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CRE Finance World, Summer 2012

Investors Slowing Down, But Still Following the Multifamily Road With such significant drops in homeownership, 2012 is expected to Earnings Remain Robust be a peak year for rent growth. MPF Research reports that annual Along with dropping sales and overbuilding concerns, the factors rents increased 4.6% over the last four quarters and expects the most often pointed to as a sign of waning investor interest are growth pace to remain at that level throughout the next year. Rev- the declining cap rates and rising unit costs. The truth is that both enues are rising alongside these rent increases, with the revenues have remained relatively steady in recent quarters. At 6.3% during growing 5.8% for the year ending first quarter 2012. Expectations the first quarter, the cap rates have indeed decreased compared are for revenue growth to remain at about 5% this year, and it’s not to the same time last year, but that change is not as significant as just for Class A properties. For example, in Dallas annual revenue many make it seem. While the cap rate dropped 20 basis points growth was actually higher in pre-1990s vintage properties (6.3%) since last year, history suggests that it should not fluctuate much than post-90s vintage properties (5.4%). from that point as cap rates have remained relatively steady over the past decade. The average cap rate since 2001 has remained Still Room for Development at about 6.8% — today’s rate is just half a percentage point below While demand for apartment units is currently quite high, some real that. Fears about increasing prices may also be unfounded. Ac- estate professionals question the recent wave of new multifamily cording to Real Capital Analytics, the average price per unit was development, raising concerns about the potential for overbuilding. $103 for the first quarter of 2012, which is actually a decline from In actuality, conservativeness by developers and lenders alike has the two previous quarters. kept new construction to a minimum in the last few years, which has helped to keep apartment vacancy rates low. In 2011, only Chart 1 100,000 new apartment units were completed, about one-third of Cap Rates the completion averaged during the last 10 to 15 years. At the end of the first quarter of this year, roughly 130,000 units were under construction in the 100 largest metropolitan areas, and develop- ment activity is expected to spike as the year continues. Even with such growth, most industry experts do not think we are in any real danger of overbuilding in the short term. Willett of MPF Research noted that prior to the recession, an average of 300,000 new units annually was considered standard for the industry. “We’re only now approaching the halfway point for normal building levels, and even at the end of the year we should just be two-thirds to three-fourths of the way there.” Research from the U.S. Monetary Policy Forum, supports these findings. According to a February report issued by the group, rental Source: Real Capital Analytics housing stock is far below where it needs to be to meet a demand that is only increasing. At the time of the report, there were 43.7 Overall, cap rates for both garden-style and mid- to high-rise prop- million rental units in the U.S., of which only 4.1 million were vacant. erties remained relatively steady, averaging just 10 basis points With multifamily construction currently running at about 100,000- below their respective one-year average. However, when we look plus apartment completions per year, new developments will con- more closely at these two types of properties, there is a disparity tinue to be outpaced by demand for some time. Especially since in how the cap rates have changed over the year. As urban-area the majority of these new developments have been planned or are properties have become more popular post-recession, the price being constructed in top-performing, high-demand submarkets, per unit for mid-to-high rise properties has been pushed up. As a where vacancy rates are even lower than average. result of this high demand, the cap rates for urban properties are CRE Finance World Summer 2012 42


CRE Finance World, Summer 2012
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