Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/206598
Rising interest rates may prompt apartment buyers to modify expectations and strategies, but these factors haven't diminished their desire for multifamily properties — at least not yet. Te voracious demand that has fueled transaction activity and capitalization rate compression across the multifamily sector in recent years appears steadfast in many markets. "We are seeing sales volume that is equal to or slightly greater than the same time last year," says John W. Stone, CCIM, principal, managing director of Multifamily Services/Foreign Investments at Colliers Arnold in Clearwater, Fla. "Tere is no shortage of bidders. Tere is no shortage of cash. Tere is no shortage of want." National apartment sales activity surged during the frst half of the year with $49.4 billion in properties trading hands — a 55 percent increase compared to the same period a year ago, according to Real Capital Analytics. However, sales volume spiked during the frst quarter due to a large Archstone portfolio sale. Extract that sale from the mix, and apartment sales rose a more modest 9 percent, according to RCA. Multifamily has been commercial real estate's strongest magnet, drawing a wide range of investors during the past several years. Te sector was the frst to recover from the recession and the combination of solid occupancies, strong rent growth, and available fnancing have attracted investors seeking properties that deliver steady cash fow. Yet industry experts are beginning to question whether that demand is sustainable in light of rising interest rates and lower expectations for rent growth. Some institutional buyers have already pulled back due to the cap rate compression that is occurring among core properties in top markets. "I think 2014 will be a slower year because those higher interest rates are going to impose themselves on the deal structure sooner or later," Stone says. "You can't keep lowering your yield requirements and think somehow you are going to survive." Yet, for now, the demand to buy apartment properties remains robust. Competition for deals has some buyers willing to adjust return expectations and price higher capital costs into a purchase in order to close deals. "Nine out of 10 buyers who come to the Tampa Bay market looking to buy apartments go home without anything," Stone says. So, buyers are willing to absorb higher capital costs in order to clinch acquisitions in a still competitive market, he adds. CCIM.com Solid Fundamentals Spur Demand Demand remains strong across the board from the relative safe haven of stabilized class A properties in major metros to value-add and opportunistic buys among class B and class C properties where investors see more upside to boost rents and realize higher yields. Tat continued appetite for apartments is not surprising to some industry veterans. "Tere is almost an instatiable drive for yield since alternative yields are so low, and the dynamics of the apartment market are still strong," says George Tikijian III, CCIM, president of Tikijian Associates, a multihousing investment advisory frm in Indianapolis. Tat demand is supported by very accessible fnancing and strong underlying fundamentals. "I think investors like the stability of multifamily in comparison to the other asset types," agrees Tomas McConnell, CCIM, director of Marcus & Millichap's National Multi Housing Group in Elmwood Park, N.J. National multifamily occupancy at midyear remained steady at 4.3 percent. Te accelerated pace of rent growth that the industry has enjoyed in recent years has moderated, but not enough to scare of buyers. Asking rents rose to $1,110 per unit in second quarter — a 2.3 percent year-over-year gain, according to Reis. While multifamily development is on the rise, it remains relatively controlled and focused mainly in areas where there is high demand and high growth. In addition, recovery in the single-family housing market is not expected to create a drag on performance in the apartment market going forward. Historically, when the single-family market has been healthy, the multifamily market has been healthy for the same reasons. Job growth generally sparks new household creation — for both home ownership and demand for rentals. Te apartment market in San Diego is "as good as it gets," says Terry Moore, CCIM, director and principal at ACI Commercial in San Diego. San Diego's stable rental market is attractive due to its diverse economy and barriers to entry for new development, including restrictive zoning and high fees. "Slow growth forces and NIMBYism have combined so that in 28 of the last 30 years our county has not built enough new apartments to satisfy demand," Moore says. Apartment vacancies in San Diego are below 5 percent, which is standard for the area, and rental increases are higher than the infation rate. Despite those attractive qualities, San Diego is a tough market to enter for outside investors. Ninety percent of November | December | 2013 27