeing fundamentals improve, with higher rents and lower occupancies, putting owners—both old and new—in a better position to refinance. In addition, December brought a bipartisan budget deal that signals Washington might be ready to play nice and avoid the hiccups that periodically downshifted the ongoing economic recovery. However, uncertainty over the future of the GSEs and concerns over a tapering of QE3 will keep the optimism for 2014 in check.


This year’s group of participating companies provided a view of their transaction volumes and a breakout of what loans were processed, including healthcare, multifamily, office, retail, hotel, industrial, mixed-use and other types. Our rankings consider a combination of greatest coverage, transaction volume commitment across sectors, loan positioning, total intermediary lending volume and direct lending activity.

Marcus & Millichap 2014 Outlook: Refinance Now, Look to Value-Add

By Mike Ratliff, Senior Associate Editor –

Long term fundamentals for the apartment industry are looking strong according to Marcus & Millichap’s 2014 Apartment Market Outlook. Continued job growth and already record-high occupancies should keep the multifamily sector strong for several years. The presentation did, however, warm of the possibility for softness in certain core urban markets due to overbuilding.

Overall macro economic trends paint a positive picture for apartments. Retail sales are 15 percent above where they were in the depths of the recession. We have regained 7.4 million out of the 8.7 million jobs lost during the downturn. This job growth is broad based, with meaningful hiring occurring in all the critical sectors. Another positive indicator is coming from a strengthening single-family market, says Hessam Nadji, senior vice president, managing director and chief sustainability officer at Marcus & Millichap.

“The strength we are now seeing in single-family does concern some apartment investors,” Nadji says.  “And that is for good reason. We have lost renters to home buying — we continue to lose some renters to home buying — but that trend is pretty stable. Roughly 30 percent of home sales are going to first time home buyers. But the bigger message of the single-family recovery is again, very positive for the multifamily side for two reasons. First off, a 10 percent price gain on a year-over-year basis in the single-family market bodes well for the economy. Some of those construction jobs are a result of residential construction on the for-sale side coming back.”

Nadji’s second point was that increasing interest rates and prices in single-family have made it harder for would-be homeowners to make a down payment and get approved for a loan. This bodes well for multifamily as well.

One particular concern (in addition to overbuilding) is how long the trend of rent growth can continue. Rents have grown faster than rental household income. This should cause a slowdown in rent growths, but primarily for the Class A sector. Class B and C assets are still showing strong rent growth, which is typical as their fundamentals typically lag those of the higher end product.

On the finance side of the industry, we can expect to see an increase in originations from life insurance companies, banks, pension funds and agency lenders throughout 2014. One of the drivers for this phenomena is the continued improvement of property fundamentals for multifamily (as well as all asset classes), says William Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp.

“Historically low cost of debt and its improving availability have become major positive factors in facilitating more business,” Hughes says.  “In essence, this allows investors to take advantage of some great opportunities. Today we are seeing a wide variety of competitive financing sources along all property sectors in most markets, with credit discipline adjusting to become slightly less restrictive, particularly with multifamily, in order to accommodate in the increase in active capital sources.”

Looking ahead, Hughes is excited for the prospects for 2014. While the fed will reduce its acquisition of bonds and MBS, Hughes believes that the central banking system will remain accommodative until the economy demonstrates significant jobs growth that results in substantial employment gains. Now that the federal budget has been approved and inflation is in check, we should see both improving employment and GDP growth. All these factors make now a great time to finance.

“We recommend that investors take a fresh look at their financing needs, both in terms of refinancing and pursuing new investment opportunities,” Hughes adds. “We continue to believe that at some point in the not too distant future, we will look back on this period and realize how unique it was.”

Investors looking for opportunities in 2014 might be served by examining deals in older properties or in secondary/tertiary urban core markets.

“Class A properties in preferred markets saw cap rates drop substantially in 2010, 2011 and 2012 as institutional investors poured funds into premiere assets,” says John Sebree, senior vice president, director of Marcus & Millichap’s National Multi Housing Group. “Class B and C product likely provides some of the best opportunity in the coming year.”

Value-add plays to drive rent growth are also becoming an increasingly popular strategy. According to Sebree, investors are targeting 1980s construction due to the ability to go in and update in order to compete a bit more with the Class A stock. Investing in next generation or hip urban markets is another possibility.

“The other value-add that is taking place is that we have had a resurgence in the urban core,” Sebree says. “Most metros have had new construction come into the urban cores at a higher rate over the past couple of years compared to what we have seen in the past. This trend is growing the urban cores and is expanding out into neighborhoods that are close to downtown areas. Areas that maybe a few years ago people would not have considered buying. Now I am seeing people say ‘I am going to buy this property — it is a little bit rough right now — but I can see the growth coming my way and I am going to get out in front of it.’”

Top 10 Rent Growth Markets of 2014

By Lindsay Machak –

Industry experts project that some of the largest metro areas will see some of the largest rent growth next year. Yet some hot secondary metros, such as Denver and Nashville, are also among the top markets for 2014.

Seattle will continue to grow in 2014 and is expected to see the biggest percent change in rents, according to New York-based Reis.

San Francisco will push rents by about 4.7 percent next year, according to the MPF. The Bay Area’s job growth market continues to improve, as the unemployment rate dropped from 6.9 percent in July to 6.1 percent in September, according to the Bureau of Labor Statistics.

Meanwhile Texas markets Austin, Dallas and Houston are each showing strong fundamentals heading into the new year. Job growth in all three markets will give the boost they need to push rents by about 3.9 percent next year. While some people may fear Austin is seeing too much development, most mangers aren’t worried about it. As far as Dallas and Houston, both markets are seeing rapid development, and are among the hottest secondary markets in the nation.

The Top 10 Rent Growth Markets for 2014:

1. Seattle: 5.8
2. San Francisco: 4.7
3. Denver: 4.6
4. San Jose: 4.5
5. Nashville: 4
6. San Diego: 4
7. Austin: 3.9
8. Dallas: 3.9
9. Houston: 3.9
10. New York City: 3.8

Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.

8 Threats to Apartment Owners in 2014

By Les Shaver –

As the rest of the economy has foundered, apartment owners have surged coming out of the recession. But the good times might not last forever. Here are eight things that could wreck their joyride.
1. Fannie Mae and Freddie Mac
It’s been more than five years since the speculation about Fannie Mae and Freddie Mac started, yet they remain a vital source of liquidity in the sector, especially in secondary and tertiary markets (where other lenders are less likely to go). “Fannie and Freddie are the most dominant lending sources in our industry,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group. “If that is changed, it will have an effect on our values and our ability to finance properties.”
2. Unemployment
The apartment sector has seen great rent growth over the past few years without its customers enjoying real income growth. If the sector wants to continue to grow, employment, and wages, must increase. And, if things regress, the industry will suffer. “You put unemployment and the economy in the macro bucket,” says Dan Fasulo, managing director at New York–based Real Capital Analytics. “They’ll be hovering above everything we do and directly impacting values.”
3. Rising Interest Rates
When interest rates rise, they reduce investor-levered returns, which obviously hinders valuations. “The interest-rate market, and how much interest rates increase and over what period of time, will have a huge effect on value,” Sebree says. “If Treasuries jump 100 or 120 basis points, that will have an effect on cap rates.”
4. Overdevelopment
Simple supply and demand dictates that when more apartments show up in your neighborhood, it generally decreases the value of those properties that were there already. “Supply is an issue at the submarket and neighborhood levels,” says Ryan Severino, senior economist and associate director of research at New York–based Reis. “It’s not a uniform thing.” But in markets with oversupply, valuations will take a hit.
5. An Exodus of Capital
Already, some players, like Washington, D.C.–based Carlyle Group, are trimming their apartment holdings. If the movement gets bigger, it could hurt values. “Capital is moving out,” Fasulo says. “Your smart money players, chasing yield compression in the market, are already playing in the other sectors where there is a bigger spread.”
6. Inflation
Inflation will hit apartment owners, but, ultimately, the sector is in a good position to handle higher prices. “If we look at what inflation will do, it will increase rents, but it will increase expenses and interest rates [too],” Sebree says. “It will probably increase values, as well. If inflation happens at a higher rate than what many are predicting, the investors that have locked in long-term debt will be in better shape than others.”
7. Political Threats 
When Bill de Blasio was elected the next mayor of New York City last month, apartment owners in the city, including Fasulo (who owns units in Brooklyn) took note. “The mayor of New York has a lot of power to impact change very quickly,” Fasulo says. “Understanding the positions of the new mayor-elect, I’m not sure I’d make a bet that operating expenses for New York City apartment owners would be going down.”
8. Geopolitical Issues
Apartment industry executives, like everyone else, are susceptible to what happens in the outside world. If gridlock in Washington or recessions in other countries plunge the U.S. into recession, multifamily owners suffer. “One of my greatest concerns that I believe will impact apartment values and fundamentals is uncertainty about global economics and our government policy,” says Lili Dunn, chief investment officer forGreensboro, N.C.–based Bell Partners (though she remains hopeful the economy will remain along its path of moderate growth).

Job Growth in Jacksonville Outpaces Florida, U.S. Averages

By Philip Shea, Associate Editor –

After three years of tepid employment growth, the Jacksonville metro is poised to create 12,500 new jobs before year’s end—amounting to a 2.1 percent increase, with even more expected in 2014. As a result, vacancies are expected to recede back to pre-2007 levels, with minimal deliveries expected over the next two years.

Hendricks-Berkadia reports that sectors such as finance, education and health care have been integral to the boost in jobs, with locally based Foundation Financial Group creating 60 new positions within the past year. Additionally, expansions of several hospitals such as St. Vincent’s Medical Center Clay County and Brooks Rehabilitation are expected to create nearly 800 new jobs.

All of this positive development in the local economy has brought the overall vacancy rate down to 8.1 percent, with another 60 basis points expected to be shaved before the end of the year. While this figure ranks far higher than the national average, it is far lower than the near-15 percent rate seen at the height of the recession in 2009.

Additionally, the pace of rent growth is expected to rise, with asking rents expected to rise 3.4 percent to $849 per month in 2013 and 4 percent to $883 per month in 2014. The most expensive submarket continues to be the areas near the beach, with rents there rising 3.4 percent to $1,029 between 2011 and 2012.

As alluded to previously, hiring is expected to accelerate even further over the next 18 months, with another 19,000 positions expected to be added throughout 2014. Other metro employers seeking to expand their operations include the Mayo Clinic, CMG Financial, and Digital Risk—the latter of which has a plan to bring 1,000 jobs to the state over the next few years.

While permitting activity is expected to pick up pace over the next two years, actual deliveries will remain modest, with 560 units and 675 units expected to be completed in 2013 and 2014, respectively. One of the larger developments currently under way, the 294-unit 220 Riverside, is slated for completion by the end of this year.

With a pause in bulk completions and demand on the rise, the metro is likely to see a marked increase in investment activity throughout the current development cycle.


DFW Apartment Market Good for Landlords, Investors–For Now

By Dees Stribling, Contributing Editor –

Dallas—Even though the Dallas-Fort Worth area never quite suffered the housing slump that many other U.S. markets did, the area’s relatively robust economy is creating new households that are tightening the apartment market. In fact, according to the recently released 2Q report by investment specialist Marcus & Millichap, employment gains in the Metroplex will be nearly 3 percent in 2012, nearly double the national average, and job seekers will be moving into the area, especially from less-than-robust markets in the Midwest and on the West Coast.

“As a result, leverage in lease negotiations will remain firmly on the side of apartment operators through the end of the year, spurring strong revenue gains,” the report predicts. In short, DFW apartment landlords are going to be in clover for the time being.

By the end of 2012, asking rents will have risen 3.4 percent to an average of $823 per month. Effective rents will rise at a faster clip of 4.2 percent as owners pare concessions, pushing the average to $744 per month by year-end, the report says.

But Marcus & Millichap also notes that there will (eventually) be some headwinds for landlords. Year-over-year, home sales in the market are up 20 percent, an indication that more renters are transitioning into single-family homes. Foreclosure activity is up more than 10 percent in 2Q12 from the second quarter of 2011, mitigating attrition from apartments to the housing market. But as foreclosure activity begins to abate and new construction of multifamily rental properties accelerates next year, apartment operators may have to react quickly with concession offerings to maintain the current tight occupancies.

New apartment construction is predicted to be quite vigorous in the coming quarters. Apartment completions will nearly triple in 2012, as about 8,100 units will come online by the end of the year. “Based on the rapidly expanding development pipeline, another dramatic increase in deliveries appears likely next year,” the report says.

In the meantime, investors are getting into the market while the getting is good. Transaction velocity will continue to escalate this year as out-of-state investors target large, better-quality deals in the Metroplex, the report anticipates. Despite cap rate compression through the past several quarters, local apartment properties continue to spin off stronger returns than similar assets in coastal markets.

For example, Class A cap rates for Metroplex multifamily can start as low as 5.5 percent, which still offers a 50- to 75-basis point premium over East Coast and coastal California metros. While investor demand for top-quality DFW assets remains elevated, prices are hovering near new construction costs, which may hamper the pace of appreciation over the next year. At the same time, though, the Class B sector may record further price growth, as many investors priced out of the Class A market shift their appetites to large Class B+ properties. Within this segment, prices for well-located 1980s assets have pushed above $40,000 per unit, changing hands at cap rates in mid-7 percent range.

Detroit Posts Third Consecutive Year of Job Gains for First Time since 2000

By Philip Shea, Associate Editor –

Source: Hendricks-Berkadia

Far from the gloom and doom that has come to characterize many people’s view of the Motor City over the past few years, this metro has seen nearly 100,000 jobs added over the past three years, and many submarkets are beginning to see vacancy rates plummet below 4 percent.

According to a recent report by Hendricks-Berkadia, occupancy increased by 90 basis points year over year between 2011 and 2012 to 95.5 percent, while vacancy in Central Washtenaw County—a populous suburb of Detroit—fell to 2.6 percent. Additionally, sales volume of multifamily properties have picked up dramatically since the economic downturn—rising from just over $100 million in 2010 to nearly $600 million in 2012.

And while construction of new properties has lagged considerably over the past three years, Hendricks-Berkadia projects that deliveries will rise to 360 market-rate units this year and 450 market-rate units in 2014.

The businesses and industries responsible for the uptick in employment include professional and business services and education and health services, which accounted for 22,000 of the positions created last year. Yet the city’s hallmark auto industry is also posting gains, with General Motors planning to hire 1,500 new workers in their Warren facility over the next few years.

And while the Central Washtenaw County submarket continues to post lowest vacancies, other areas like Southwest Wayne County and Southeast Oakland County are not far behind, with rates of 3.6 percent and 3.8 percent, respectively. These areas include townships such as Romulus and Birmingham.

Source: Hendricks-Berkadia

Meanwhile the submarket with the highest rents continues to be the Farmington Hills/Troy area, with the 2012 average rent coming in at $1,033 per month. This was followed closely by the downtown Detroit submarket, coming in at $944 per month. Farmington Hills is an affluent submarket with a 2010 median household income of just under $110,000.

Looking forward, Hendricks-Berkadia expects the metro to add over 65,000 jobs, which will boost occupancies even further, ultimately driving the overall vacancy rate to 3.4 percent. This is an exceptional development, especially considering this figure has averaged 6.8 percent over the last 10 years.