Category Archives: State of the Industry

A Record Low Unanchored Retail Cap Rate

By Jennifer LeClaire  – GlobeSt.com

TAMPA, FL—With a record low cap rate for unanchoredretail that some brokers say signals a recover, East Bay Plaza has trade hands. The Largo, FL retail center sold for $2.95 million in an all-cash deal. The sale price represents $283.63 per square foot.

“The in-going cap rate of 7% is the lowest we have seen for a stable retail center in years,” Franklin Street’sJonathan Graber tells GlobeSt.com. “The market for unanchored retail centers has been improving since 2013 and is approaching levels last seen in 2007 and 2008.”

Graber and Franklin Street’s Rafeal Wright represented the seller, East Bay Plaza Integra, a Florida Limited Liability company. Franklin Street put together this off-market transaction with a 1031 buyer, Warner Enterprises, a California Limited Partnership.

“The seller was an experienced retail owner and developer out of Southeast Flora,” Wright said. “This retail center is located in one of the area’s most important retail sub-markets.

As Graber sees it, this is happening for several reasons. He lists the reasons as: record-low cap rates for triple net and multifamily property; historically low interest rates; a lack of new construction; positive absorption of retail space; and access to attractive financing.

Built in 2008, the 10,401-square-foot unanchored retail plaza is 100% occupied with a mix of national and regional tenants including Einstein Bagels, Anytime Fitness, Liberty Tax Service, Radio Shack, and Zoom Tan. The deal also included a long-term billboard lease.

“With Kimco Realty working on one of the area’s largest retail redevelopments across the street and Walmart opening a new supercenter on the opposite corner earlier this year, this intersection continues to gain in value,” Write tells GlobeSt.com. “Additionally, this area of Pinellas County has some of the strongest population densities and traffic counts in all of Tampa Bay.”

East Bay Plaza is located at 5395 East Bay Drive in Largo, FL. It sits on the southwest corner of US 19 and East Bay Drive.

Oversupply Not an Option In These Markets

By Sule Aygoren - GlobeSt.com

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.

Student Housing Pros: Watch Your Backs

 - NREIonline.com

The long-term outlook for student housing may be positive, but investors and managers should be on the lookout for competition from new construction.

“You are in a maturing industry where a lot of the easy money has already been made,” says Terrell Gates, founder and CEO, Virtus Real Estate Capital.

Experts expect demand for student housing to increase over the next several years. But student housing operators are looking over their shoulders for potential competition, especially in major student housing markets serving large universities. Nearly all of the new beds under construction are being built near the 300 or so largest universities in the country.

Demographics

Enrollment at U.S. universities reportedly declined last year by about 500,000 students. That news set off a wave of speculation that the student housing business might be overheated. Some investors worry that the recent dip in enrollment is the beginning of a long-term trend, as prospective students decide not to take on the burden of student loan debt.

“Students and parents are going to be more discerning on how much debt they pile on,” says Jim Arbury, vice president for the National Multi Housing Council. However, students are still likely to enroll. “An average student might pile up $25,000 in student loan debt. For the average job available to a college graduate, $25,000 is worth it.”

Projections from the U.S. Dept. of Education show college enrollment growing overall from 21 million in 2010 to 24 million in 2020.

In the recent dip in enrollment, the majority of the students who didn’t return were graduate students who have put off further education as the unemployment rate declined. “These are not people traditionally targeted by student housing,” says Terrell. Also the biggest drop in enrollment came at smaller, often more expensive private colleges, while most student housing properties can be found near larger, public universities.

“Nobody has seen a major impact on the great bargain schools, the state schools,” says NMHC’s Arbury.

New construction hits markets

Roughly 50,000 student housing beds came onto the market in the summer of 2013, in time for the 2013-14 school year. Next summer another 50,000 beds should hit the market. That’s up from 40,000 that came on line in the summer of 2012, according to Terrell.

The new flood of student housing follows a long period during and after the crash when very little new student housing was built. Also, the level of new construction is not that large considering that there are more than 20 million students now enrolled in college or university.

However, the flood of new construction is concentrated in the area nearby the roughly 300 largest universities with more than 10,000 students apiece, says Arbury. The newest student housing is targeted even more tightly. Because of the high cost of new construction, these new beds target the wealthiest students who can afford the cost. “You can only make the math work if you’re delivering class-A properties,” says Terrell.

Terrell expects to see more consolidation in the business as more large institution investors enter the space and existing student housing companies grow to an institutional size.  “The news is out: Everyone understands that student housing is recession resilient,” he says. “Consolidation is coming.”

Office Market Remains Stuck in a Rut

 and  - NREIonline.com

The national vacancy rate for office properties remained unchanged during the fourth quarter at 16.9 percent. Given how slowly the office sector’s recovery has progressed, this is not necessarily reason for worry.

Since the third quarter of 2007 the national vacancy rate hasn’t declined by more than 10 basis points in any given quarter. For all of 2013, the vacancy rate fell by just 20 basis points, roughly comparable to the 30 basis point decline in 2012.

National vacancies remain elevated at 440 basis points above the sector’s cyclical low, recorded in the third quarter of 2007, before the recession began that December. Tepid supply growth and lackluster demand have remained largely in balance during this recovery, accounting for the slow pace of vacancy compression.

 

 

With most employment growth coming from low-paying, low-skilled jobs that do not utilize office space, demand remains weak. The amount of occupied stock rose by 8.9 million sq. ft. in the fourth quarter. This is a meager increase from the 7.6 million sq. ft. that were absorbed during the third quarter. This was, however, largely due to a jump in completions. For the quarter, 9.3 million sq. ft. came on-line, up from last quarter’s 6.3 million sq. ft. of new construction.

This dynamic between net absorption and construction held throughout the year. For 2013, quarterly net absorption averaged 7.1 million sq. ft., a 69 percent increase from 2012′s average of 4.2 million sq. ft. For construction, the quarterly average was 6.5 million sq. ft., a 109 percent increase from 2012′s average of 3.1. Demand certainly increased in 2013, with office buildings entering the market mostly occupied (or leasing up quickly). This is in line with strict requirements for pre-leasing from lenders that provide construction and development financing.

The bottom line is that until the growth rate in high-wage, high-skill jobs that require office space accelerates expect slack demand for existing inventory to be the norm and vacancy compression to be slow but steady.

Rent growth plods along

Asking and effective rents both grew by 0.7 percent during the fourth quarter. Asking and effective rents have now risen for 13 consecutive quarters. During 2013 the average asking rent increased by 2.1 percent while effective rent grew by 2.2 percent. This was somewhat better than 2012′s performance when asking rents grew by 1.8 percent while effective rents grew by 2.0 percent.

 

 

Unfortunately, there is too much vacant space for market dynamics to be conducive to significant rent growth. With the national vacancy rate at 16.9 percent and declining slowly, landlords remain unable to drive asking rents upward or pull back on lease concessions. That does not mean that rents are unable to slowly creep up—as they did in 2013—but stronger, healthier rent growth is only possible at far lower vacancy rates such as were observed before the recession. Reis’ historical data indicates that national vacancies need to compress by another 300 basis points before rent growth accelerates on a broader basis. Given the pace of vacancy declines, it will take another few years to get there.

Top metros reap outsized gains

In the current market environment, weakness at the national level does belie strength found in a handful of metropolitan markets and selected submarkets. With the technology and energy industries  continuing to grow and create a meaningful amount of high-wage office-using jobs, the performance of markets with a concentration of companies in these industries continues to excel. This is a familiar trend over the last few years.  The markets with the highest year-over-year effective rent growth in the fourth quarter were San Jose (+5.0 percent), San Francisco (+4.5 percent), New York (+4.2 percent), Houston (+3.7 percent), Seattle (+3.0 percent), Boston (+2.9 percent) andDallas (+2.8 percent).  Also at the top of the list was Orange County (+2.8 percent), a metro we haven’t mentioned much.  A combination of recovering tourism and an increase in demand for space from the healthcare industry has helped support the metro’s office market. Orange County ranked fourth in terms of quarterly effective rent growth (+1.3 percent) in the last three months of the year.

New York has reclaimed the title of the tightest market from Washington, D.C., with a 9.9 percent vacancy rate at the end of the fourth quarter of 2013. Washington fell to second place at 10.3 percent. While both markets experienced vacancy rate increases during the quarter, Washington’s rise is more troubling. While New York’s was likely a short-term aberration, Washington-based employers continue to bear the brunt of budget cuts and political brinkmanship. Although the budget has been passed and the shutdown proved to be ephemeral, haggling over the state of the federal government’s finances is far from over.

Near-term office outlook

The outlook for 2014 is for moderate improvement versus 2013. Many companies refrained from hiring in 2013 because of so much uncertainty. As this fog of uncertainty dissipates, particularly surrounding policy making in Washington, D.C., it should serve as a catalyst for hiring. We expect that the labor market, including the professional, managerial, technical and sales-related occupations that typically reside in office buildings, will improve throughout the year. Therefore, we anticipate that vacancy compression will increase modestly, to about 40 basis points.

Rent growth should continue to accelerate next year, rising by close to 3 percent on an asking rent basis and by over 3 percent on an effective rent basis. It has taken the economy and the office market years to claw their way back from the depths of the worst recession since the 1930s. 2014 is not likely to be the breakout year, but there are reasons to be more optimistic.

Brad Doremus is senior analyst, and Victor Calanog is head of research and economics, for New York-based research firm Reis.

Storage Wars: Investor Demand Grows for Self-Storage Properties

Michael Bull – Bull Realty – NREIonline.com

In the past, self-storage properties were often overlooked by investors, but that’s not the case anymore. While many other sectors of commercial real estate were hit hard by the recession, the self-storage industry weathered the storm with minimal damage. As vacancy rates fall and rents grow, investor demand for self-storage properties continues to rise.

Those were a few of the points made during the most recent episode of the “Commercial Real Estate Show” radio program, on which my guests and I discussed sector fundamentals, new construction and investor appeal.

Strong fundamentals

“Self-storage isn’t as glamorous as a high-rise office building or a mall,” said Michael Scanlon, president and CEO of the Self Storage Association. “We’ve always been relegated to secondary status in the commercial real estate industry. However, during the recession, many of the big segments took a nosedive, and self-storage sagged a little but didn’t take the same nosedive.”

Fundamentals have really been improving during 2013, which is a continuation of the last couple of years, said Ryan Severino, senior economist at Reis. Vacancy dropped from 14.9 percent at the beginning of the year to 12.6 percent in the third quarter, he said. Asking rents have grown 2.1 percent year-to-date.

In 2014, vacancy rates are expected to drop by another 80 basis points, and asking rents are expected to grow by about 2.8 percent, Severino added.

“The self-storage sector is sneaky big,” Scanlon said. “In 2013, all 30 teams in the NFL generated $9 billion in total revenue, while the music industry generated about $21 billion, and self-storage generated $24 billion.”

Increase in supply

During the last couple of years, 300 to 400 new self-storage facilities have been constructed, Scanlon said. With the economy continuing to improve, it’s estimated that as many as 800 new facilities will be constructed in 2014.

“Supply is increasing relative to where it’s been the past few years, but I don’t see it being an impediment to the market’s recovery,” Severino said. “We expect to see vacancy rates continue to trend down, which means we expect to see net absorption outpacing new construction.”

Despite the amount of properties being developed, building a self-storage facility can be tricky, Scanlon added. For most investors today, due to soaring construction costs it’s cheaper to buy a facility and fix it up than to build.

“When we started, we used industrial-zoned land in heavy commercial areas for self-storage facilities,” Scanlon said. “More recently, we are building in light-commercial and semi-residential zoned areas, and we’ve had to build them with more curb appeal.”

Investor demand increases

“We are now a mainstream part of portfolios that are involved in commercial real estate,” Scanlon said. “People are hedging their bets by putting some money in self-storage.”

Investors who are interested in entering the self-storage market should consider finding a facility they like and asking to invest in the owner’s next property, Scanlon said. “Country club money is how a lot of small operators get their money to build or expand,” he said.

Before purchasing properties, investors should perform a full audit, said Scott Zucker, partner at WZEM. “It’s important to have a good idea of what’s going on inside the facility and who the tenants are,” he added.

Access to the property and new developments around the area are also important factors to take into consideration, Zucker said. “Curb cuts are there so trucks can access the property,” he said. “If there’s a lot of development in the area, road access and access into the property can be affected.”

Cap rates for self-storage are about 6 percent for class-A properties, 7 percent for class-B properties and 7.5 percent for class-C properties, Severino said. In comparison, mean cap rates for apartments are about 6.4 percent, and cap rates for retail are about 8.1 percent.

“Investors are still being choosy about what they buy and sell,” Severino added. “Transaction volumes for all property types are down relative to what they were before the recession. Even with that selection bias, self-storage holds up well relative to the other property types.”

The entire episode on the self-storage industry is available for download atwww.CREshow.com. Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta. 

Seniors Seek Multifamily Units in Warm Climates

 - NationalRealEstateInvestor.com

As the U.S. housing market improves, senior citizens have been looking to sell homes they’ve been holding onto since the recession.

Seniors wanting to get out of underwater homes have been putting them on the market, where one in four home sellers is 65 years or older, according to the National Association of Realtors. Additionally, the National Association of Home Builders said in a fourth quarter report that improvements in the single-family housing market mean seniors are increasingly able to sell their current homes and move into smaller homes or apartments.

Nikki Buckelew, CEO and founder of Austin, Texas-based Seniors Real Estate Institute, says today’s residential brokers need to take the time to learn how to work with seniors to sell their homes and how to help them find either smaller properties or appropriate assisted-living facilities. The seniors housing market is a distinct niche, and Buckelew says in the next few years there will be many more seniors-only realtor teams formed to help owners sell their single-family homes and move into seniors housing.

A decade ago, Buckelew notes, the seniors living communities were not a good fit for the typical real estate agent who had no training in how to work elderly clients. However, she says agents must get trained up quickly, as the Census Bureau estimates that 11.3 million seniors will sell their homes by 2020, and that number is expected to reach 15 million between 2020 and 2030.

“This group of 80-somethings are trying to exit their homes, and the typical agent still isn’t equipped for the transaction,” Buckelew says. “The right team is critical, and should include elder law attorneys, financial planners, estate liquidators, antique appraisers, home inspectors and senior move specialists. Just the move alone is a huge hassle for seniors, as they have a hard time liquidating their personal belongings.”

On the move

Self-storage listing agency Sparefoot said in a recent study that the Southwest, particularly Texas, should get ready for a large influx of seniors. San Antonio topped a list of 15 cities where baby boomers are thriving, with the list also including Austin, Houston and the McAllen-Edinburg-Mission corridor.

The Carolinas also took up top spots in the study, with Raleigh and Charlotte in North Carolina cracking the top 10, and Columbia, S.C. coming in at number 11. The list is based on government and NAR statistics on boomer population growth, housing affordability and total health care workers per capita.

Boise, Idaho was the northernmost city to make the list, as the rest of the SpareFoot communities listed are in Southern climates. Las Vegas gained about 20 percent more boomers between 2000 and 2010, according to the study, while Chicago and New York City both lost about 9 percent.

Downsizing boomers are also responsible for the drop in the popularity of single-family homes in favor of apartment living, according to a recent white paper written by John Rappaport, a senior economist with the Federal Reserve Bank of Kansas City. Rappaport writes that major cities must start planning for more multifamily properties, and related amenities such as medical properties, to handle this wave.

“The projected shift from single-family to multifamily living will likely have many large, long-lasting effects on the U.S. economy,” Rappaport said in the report. “The aging of the U.S. population will put further downward pressure on single-family con­struction but offsetting upward pressure on multifamily construction…The longer term outlook is especially positive for multifamily construction, reflecting the aging of the baby boomers.”

New Year Demands New Investment Strategies

By John S. Sebree - vice president/national director, National Multi Housing Group, Marcus & Millichap – MultiFamilyExecutive.com contributor

With most opportunities exhausted in major metros, apartment investors in 2014 will be left to pursue alternate markets or hold periods for higher yields.

Amid pitched competition that has driven down cap rates, identifying assets that will provide targeted returns will increasingly force multifamily investors to adopt new investment strategies during 2014.

Purchasing properties with below-market rents, subsequently strengthening occupancy and raising rents, and then selling the property for a handsome profit was a winning strategy coming out of the recession, but no more. Most of this type of opportunity in major metros has been exhausted, leaving investors to determine where to turn next. Some are making a transition to a “buy-and-hold” approach to investing, acquiring targets that will provide stable income streams for the next five to seven years and serve as a hedge against the potential onset of inflation.

Some Seek Riskier, Higher-Yield Properties
Meanwhile, other investors are broadening their search for properties that have higher risk profiles and greater potential for significant value appreciation. Many secondary and tertiary submarkets of major metros hold properties that fit this profile, and an increasingly large share of deal volume in most markets will occur in these areas. In addition, secondary and tertiary metros continue to gain favor with investors in their search for properties with higher yields than their counterparts in the nation’s most prominent urban centers. The smaller metros in the Midwest, in addition to thriving areas such as Austin, Texas, will see significant inflows of equity capital during 2014, and debt providers are sure to follow closely behind.

Austin, in particular, stands out as the type of market that out-of-area investors will gravitate to in greater numbers in the year ahead. Unlike secondary metros that lack a diverse set of economic drivers to generate rental housing demand, Austin can boast government employment, a major university, and a booming tech sector as key economic engines. Austin’s economy will strengthen further over the next year, with local gross domestic product forecast to surpass $100 billion for the first time in history. Meanwhile, vacancy may rise to a more normal level next year as the metro records another surge in completions, making asset and submarket selection an imperative consideration for investors.

In Florida, capital will continue to migrate north from the three-county South Florida region to the center of the state and Jacksonville in the northeast corner. Deal volume in Jacksonville has been notable recently for the increased presence of large investors and institutions seeking core holdings that provide higher returns. As a wide-ranging metro area with several hubs of economic activity, Jacksonville will continue to attract large investors in the years ahead. Expanded access to debt, meanwhile, will also enable smaller investors to complete more transactions.

Good Returns, Strengthening Economies Encourage Investors
The strength of the investment markets in all metros rests heavily on investors enjoying continued access to the capital markets. From an equity capital standpoint, new capital continues to emerge in the multifamily segment, spurred by the lack of adequate returns available in other asset classes. Debt capital is also expanding, and, in many metros, lenders are competing keenly to provide acquisition funding. Higher interest rates appear certain at some point in the near term and will most likely affect pricing on low-margin properties, meaning primarily Class A assets. Properties on the lower rungs of the quality scale, however, will not see any price adjustments in the near term.

Strengthening metro economies will also boost apartment operations and encourage investors. Through October 2013, more than 80 percent of the jobs lost nationwide during the recession had been replaced, and many metros have already added more jobs than were lost during the downturn. The surprisingly robust number of workers hired nationwide in October despite the federal government shutdown that month erased many doubts about whether the economic recovery is sustainable. Economic growth and job creation will gain momentum in 2014 as demand for goods and services rises.

Finally, the recovery in the single-family home market may potentially raise vacancy and lower rent growth in several metros in 2014, but several offsetting factors are also in force that will prevent a broad-based flight to homeownership. The rise in 30-year mortgage rates during 2013 has likely relegated many marginally qualified prospective home buyers to the rental segment. Also, a lack of new homes being built at affordable “entry points” will thwart home buying aspirations.

Why 2014 Will Be a Holder’s Market

By Les Shaver - MultiFamilyExecutive.com

Just because it seems like cap rates can’t go down any farther, and many formerly favorable markets will be flooded with supply, that doesn’t mean everyone wants to sell.

There are many good reasons to buy and hold too. And, they are many of the same reasons the apartment sector has been a favorite of investors over the past few years.

Pent-up demand from Echo Boomers (with 21.8 million individuals ages 18 to 34 living at home in 2012, according to the Census), and the promise of economic growth in 2014 and 2015 mean the apartment market hasn’t hit its ceiling.

“Although the rate of acceleration is slowing and pricing is a concern, apartment fundamentals are still generally healthy,” says Lili Dunn, chief investment officer for Greensboro, N.C.–based Bell Partners. “Rental housing benefits from strong demand driven by robust rental household formation, which is fueled by demographic trends and, to a lesser extent, job growth.”

Economists believe the apartment market still has a lot of upside over the next four or five years, at least, pointing to about 2.2 million new jobs created in 2013.

“That is a recovery,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group. “It’s a lethargic recovery. But it’s still a recovery that’s gaining speed. This year, depending on whom you talk to, we’re anticipating 2.7 million to 3 million new jobs. These new jobs will continue to increase the formation of new households.”

And, Dunn doesn’t think there will be an oversupply of apartments to sap the demographic-driven demand. She points out that the supply in the pipeline is expected to decline after hitting 300,000 units in 2014, and thinks supply concerns are overblown. “New supply is also still within reasonable levels of long-term averages,” she says.

While many well-heeled investors are starting to dispose of their apartment holdings and chase yield in other asset classes, some economists think weaknesses in those other sectors—such as office and retail—will help apartment investments maintain their value.

“Some people are still risk adverse about other property types and are taking a long-term hold approach to this,” says Ryan Severino, senior economist and associate director of research at New York–based Reis.

With these economic tailwinds, Severino doesn’t expect to see a market implosion like the one that occurred in the late 2000s, where condo converters, not buying on a cap-rate basis, pushed prices to unsustainable levels.

“Even in the markets where cap rates are rising, it isn’t like 2008 and 2009, where we had a massive expansion in cap rates that clobbered the market,” Severino says. “I don’t think you’ll see that performance from the underlying economy or see demand erode like that [again].”

Brokers and market researchers are concerned about where pricing is heading, but aren’t exactly planning for an Armageddon-like scenario.

“Unless something blows up, I don’t see a hard crash,” says Dan Fasulo, managing director at New York–based Real Capital Analytics (RCA). “But I guess, who does see a hard crash? By just looking at line graphs we [have] leveled off. Cap rates aren’t moving lower. The rate of increase in pricing is slowing. You can expect more of that over the next couple of years.”

Why 2014 Will Be a Seller’s Market

By Les Shaver - MultiFamilyExecutive.com

Jared Kushner hadn’t been running New York–based Kushner Cos. long when he noticed something problematic in early 2007: He could no longer justify buying apartments.

“I remember sitting with my dad and saying we couldn’t make sense of the buys in the markets—buying at 4 caps and financing at 6 percent,” Kushner says. “The dynamics really didn’t seem to make sense for multifamily.”

So, the Kushners made a decision. “We basically said, if we’re not buyers, we’re sellers,” Jared says. “We were able to market the portfolio and get an extraordinary price.”

The timing was impeccable. Kushner sold 17,000 units in 86 complexes to AIG and Morgan Properties in June 2007 for $1.9 billion. In 2008, the economy fell into recession. By 2010, acquisition pricing looked a lot better to Kushner (as it did to other opportunistic buyers around the country). So, over the past four years, the company has scooped up $3.5 billion worth of assets as the younger Kushner expanded the firm’s footprint beyond the Garden State to his new home in New York City, plus seven markets around the country.

Early on, Kushner found a number of buying opportunities. “The last couple of years have been a phenomenal time because [interest] rates have been low, cap rates have been high, and the spread seemed to make sense for us to be very aggressive buyers,” Kushner says.

But that dynamic is changing as more investors chase yield off the beaten path. “We haven’t been able to find the opportunities in the seven national markets that we’re in,” he says. “Gardens have been trading at prices beyond where we are comfortable. So, we’re super focused on New York City, which is a market that seems to have no end in sight for how it will continue to perform.”

Kushner certainly isn’t alone. As single-property transactions and cap rates head to near-record levels, interest rates perk up, and inflation fears hover, some industry analysts (and even a few executives) have started to ask themselves the same question the Kushners pondered in 2007—Is now the time to think about selling?

As it seems with every question in real estate, there’s no easy answer.

Disposition Decision
Some indicators say it’s 2007 again. As of the third quarter of 2013, cap rates came in at 6.2 percent nationally. “That’s every bit as low as 2007,” says Dan Fasulo, managing director at New York–based Real Capital Analytics (RCA).

With $22 billion of sales volume in the third quarter of 2013 and $30 billion in the fourth quarter of 2012, the apartment market was reaching the lofty volume it hit during the last boom. In fact, single-property deals are at an all-time high.

Part of that might be from a lack of supply on the market. That situation could actually make dispositions appealing for opportunistic sellers in 2014, especially for those that made value-add acquisitions (and have now stabilized those properties) during the recession.

“Now is a very good time to sell because of the number of buyers in the marketplace,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group.

You can put Lili Dunn, chief investment officer for Greensboro, N.C.–based Bell Partners, in the opportunistic category. Bell, which completes about $1 billion in transactions a year, seizes good opportunities to buy and sell. But, in the near term, the company expects to be a net seller.

“Pricing is back to peak levels,” Dunn says. “There seems to be a dislocation between cap rates and projected growth rates in some areas. It is a great time to take advantage of markets that have peaked and/or assets that have maximized operating performance.”

While some companies, like Bell, can be opportunistic sellers to prune their portfolios, there is an argument to be made that this may be a better sales environment than owners may see in the next few years. So, if large institutional investors want to sell, now is the time. Already, some are leaving the market. Bloomberg reports that Washington, D.C.–based Carlyle Group “is reducing holdings of multifamily housing as rent growth slows from a post-recession surge.”

Many of these investors may be looking to park their money in other classes, such as office and retail. In fact, Fasulo sees more upside in office and retail, where rents are still 20 percent to 30 percent lower than peak.

“I think the market will be hard-pressed to continue its momentum,” Fasulo says. “As far as double-digit gains in pricing, I think that game is pretty much over. Your serious players in the market are expecting debt costs to be higher going forward, with little room to raise rents higher.”

Though there’s not a lot of evidence of it so far, rising interest rates could eventually pull cap rates up. Ten-year Treasuries jumped from 1.6 percent in May 2013 to 2.6 percent at press time. If cap rates eventually follow, buyers might have to make a decision.

“Sellers have expectations of where prices should be,” Kushner says. “The question is, do cap rates widen out and do people keep hitting those prices and settling for less return on investment relative to risk?”

If buyers eventually balk at those decreasing returns, sellers might have to make price adjustments. Overdevelopment could eventually add more supply to the market, also forcing sellers to adjust.

With supply ramping up, you might face more competition from other sellers over the next few years than you might in the near term,” says Ryan Severino, senior economist and associate director of research at New York–based Reis. “If you’re in a position to harvest those gains (from a value-add situation) and redeploy that capital into something else that might present better return options going forward, now is not a bad time to do it.”

Top 10 Rent Growth Markets of 2014

By Lindsay Machak - MultiFamilyExecutive.com

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.