ATLANTA — The third quarter of 2021 was the most prolific quarter on record for U.S. multifamily investment sales, according to Real Capital Analytics (RCA). Apartment sales volume totaled $78.7 billion for the quarter, a 192 percent increase from third-quarter 2020 and a 59 percent jump from third-quarter 2019. RCA data shows that the dollar amount of assets traded this past quarter exceeded the average annual sales from the period 2008 through 2011.
James Mehalso, managing director of transactions for PGIM Real Estate, expects his firm to keep its foot on the gas for next year on both the acquisitions and sales side for multifamily assets.
“The rental market is hot,” said Mehalso. “We don’t see it really changing much in 2022, at least in the first six months.”
Mehalso’s comments came Thursday, Dec. 2, during a panel discussion as part of the 12th annual InterFace Multifamily Southeast conference hosted by France Media and the InterFace Conference Group at the Westin Buckhead in Atlanta. Moderated by Paul Berry, vice chairman of CBRE, the panel was titled, “After a Wild 2021, What’s the Investment Market Outlook for 2022?”
Pictured is InterFace Multifamily Southeast’s cocktail party at the Westin Buckhead in Atlanta. The social gathering took place on Wednesday, Dec. 1. (Photo courtesy of Craig McIntosh)
The event, which attracted more than 300 industry professionals, marked the return of in-person attendance following last year’s virtual conference.
Underscoring the white-hot sales volume is the strong performance of the U.S. apartment sector, according to the panelists. Moody’s Analytics Reis reported that effective rents nationally increased 7.9 percent year-over-year in the third quarter. The vacancy rate also improved to 4.7 percent, down from 5.3 percent in the previous quarter.
In the Southeast, rent growth is even more pronounced. Mehalso said that PGIM was experiencing 15 to 35 percent rent growth for new-lease trade-outs at its portfolio of properties. (“New-lease trade-out” refers to the difference in rent a new occupant of a unit is paying compared to the rent the unit’s previous occupant was paying.)
The steep escalation in asking rents is affecting pricing in real time, according to the panelists. Equity Residential, a publicly traded multifamily REIT based in Chicago, recently purchased SkyHouse South, a 320-unit high-rise in Midtown Atlanta. The transaction took place this summer and sparked the return to Atlanta for Equity Residential, which is pivoting heavily out of its California holdings to Sun Belt markets such as Atlanta.
Brian Grant, senior vice president of acquisitions at Equity Residential, said that the $115 million acquisition was also a relative discount to what his firm would have to pay for it today. “We’d have to trade close to a 20 percent premium for what we bought it for,” said Grant.
Equity Residential returned to the Atlanta market with its acquisition of SkyHouse South (pictured) in Midtown this past summer. Brian Grant, senior vice president of acquisitions at Equity Residential, said that if the firm was buying the property today it would have to pay 20 percent more.
Zev Kornwasser, chief investment officer at New Jersey-based Silver Point Group, said that pricing swings are also exceeding what his firm experienced from pre-pandemic levels.
Silver Point purchased an unnamed property in metro Atlanta a couple years ago and will close soon on a neighboring property for a premium of $85,000 more per door.
“We’re coming back for more because the rent growth is there and we’re doing so well on the existing deal,” said Kornwasser.
Kornwasser said he’s not exactly sure of the driving force behind the rapid rise in rent growth for the apartment sector.
“One theory is that maybe roommates who lived together [during the pandemic] decided to rent their own place. It might be general inflation. We honestly don’t understand why it happened.”
From the renter’s perspective, part of the calculus that could be fueling multifamily demand is that the single-family housing market is moving further out of reach for many prospective homebuyers. Home prices in the United States rose 19.5 percent year-over-year in September, according to the S&P CoreLogic Case-Shiller national home price index.
Additionally, the U.S. homeownership rate decreased sharply from pre-pandemic levels, falling from 67.9 percent to 65.4 percent between second-quarter 2020 and third-quarter 2021, a 250-basis point swing.
InterFace Multifamily Southeast is an annual event providing networking opportunities as well as informative panel discussions. Pictured is the event’s opening networking and cocktail reception. (Photo courtesy of Craig McIntosh)
Panelist Bennett Sands, managing director of Wood Partners, a prolific multifamily developer with projects either announced or recently delivered in markets across the country, said that 2021 was a record year for the company’s development pipeline. Wood Partners expects by the time 2021 comes to a close, it will have sold 25 properties for the year, and it anticipates selling another 29 or so properties in 2022.
Wood Partners is active in Austin, Hollywood, Salt Lake City, Central Florida, Baltimore, Charlotte and Houston. “We have a record number of starts this year totaling close to $2 billion of new development,” said Sands. “And next year, we are projecting $2.2 billion to $2.3 billion in starts.”
Sands said that the growth in rental rates is coming at a good time because construction costs for developers such as Wood Partners have also risen dramatically.
“We have a 15 percent rise in hard costs year-over-year,” said Sands. “I’ve spent more time than ever in my career going over deals under construction. When we’re meeting with our general contractors, we’re laser-focused on talking about every issue they’re encountering. There’s far more scrutiny than ever before.”
— John Nelson