More renters meant more profits for multifamily REITs in 2014, which provided tremendous returns to their investors over the last year.
“This is clearly a solid time for the whole multifamily REIT sector,” says Calvin Schnure, an economist and senior vice president of research and economic analysis for the National Association of Real Estate Investment Trusts (NAREIT).
The outlook for REITs is also good, with demand expected to stay strong for the foreseeable future, according to NAREIT, improving demand from investors.
REITs had a great start to the new year
Apartment REITs delivered a 6.96 percent return to investors in January, including a 2.88 percent return from dividends, according to NAREIT. That’s a very high return for just one month—for many real estate investments, about 7 percent would be an acceptable return for an entire year. In comparison, the S&P 500 fell 3.0 percent in January.
Investors in apartment REITs may be getting used to very strong returns after receiving a 39.62 percent total return in 2014, including a dividend yield of 2.88 percent. That’s compared to a 14.22 percent for the S&P 500. Apartment REITs also did better than all-equity REITs overall in 2014, which earned a total return of just 28.03 percent.
Strong stock prices reflect strong performance from the REITs. “We’ve seen good, solid growth in earnings,” says Schnure.
Demand is high for apartments, and Schnure expects REITs to benefit from demand for apartments that is stronger than supply of apartments for the foreseeable future. The number of rental households surged by a record 2 million units over the past four quarters as the acceleration in job growth begins to unlock pent-up demand for rental housing. “This is the biggest increase in rental occupancy rates since the Census Bureau began tracking data in 1965,” says Schnure.
Schnure estimates there are 3 million or more “shadow households” in the form of people doubled-up with roommates or family members. These individuals are likely to search for their own apartment as they get first jobs, better jobs or raises. REITs are in a strong position to capture these new renters. “They tend to own investment properties in gateway cities— that’s where the demand is,” says Schnure.
Developers are building new units, but not enough to hurt REITs. “I am not at all worried about new supply,” says Schnure. “This growth in rental demand is likely to outpace the new supply of apartments in the pipeline, supporting the outlook for multifamily housing stocks.” Developers are now building new apartments at a rate of 300,000 to 350,000 a year. “That is not keeping up with demand,” Schnure notes.
Affordability is the biggest thing holding back apartment REITs—and the broader apartment market. “The number of renters paying 30 percent or more of their income on rent is high,” says Schnure. “That is putting a cap on rent growth, which puts a cap on earnings growth for apartment REITs.”
Nationwide, rents continued to grow in the fourth quarter, but at a slower pace than in prior years. “With the job market picking up, normally rent growth would be several percentage points high than it is right now,” says Schnure.
REITs turn to secondary marketsREITs continue to deploy their available capital to buy up properties and grow their portfolios, experts say. However, as economic recovery spreads, REITs have become more interested in secondary markets.
“There seems to have been a shift back into secondary markets after being very focused on major markets during 2013,” says Ben Carlos Thypin, director of market analysis for Real Capital Analytics. REITs made 35.91 percent of their purchases in secondary markets in 2014, up from 24.05 percent in 2013. With the exception of 2012, that’s the biggest concentration on secondary markets that the REITs have shown since 2009. Before the crash, REITs regularly made well over a third of their purchases in secondary markets.
“It makes sense,” says Schnure. “Capitalization rates are low in secondary markets. We have also seen recovery spreading to secondary markets in 2014 from gateway cities.”
Read More: http://nreionline.com/multifamily/apartment-reits-grow-stronger
Blackstone Group LP agreed to buy a roughly 50 percent stake in six New York-area office properties from RXR Realty, its largest acquisition yet in an expansion toward purchasing stable, well-leased real estate.
RXR plans to sell Blackstone part ownership in the 5.3 million-square-foot (492,000-square-meter) portfolio, valued at $4 billion, the companies said in a statement Wednesday. The deal involves Manhattan’s Starrett-Lehigh building; 1330, 620 and 1166 Avenue of the Americas; 340 Madison Ave.; and University Square Campus near Princeton, New Jersey.
RXR, a Uniondale, New York-based real estate company run by Scott Rechler, said it will continue to operate the properties.
RXR is “uniquely positioned to unlock the incremental upside in the portfolio,” Jon Gray, global head of real estate for Blackstone, said in the statement. “We look forward to finding more opportunities to work on together in the future.”
Blackstone, the world’s biggest private-equity investor in real estate, is raising a new fund to buy core-plus real estate, or prime properties that may require relatively minor leasing or renovations to boost returns. Chairman and Chief Executive Officer Stephen Schwarzman said last year the company could have $100 billion of such properties under management over the next decade.
For RXR, the deal offers the opportunity to “harvest value” from Manhattan properties acquired since 2009, as the market recovered from the global financial crisis, Rechler said in an interview. Prices for office buildings in New York have surpassed the prior peak, propelled by demand from both domestic and foreign investors seeking safety and steady growth.
“It’s a way of taking chips off the table, and allows us to invest in new opportunities to create value,” Rechler said. “That’s always been our mantra.”
RXR DealsNew York office rents and property values should continue to rise, Rechler said.
“If I thought we had hit the top, we would have sold 100 percent of our interests and we wouldn’t be buying 32 Old Slip, 61 Broadway, 530 Fifth,” he said, referring to recent RXR transactions.
The transaction is the first large-scale recapitalization of the RXR portfolio since the company was created in 2007, following the sale of Rechler’s Reckson Associates Realty Corp. to SL Green Realty Corp., he said.
Deal CompromiseThe deal with Blackstone is “something of a hedge” by RXR, said Ben Carlos Thypin, director of market analysis at New York-based property-research firm Real Capital Analytics Inc.
“It’s a compromise between selling outright and calling a top, and continuing to ride things out,” he said. “It’s the best of both worlds.”
Read More: http://www.bloomberg.com/news/articles/2015-02-11/blackstone-to-buy-stake-in-new-york-area-rxr-buildings
After paying a record price for a Chicago hotel in 2011, Sam Zell is poised to break that record with the sale of the same property, the Waldorf Astoria in the Gold Coast.
With five-star hotels fetching lofty prices, the billionaire investor has decided to cash out of the 188-room property at 11 E. Walton St., owned by a Zell fund. He has hired JLL the sell the hotel, among the most expensive in the city, which will go up for sale in the next few months, according to people familiar with his plans.
The Zell fund bought the hotel in November 2011, when it was called the Elysian, for $95 million, or $505,000 per room, a record per-room price for Chicago. Though it's unclear how much the property will fetch this time around, it almost certainly will sell for much more than that today, given how much hotel values have jumped the past three years.
Trophy hotels like the Waldorf have attracted a lot of interest from foreign investors, especially those from China, which are more concerned with preserving their wealth than generating a high return. Anbang Insurance Group of China paid $1.95 billion, or $1.4 million per room, for the Waldorf Astoria in New York. And this month, Greenwich, Conn.-based Starwood Capital Group agreed to sell the luxury Baccarat Hotel in New York to Sunshine Insurance Group of China for $230 million, or $2 million per room, a U.S. record.
“A foreign investor looking for a secure place to put their money is a likely candidate” to buy the Chicago Waldorf, said Ben Thypin, director of market analysis at Real Capital Analytics, a New York-based research firm.
Read More: http://www.chicagobusiness.com/realestate/20150211/CRED03/150219968/-zell-set-to-cash-out-of-waldorf-astoria
Prices for apartment properties rose again in 2014 as investors bought a larger volume of properties than they did even in 2007—the biggest year of the last real estate boom for apartments.
“Investor demand for multifamily has not wavered at all,” says David Young, managing director for JLL.
The market for apartment properties has matured well past the recovery from the Great Recession. Investors are looking beyond the safest core markets to find higher yields from their investment. They are also looking much more deeply into the individual details of the properties they buy—from the local employment outlook to parking in the neighborhood.
“When we are out there in a go-go economy, we tend to get analytical,” says Young. So far, this analysis shows strong fundamental demand for many properties. “We feel that it is very sustainable,” says Young of the demand for apartments.
These strong fundamentals continue to draw new buyers. Investors bought and sold a total of $112.0 billion of apartment properties in 2014, up 9 percent from 2013, according to data from Real Capital Analytics, based in New York City. That record-breaking volume of sales is 7 percent more than the volume traded in 2007.
In the years since the crash, the volume of the apartment sales has grown tremendously, but the number of sales is unlikely to grow forever. The rate of growth has slowed every year. The volume of apartment properties sold doubled in 2010, rose by about one-third in 2011, increase by more than a quarter in 2012 and rose by roughly a fifth in 2013. In 2014, the increase was just over 9 percent.
That’s partly because the apartment industry is later in the real estate cycle than most other property types. “The rate of growth has slowed for a number of reasons including a lack of sufficient quality product in the market, limits on agency lending, and the ongoing decline in yields,” says Ben Thypin, director of market analysis for Real Capital Analytics.
Read More: http://nreionline.com/multifamily/record-sales-volume-and-high-prices-apartments-2014
Barry Sternlicht’s Starwood Capital Group agreed to sell New York’s luxury Baccarat Hotel to an affiliate of China’s Sunshine Insurance Group.
The 114-room property on Manhattan’s West 53rd Street is scheduled to open next month, Starwood said in a statement Monday. The Beijing-based insurer agreed to pay $230 million for the hotel, which occupies the first 12 floors of the 50-story Baccarat Hotel & Residences project, the Wall Street Journal reported on Feb. 6.
Chinese companies have accelerated real estate investments in global gateway cities such as New York. In October, Beijing’s Anbang Insurance Group Co. agreed to pay $1.95 billion for the Waldorf-Astoria Hotel on Park Avenue, an Art Deco landmark and one of the city’s signature properties. It would be highest price paid by a Chinese buyer for a standing U.S. building, Kevin Mallory, global head of hotels for CBRE Group Inc., said when the deal was announced.
That the buyer for the Baccarat “is yet another Chinese insurer could signal an increase in the pace of Chinese institutional capital looking abroad for diversification and safety,” said Ben Carlos Thypin, director of market analysis at property-research firm Real Capital Analytics Inc.
At about $2 million per room, the price for the Baccarat would be the second-highest on that basis for a New York hotel, behind the $2.5 million per room paid for a 75 percent stake in the Plaza Hotel in 2012, Thypin said. That price included the Plaza’s retail space, he said.
Ben Carlos Thypin
I am currently the co-founder of Quantierra, the world's first data driven real estate brokerage and investment manager. In my former life as Director of Market Analysis at Real Capital Analytics, I worked with press outlets large and small to provide them with great data and insightful commentary. Here are some of the results of this collaboration. For the rest, please check out the News Archive.