2018 Multifamily Investment Volume to Surpass Last Year, Say Apartment Association Panelists

by Camren Skelton

ATLANTA — Multifamily investors are anticipating another solid year for U.S. apartment sales. Annual transaction volume is robust, price per unit is increasing and fundamentals like rent growth and occupancy are strong, leaving buyers confident that apartment properties remain a safe investment.

“Investors are so sophisticated now, and they have the option of going into whatever sector, whatever geography, with whatever strategy they want, and they are scanning it all,” said Malcolm McComb, vice chairman of CBRE. “But what’s coming out again and again for many years in a row now is multifamily and industrial are stealing the show.”

McComb’s comments were made during the opening presentation at the Atlanta Apartment Association’s (AAA) “2018 Apartment Market Outlook: Disruption in the Apartment Industry.” The conference was held on Friday, Aug. 10, at the Cobb Galleria Centre in Atlanta.

Back on the Upswing
After a slight decrease in total transaction volume in 2017 — the first time since 2009 that U.S. multifamily annual sales volume didn’t surpass the preceding year — 2018 transaction volume is on track to match or slightly surpass last year’s output.

Through the first half of 2018, apartment investment sales totaled $69.9 billion, a 7.9 percent increase compared to the first half of 2017 when sales totaled $64.8 billion, according to Real Capital Analytics (RCA), which tracks sales of multifamily properties and portfolios $2.5 million and greater.

While sales slipped slightly in the second quarter compared to second-quarter 2017, experts say total transaction volume is still robust nationally and the deviation could be attributed to other factors.

“The dip in the second quarter was slightly skewed due to a large transaction last year between Starwood and Milestone in second-quarter 2017,” said McComb, referring to Starwood Capital Group’s $2.85 billion acquisition of Milestone Apartments REIT. The deal added 78 garden-style apartment properties comprising 24,061 units to Starwood’s portfolio.

“But we have a huge transaction log going on, which really creates a lot of opportunity for multifamily investors on all sides of the table today,” he said.

More individual apartment properties sold in 2017 (8,023) than in 2016 (7,996), according to RCA, and it seems that trend is poised to continue. Through the first half of the year, 3,850 individual apartment properties sold, a 2.1 percent increase from the first half of 2017, when 3,770 properties sold, according to RCA.

Property prices — especially in Class B assets in non-major metros — continue to grow due to solid multifamily fundamentals and strong investor demand.

Since December 2013, the average apartment price in the U.S. has risen 60 percent, according to RCA, and garden properties in smaller markets have experienced the biggest impact in recent quarters. According to RCA’s Commercial Property Price Index (CPPI), garden-style communities posted a 12.7 percent price increase year-over-year, while mid- and high-rise communities posted a 6.1 percent increase.

Additionally, non-major metros posted a 13.5 percent price increase while the six major metros (New York, Boston, Chicago, Los Angeles, San Francisco and Washington, D.C.) posted a 7.6 percent increase.

“If you own garden properties in non-major metros, you are the winner, year-over-year, relative to all other commercial real estate,” said McComb.

Investors are taking heed and targeting communities in secondary markets. Earlier this month, a Texas-based private equity group acquired Central Park Apartments, a multifamily property located in Riverdale, Georgia, roughly 10 miles south of Atlanta. Franklin Street brokered the $4.6 million transaction. The 1970s-era community offers a mix of townhome and garden-style units.

Strong Fundamentals
Although multifamily supply has been robust in recent quarters — a factor that could potentially undermine performance metrics like rent growth and occupancy — the sector’s fundamentals remain strong.

Halfway through the year, annual rent growth is sitting at 2.5 percent on new leases, marking the 32nd consecutive quarter of positive rent growth, according to RealPage Inc., a real estate data analytics firm based in Richardson, Texas.

“The previous cycle was at 19 quarters and now we’re sitting at 32, so not only is it longer, but also higher,” said Carl Whitaker, manager of the data analytics group at RealPage, during the conference’s “Performance and Forecast for Atlanta and National Multifamily Markets” panel. “The average rent growth over the past 32 quarters has been about 90 basis points higher than the previous cycle.”

And that streak is poised to continue. “We’ve had a good run and we still see the strong demand drivers that will be continuing this for the foreseeable future,” said Whitaker.

The U.S. multifamily market is also maintaining strong occupancy, posting a mid-year rate of 95.4 percent — only slightly past its peak of 95.5 percent in 2015, according to RealPage data.

“Even though we are deep into this cycle, there is a sustained enthusiasm for multifamily,” said McComb.

Long-Term Holding Patterns
On the disposition side, multifamily investors are practicing patience as the need for accelerated timelines has backed off a bit.

“We’ve changed the way we’re structuring deals in the majority of deals that we’re closing,” said Andy Green, principal at Tribridge Residential, during the “Perspective from Owners/Investors” panel at the conference. “It’s a straight split, owning for 10 to 15 years. We’re less concerned with the exit.”

Joining Green on the panel was Alex Cathcart, vice president of Federal Capital Partners; Pamela Thomas, director of real estate investments at Canada Pension Plan Investment Board (CPPIB) America Inc.; and Mike Altman, chief investment officer at Cortland Partners.

The panelists shared that deciding who to sell to is also becoming more of a priority. Since investors aren’t as anxious to dispose of product, there is less of a focus on hard, up-front cash and more of a focus on buyer reputation.

“At the end of the day, you want to sell to a company that you know is going to transact and has a reputation for closing, and that means far more to me than somebody stepping up and putting $1 million hard,” said Green.

“In many cases, quick execution and hard, earnest money up front are the tools for low-quality bidders to remain competitive,” added Thomas of CPPIB. “High-quality bidders are really what you’re after, and we have taken those over lower-certainty bidders that were offering shorter timelines and hard money.”

AAA is the multifamily housing trade association for the metropolitan Atlanta area. Founded in 1975, AAA is an affiliate of the Georgia Apartment Association and the National Apartment Association. Currently, AAA represents more than 1,450 member companies, including 370 apartment management firms that service approximately 390,000 apartment homes, and more than 1,100 businesses that provide products and services to the industry.

— Camren Skelton

You may also like