Multifamily Outlook United States Year in Review

Transcription

1 Multifamily Outlook United States Year in Review Multifamily firing on all cylinders through 2013 and beyond Apartment sector expansion continues with occupancy at a 10-year high. Conditions remain tight across all gateway cities but the most notable gains are within recovering and thriving Sunbelt metros sales transaction volume was record setting, exceeding $100 billion. Apartment operators led but REIT activity moved the needle. Expect multifamily performance to remain strong for the foreseeable future as economic expansion fuels household formation and helps mitigate the threat of over supply.

2 Jones Lang LaSalle United States Multifamily Outlook Year-End Conditions remain tight across all gateway cities but the most notable gains are within recovering and thriving Sunbelt metros.

3 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily 2013 performance overview The U.S. recovery gained momentum during year-end as 12-month employment gains maintained a consistent rate of 1.7 percent, GDP growth got back on course and exceeded forecasts and Washington gridlock subsided briefly as a temporary bipartisan agreement over the debt limit eased some uncertainty for the time being. Rising consumer confidence and still historically low interest rates played a critical role in aiding growth by propelling the housing market recovery. Housing has been an important driver behind the economic expansion of recent months as the associated industries have ramped back up and created jobs; the most notable of which can be seen within the construction sector s expansion that averaged 10,000 new jobs per month in And of course the darlings of U.S. industry, high-tech and energy, continued to spawn population migration, increase household formation and support income growth across most major metros. Over the last 6 months nearly one half of all metros tracked by the U.S. Census Bureau have seen a rise in homeownership; however, rentership remains strong across the U.S. as the current homeownership rate of 65.3 percent is 20 basis points lower year-overyear and still 3.9 percentage points below the peak of 69.2 percent. Households in major markets are showing even stronger signs of a continued trend toward renting as the homeownership rate across major metros is lower than the national average and 5.6 percentage points below peak levels. Homeownership, vacancy and employment trends 69.0% 68.0% 12.0% 10.0% While the housing recovery is causing expansion nationwide, the mending of the hardest hit housing markets, primarily in the Sunbelt, is driving significant gains in those metros. As of November s employment data, 28 of the 72 largest U.S. metros (classified as metropolitan areas or divisions with an employment base greater than 500,000) saw more than a 2.0 percent increase in payrolls; of which, 54.0 percent were located in the Sunbelt. Florida, Texas, California, New York and North Carolina experienced the largest increases, respectively, with two or more metros in their state at or exceeding the 2.0 percent threshold. 67.0% 66.0% 65.0% 64.0% 63.0% 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 8.0% 6.0% 4.0% 2.0% 0.0% Metros with employment growth 2.0 percent 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Tampa Houston Nashville San Jose New York City Orlando Dallas Austin Denver Atlanta Boston Oklahoma City Las Vegas San Francisco Fort Lauderdale New York Phoenix Charlotte West Palm Beach Seattle Salt Lake City Bethesda Santa Ana Louisville Portland Indianapolis Source: Bureau of Labor Statistics YOY employment growth As a result, preliminary 2013 estimates indicate that population migration and household formations saw the largest uptick over the last year within the Sunbelt metros. Austin, Houston, Dallas-Fort Worth, Raleigh- Durham, Charlotte and Orlando led gains in both categories. The uptick in home purchases, pricing (fueled by low inventory) and housing starts certainly indicates a shifting of U.S. households back toward the American dream of homeownership; however, opportunistic investors and second home purchasers reportedly still accounted for a significant portion of home buyers in Source: REIS, Jones Lang LaSalle, U.S. Census Bureau, Bureau of Labor Statistics Only 2 of the 31 major multifamily metros tracked by Jones Lang LaSalle, Boston and Jacksonville, have seen homeownership surpass the peak/pre-recession levels. While signs point to U.S. households jumping back into ownership, the trend has yet to impact most major metros nor is any change anticipated for the near term. Metro homeownership rates by largest loss since peak 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Homeownership rate Multifamily vacancy Unemployment rate Peak homeownership rate Phoenix Inland Empire Nashville Denver Raleigh Atlanta Orlando Las Vegas Austin South Florida Portland San Jose Charlotte Baltimore San Diego Memphis Los Angeles Seattle Tampa Houston San Francisco New York Philadelphia Dallas-Fort Wash-NoVa-MD Chicago Jacksonville Boston Source: U.S. Census Bureau, Jones Lang LaSalle Q homeownership rate

4 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily 2013 performance overview and investment landscape Market conditions Overall, renter demand remained strong in Multifamily occupancy in the U.S. stands at a 10-year high of 95.8 percent and gains have averaged 13 basis points a quarter; maintaining the 2012 pace despite the increasing delivery pipeline. On a year-over-year basis there is a clear trend of mending secondary Sunbelt markets leading the overall occupancy gains; however, the gateway markets continue to have the tightest market conditions with occupancy at or above 97.0 percent in San Diego, New York and San Francisco. Tight market conditions brought U.S. quarterly rent increases averaging 75 basis points a quarter in 2013 with High-Tech and STEM employment centric markets driving the most notable rent growth. On a year-overyear basis, Seattle, Nashville, San Francisco, Denver and Houston have led, respectfully, with annual rent growth between 4.5 and 7.0 percent at the metro level. Conditions remain particularly tight within core assets in urban infill markets around the country as reported rent growth in many cases is at this level and higher. United States multifamily performance indicators Absorption and deliveries (units) 120, ,000 80,000 60,000 40,000 20, ,000-40,000-60, Deliveries (units) month rent growth Source: REIS, Jones Lang LaSalle Construction and the impact on fundamentals While renter demand is expected to remain strong over the next few years, primarily as a result of the organically expanding renter base of Baby Boomers and Echo Boomers, the implications surrounding this very active multifamily development cycle are on the forefront of interest. 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 in the U.S. and will keep conditions balanced across the country. Metros that have been of particular concern such as Austin, Denver and Seattle may see some softening; however, based on the current pipeline versus projected economic/demographic expansion, occupancy in those metros is projected to maintain healthy levels hovering in the 95.0 percent range into Net Absorption (units) Vacancy % 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Vancancy and rent growth 2017 forecast indicators Ranking Highest est. annual household growth Highest est. annual job growth Highest ratio of units absorbed to deliveries 1 st Las Vegas Austin Memphis 2 nd Austin San Antonio Las Vegas 3 rd Charlotte Dallas-Ft. Worth Palm Beach 4 th Phoenix Las Vegas Inland Empire 5 th Orlando Orlando Orange County 6 th Raleigh-Durham Raleigh-Durham Philadelphia 7 th Dallas-Ft. Worth Houston Houston 8 th Portland Charlotte San Antonio 9 th San Antonio Denver Dallas-Fort Worth 10 th Houston Atlanta San Diego Source: Moody s Analytics, REIS, Jones Lang LaSalle. Investment Landscape As expected, 2013 turned out to be a record breaking year for multifamily sales volumes, exceeding $100 billion. Velocity increased 29.6 percent over 2012 s $80 billion in total volume and surpassed the 2007 record by nearly $6.0 billion. As is typical, New York, D.C. and Los Angeles led in total sales volume; however, Dallas and Houston made the top five in 2013, beating out San Francisco and Atlanta. Demand increased significantly for assets located in secondary Sunbelt markets, with Orlando, Las Vegas, Charlotte, Raleigh-Durham and Nashville seeing an increase greater than 50.0 percent over Additionally, primary Mid-Atlantic markets (the DC metro and Philadelphia) and primary Texas markets (Houston and Dallas-Fort Worth) saw velocity rise more than 50.0 percent. Billions Historical multifamily sales volume $120 $100 $80 $60 $40 $20 $0 $31.1 $20.0 $23.7 $50.6 $99.4 $89.3 $90.6 $38.3 $15.4 $34.5 $53.5 $81.5 $ Source: REIS (sales over $5M), Jones Lang LaSalle sales volume is based on preliminary estimates

5 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily 2013 investment landscape Investor Composition A large component of these record volumes was needle moving portfolio sales, ownership entity transfers and mergers of major apartment operators. The most notable being the Equity Residential and Avalon Bay joint venture to purchase the entire Archstone portfolio. Also notable was the acquisition of Colonial Properties Trust by Mid-America Apartment Communities. With 85,000 units, the Mid-America/Colonial merger formed the largest multifamily owner by number of units after Equity Residential. Portfolio sales in 2013 made up 41.0 percent of the total volume, which is significantly higher than the previous year but still short of 2007 when 45.0 percent of transaction volume was comprised of portfolio sales. Year-to-date 2013 investor composition Apartment Operator REIT $22,532 Investment Manager $8,407 Equity Fund $7,279 Non Traded REIT $2,652 Bank $1,606 Insurance $751 Pension Fund $721 High Net Worth $672 REOC $518 Finance $345 $42,067 Portfolio versus nonportfolio transactions Billions $120 Non-portfolio PortFolio % portfolio $100 $80 $60 $40 $20 $ Source: Real Capital Analytics, Jones Lang LaSalle 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Real Capital Analytics, Jones Lang LaSalle $0 $20,000 $40,000 Millions Cross-border demand Since 2012, uncertainty overseas has driven demand for U.S. multifamily product back to pre-recessionary levels. Canadians, which have historically been active buyers, led international acquisition activity over the last 24 months and closed $4.6 billion in U.S. multifamily transactions. Switzerland has been the second most active with $850 million in purchases followed by Israel ($549M), the United Kingdom ($455M), Bahrain ($379M) and Kuwait ($273M). This international capital has found its way to nearly all major metros with Dallas, New York, Chicago, Houston and South Florida each seeing over $300 million in cross-boarder capital since the start of was a big year for all buyer types but apartment operators ended the year accounting for nearly 50.0 percent of the total sales volume. Apartment operator acquisitions totaled more than $42.0 billion, which is slightly higher than their activity in 2012; Greystar and the Carroll Organization were the largest buyers within that category. REIT activity was also significant; exceeding $25.0 billion. The percent increase in volume over 2012 was largely a result of the purchases by Equity Residential, AvalonBay and Mid-America. While investment managers total multifamily purchase volume fell 7.4 percent from 2012, activity was significant and totaled more than $8.4 billion; Invesco led with more than $1.1 billion in acquisitions. Lastly, equity funds increased activity 37.3 percent over 2012 with more than $7.2 billion in total volume. Blackstone s $2.2 billion in 2013 acquisitions dominating equity fund activity. Canada: $4.6B Netherlands: $92M U.K.: $455M Germany: $245M Luxembourg: $37M Switzerland: $850M Turkey: $52M Spain: $17M Japan: $15M Greece: $23M Kuwait: $273M Israel: $549M Bahrain: $379M Taiwan: $36M Thailand: $115M Australia: $24M Argentina: $15M Source: Jones Lang LaSalle, Real Capital Analytics Note: Includes multifamily sales transactions greater than $5M since 2012

6 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily 2013 investment landscape - dashboard Historic cap rates - primary and secondary markets 2013 and 2012 metro sales volume. Data labels display 2013 total 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% Primary market cap rate Secondary market cap rate While cap rates continued to compress in primary markets, the mid-year rise in interest rates caused the average cap rates in secondary metros to rise 10 basis points value/demand indicators by building vintage Average price per square foot $450 Bubble size represents # of buildings sold $400 $350 $300 $250 $200 $150 $100 $50 $0 $0 $50 $100 $150 $200 $250 $300 $350 Average price per unit (thousands) < Typically located in the urban core of primary markets, pre-1960s vintage assets were in high demand through Top multifamily buyers of 2013 Top multifamily sellers of 2013 Company Volume Company Volume Equity Residential $9.0B Lehman Bros. $15.5B AvalonBay $6.0B Equity Residential $4.4B Mid-America $2.3B GE Capital $2.2B Blackstone $2.2B Colonial Prop. $2.2B Goldman Sachs $1.6B AvalonBay $1.2B New York Wash-NoVa-MD Los Angeles Dallas Houston San Francisco Atlanta Phoenix Seattle Boston Orlando Denver Austin Chicago San Diego Raleigh-Durham South Florida Charlotte Tampa Inland Empire No NJ Las Vegas San Antonio Philadelphia Baltimore Portland Nashville Jacksonville Orange County Memphis Richmond $14.1 $9.7 $7.0 $5.6 $5.1 $4.9 $4.0 $3.1 $3.1 $2.4 $2.3 $2.2 $2.2 $2.1 $2.0 $1.8 $1.8 $1.7 $1.3 $1.3 $1.2 $1.2 $1.1 $1.1 $1.0 $1.0 $1.0 $0.8 $0.7 $0.3 $0.2 $0 $5 $10 $15 Billions Source: Real Capital Analytics (sales over $5M), Jones Lang LaSalle Research. All sales volumes are based on preliminary 2013 estimates.

7 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily 2013 investment landscape Current lending environment: the flood gates are open The potential winding down of the GSEs did not have an impact on 2013 s record breaking sales volumes. Preliminary reports indicate that the agencies continued to dominate multifamily lending activity and maintained close to their 2012 market share of 40.0 percent, offering as much as 80.0 percent leverage, with tier-3 spreads averaging 225 basis points in the fourth quarter. While the agencies have maintained a dominant foothold in higher leveraged transactions, Life Insurance Companies have been taking market share by being particularly competitive for lower leveraged deals (65.0 percent or less); their floating rate programs in particular have been very attractive to borrowers. The volatile interest rate environment of recent months has had an impact on asset valuation, primarily for assets located in suburban and secondary markets. The threat of the fed pulling back their bond buying program drove treasury rates up at mid-year and agency spreads initially reacted in tandem and eventually flattened. Between May and July, tier- 3 agency rates rose upward of 125 basis points and periodically reached those heights through early September. During that period, demand for core product remained strong enough to keep cap rates compressed despite the rise in rates. In fact, new value benchmarks were reached in many markets, particularly in the urban core of gateway cities. However, for assets located in suburban and secondary markets, investors shifted strategies and reportedly began exploring and underwriting shorter term debt options. Values for these assets reportedly decreased to the tune of a 10 to 30 basis point increase in cap rate. As of January 10, 2014, tier-3 agency rates remained 100 basis points higher, on average, than they were on May 1, We anticipate that the recent trend of rising interest rates will continue as economic conditions strengthen and the Federal Reserve begins to withdraw from its bond buying program; however, we do anticipate that the strong fundamentals surrounding the property sector will continue to keep buyer yield expectations tight, particularly for core product. Agency spreads and rates 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Source: Fannie Mae, Jones Lang LaSalle 5yr spread 7yr spread 10yr spread 5yr Rate 7yr Rate 10yr Rate The future of the GSEs We expect that 2014 will be another strong year for multifamily investment. Assets located in secondary markets and value-add opportunities will be in higher demand as the search for yield becomes increasingly difficult. In addition to existing demand, recent banking regulations set by the Volcker Rule appear to support various types of real estate investment, which will bode well for the multifamily sector. While the full implications of the passing of the Volcker Rule have yet to surface, it has come to light that it will allow banks to invest in various vehicles associated with real estate. For example, regulators excluded many real estate loans from the tough restrictions on investment funds, allowing investment banks to continue making concentrated bets with their own capital. Immediately following the passing of the Volcker Rule the Wall Street Journal reported that Goldman Sachs is raising a new fund, to which it will contribute 20.0 percent in capital, for investments in commercial real estate-backed loans. Reports indicate that Goldman has raised more than $1.0 billion for the new fund and aims to boost the total to $2.0 billion. In addition, banks can still engage in proprietary trading of bonds backed by government entities, such as Fannie Mae and Freddie Mac, which could shed support for keeping the agencies multifamily business in-tact over the long term. Lastly, given that 2014 is an election year and the fact that the GSE s combined annual earnings will be approximately $40 to $50 billion, it will likely be difficult to materially change their business practices. Hence, the multifamily lending environment will remain favorable and supportive of increased investment within the sector.

8 Jones Lang LaSalle United States Multifamily Outlook Year-End United States - Multifamily clock Washington, DC Boston, New York, San Francisco Baltimore, Chicago, Northern New Jersey, Philadelphia Austin, Richmond, San Jose, Seattle, United States Charlotte, Dallas, Denver, Houston, Los Angeles, Nashville, Portland Atlanta, Inland Empire, Orange County, San Diego, South Florida Peaking market Falling market Las Vegas, Orlando, Raleigh-Durham, Tampa Bay Rising market Bottoming market Jacksonville, Memphis Clock description This diagram illustrates where Jones Lang LaSalle estimates each prime multifamily market is within its individual rental cycle at the end of the quarter. Markets can move around the clock at different speeds and directions. The diagram is a convenient method of comparing the relative position of markets in their rental cycle. The position is not necessarily representative of investment or development market prospects. The position refers to prime face rental values positions All markets experienced rent growth in 2013, averaging 3.0 percent across the country. On a year-over-year basis, Seattle, Nashville, San Francisco, Denver and Houston have led, respectfully, with annual rent growth between 4.5 and 7.0 percent Seattle continued to lead in rent growth with 7.0 percent growth over the last 12 months. Across the U.S., occupancy increased 50 basis points over the last 12 months. New York, San Diego, San Jose and Portland are the nation s tightest markets, respectively, with occupancy at or above 97.0 percent. Seattle, Austin, New York, Charlotte, Denver and Nashville have seen the largest increase in inventory, more than 1.5 percent, over the last 12 months. The strongest growth within fundamentals over the last 12 months has occurred within the Sunbelt and specifically in Las Vegas, Jacksonville, Houston, Phoenix and Tampa, respectively.

9 Jones Lang LaSalle United States Multifamily Outlook Year-End multifamily vacancy across the United States Seattle Boston San Francisco San Jose Los Angeles Orange County San Diego I.E. Las Vegas Phoenix Dallas Memphis Chicago New York Northern NJ Philadelphia Baltimore Washington, DC Richmond-Tidewater Raleigh Charlotte Atlanta Nashville Houston Tampa Jacksonville Orlando South FL Vacancy meter 7.0% + 6.0% to 6.9% 4.0% to 5.9% 3.0% to 3.9% < 3.0% Top YOY rent growth Top YOY occupancy growth Seattle 7.0% Las Vegas 1.4% Nashville 4.8% Jacksonville 1.4% San Fran-San Jose- Oakland 4.8% Houston 1.2% Denver 4.5% Phoenix 1.1% Houston 4.5% Tampa 1.1% Portland 4.2% Memphis 1.1% Austin 4.1% Atlanta 1.0% Boston 3.9% Orlando 0.9% Baltimore 3.6% San Antonio 0.8% Orlando 3.6% Inland Empire 0.8% Source: REIS, Jones Lang LaSalle Research

10 Jones Lang LaSalle United States Multifamily Outlook Year-End United States Multifamily metrics Market Units under construction % under construction Occupancy YOY% change in occupancy Effective rent YOY% change in effective rent 12-month $ volume % Change YOY $ vol. Atlanta 8, % 93.8% 1.0% $ % $4,000,309, % Austin 11, % 95.6% -0.1% $ % $2,156,975, % Baltimore 4, % 96.4% 0.5% $1, % $1,033,814, % Boston 6, % 96.2% 0.0% $1, % $2,435,851, % Charlotte 7, % 95.2% 0.6% $ % $1,730,622, % Chicago 5, % 96.3% 0.3% $1, % $2,125,721, % Dallas-Ft. Worth 23, % 94.9% 0.7% $ % $5,606,228, % Denver 10, % 96.3% 0.3% $ % $2,212,286, % Houston 18, % 93.6% 1.2% $ % $5,116,920, % Inland Empire 1, % 96.5% 0.8% $1, % $1,315,045, % Jacksonville 3, % 93.2% 1.4% $ % $821,737, % Las Vegas 1, % 94.5% 1.4% $ % $1,206,490, % Los Angeles 14, % 96.8% 0.3% $1, % $6,984,004, % Memphis % 91.8% 1.1% $ % $264,567, % Nashville 5, % 95.7% 0.3% $ % $975,459, % New York 8, % 97.6% -0.2% $3, % $14,116,118, % Northern New Jersey 6, % 96.5% 0.3% $1, % $1,214,429, % Orange County 3, % 96.9% 0.4% $1, % $714,450, % Orlando 8, % 94.9% 0.9% $ % $2,286,938, % Philadelphia 3, % 96.4% 0.3% $1, % $1,082,178, % Phoenix 4, % 94.6% 1.1% $ % $3,117,401, % Portland 4, % 97.0% 0.4% $ % $1,019,387, % Raleigh-Durham 10, % 96.1% 0.7% $ % $1,818,387, % Richmond 3, % 95.3% 0.4% $ % $208,387, % San Antonio 10, % 94.4% 0.8% $ % $1,086,472, % San Diego 3, % 97.7% 0.7% $1, % $1,969,832, % San Fran-San Jose-Oakland 14, % 97.1% 0.2% $1, % $4,927,530, % Seattle 7, % 95.9% 0.3% $1, % $3,096,264, % South Florida 11, % 95.7% 0.2% $1, % $1,787,713, % Tampa 5, % 95.5% 1.1% $ % $1,332,080, % Wash-NoVa-MD 22, % 96.1% 0.1% $1, % $9,741,650, % United States 317, % 95.8% 0.5% $1, % $105,412,173, % Source: REIS, U.S. Census Bureau, Real Capital Analytics, Jones Lang LaSalle Research. All sales volumes are based on preliminary 2013 estimates

11 Jones Lang LaSalle United States Multifamily Outlook Year-End We expect multifamily performance to remain strong for the foreseeable future as economic expansion fuels household formation and helps mitigate the threat of over supply.

12 About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management. For further information, visit About Jones Lang LaSalle Research Jones Lang LaSalle s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. Jubeen Vaghefi International Director National Multifamily Practice Leader Jubeen.Vaghefi@am.jll.com David Young Managing Director West Coast Leader David.Young@am.jll.com Brady Titcomb Research Director United States Multifamily Brady.Titcomb@am.jll.com Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document.