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
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
In the latest sign that ultraluxury apartment living is spreading far beyond New York and San Francisco, a glass-sheathed tower changed hands in Chicago last week in a deal that is shattering records.
The 60-story building, named OneEleven, was sold for $328.2 million, or $651,000 per unit, the highest price ever paid per unit for an apartment building of more than 50 units in Chicago. The 504-unit building, located in Chicago’s downtown Loop neighborhood, was sold by a unit of New York-based Related Cos. and was acquired by Heitman, a global real-estate investment-management firm based in Chicago.
The purchase price “is emblematic of the seemingly insatiable demand for high-quality, large real-estate assets in primary markets,” said Ben Thypin, director of market analysis for Real Capital Analytics, a commercial-real-estate data and analysis firm in New York.
The bidding for Atlanta-based Gables Residential and its $3 billion Class-A Sun Belt portfolio with management and development capabilities is headed to the wire, with final bids due this week, according to a recent report from Real Estate Alert.
The report also identified a group of finalists, including current owner New York-based Clarion Partners; Denver-based REIT Aimco; a joint venture between Charleston, S.C.-based Greystar and Newport Beach, Calif.-based Pimco; pension fund CalPERS and Boston-based GID Investments of Boston; and a team of DRA Advisors of New York and the Abu Dhabi Investment Authority.
“Most of the buyers are similar to the old Clarion joint venture—a real estate manager plus an institutional investor,” said Ben Thypin, director of market analysis at New York-based Real Capital Analytics.
Multifamily REITs have lots of money from eager Wall Street investors, but it’s hard to find good opportunities to buy properties in core markets. Apartment REITs have been net sellers overall in 2014, though by a very small margin.
“They are looking to optimize their portfolios,” says Ben Thypin, director of market analysis for Real Capital Analytics (RCA), based in New York City. “A common strategy has been to shed non-core and build their assets in core markets.”
Read More: http://nreionline.com/reits/reits-struggle-buy-apartments
A Chicago landlord is selling a vintage downtown apartment building for $74 million, more than twice what it paid for the property in 2012.
Waterton Associates LLC is selling the Seneca, a 254-unit building in Streeterville, to Emmes Asset Management, a New York-based real estate investor, according to an Emmes representative. Emmes is paying $74 million for the 16-story building at 200 E. Chestnut St., said the company representative, who asked not to be identified and declined to discuss the transaction.
The sale, which is expected to close by year-end, will generate a big return for Waterton, which bought the Seneca for $35.6 million in March 2012, when it was a hotel-apartment building. The Chicago-based firm spent about $6 million renovating the property and converting it to a pure apartment building.
A Waterton spokesman declined to comment. An executive in the Chicago office of HFF, the brokerage hire to sell the property, also declined to comment.
The sale provides yet another illustration of how investors who bought downtown apartments a few years ago are reaping huge gains by selling today. Amid high occupancies and rents and low interest rates, investors are paying record prices for apartments in Chicago. They're betting that the good times will continue even as competition heats up amid a building boom that will add thousands of units to the downtown market over the next couple years.
The Seneca is the first Chicago acquisition for Emmes, which owns a couple of shopping centers in Peoria. The firm is one of several from New York that are taking a closer look at real estate in Chicago, where prices are still attractive relative to coastal cities like its hometown and San Francisco. New York-based Georgetown Co., for instance, recently paid $215 million for K2, a 496-unit apartment building in the Fulton River District.
“New York and San Francisco are too crazy,” said Ben Thypin, director of market analysis at Real Capital Analytics, a Chicago-based research firm. Investors “want a market that is liquid and a reliable store of value, and Chicago's playing that role right now.”
Read More: http://www.chicagobusiness.com/realestate/20141126/CRED03/141129860/streeterville-apartments-to-fetch-74-million
For the second straight quarter, apartment sales showed robust growth as the transaction market continues to dust off a mediocre 2013. Apartment sales hit $27.5 billion in the third quarter, a 28 percent increase compared to the third quarter of 2013, according to a report from New York-based research firm Real Capital Analytics (RCA). The quarter’s performance was driven by a staggering $22 billion in sales of individual properties, one of the highest quarterly figures on record. Three of those trades occurred in New York.“In New York, there has been bunch of big trades of large older buildings that are undergoing condo conversion or at least renovation,” says Ben Thypin, director of market analysis at RCA.
In the third quarter, portfolio sales actually dipped almost $500 million compared to the third quarter of 2013.
“We’ve had so many portfolios sell over the past few years that it’s unlikely any of them are going to be resold during the next few years,” Thypin says. “There are only so many portfolios out there.”
Read More: http://www.multifamilyexecutive.com/business-finance/apartment-sales-jump-28-in-the-third-quarter_o
The city’s affordable housing finance unit is planning for the first time to issue bonds that will be packaged as commercial mortgage backed securities. This inaugural group of loans pegged at $550 million will be secured by the market-rate residential high-rise 8 Spruce Street, known as New York by Gehry, located in Lower Manhattan.
The Housing Development Corporation, which generally focuses on financing affordable housing for the city, will issue the bonds, which will then be packaged and divided into different risk levels and sold into the CMBS market. Wells Fargo will be the loan servicer.
Sources within the city agency said there were special circumstances that made the CMBS structure useful here, and it was not expected to become a common practice. This bond deal is similar to two the state’s New York Liberty Development Corporation structured to finance 1 Bryant Park and 7 World Trade Center, but this is the first for the city.
Nonetheless, insiders said it showed an inventive use of market tools.
“It demonstrates HDC’s willingness to get creative on structuring in order to diversify how HDC-financed projects are capitalized,” Ben Thypin, director of market analysis with data firm Real Capital Analytics, said.
New York City has a new most expensive apartment for sale: $130 million. And it’s not even built yet.
The 12,394-square-foot triplex topping a new luxury tower at 520 Park Avenue would be the most expensive apartment price tag New York has ever seen, surpassing the $118.5 million asking price for three separate units currently being marketed together in Battery City’s Ritz-Carlton tower.
The 54-story condominium tower at 520 Park Avenue is scheduled to begin rising by February 2015, says Arthur Zeckendorf of Zeckendorf Development. Set on 60th Street two blocks east of Central Park, 520 Park Avenue is designed to rival another, wildly successful Zeckendorf project: 15 Central Park West, now a billionaire enclave and one of New York’s most prestigious addresses.
“Clearly 520 Park is the 15 Central Park West of the Upper East Side,” Arthur Zeckendorf told Forbes. “Both buildings were designed to be sister buildings.” He described the penthouse at 520 Park as having 15-foot ceilings, with old world finishes and modern amenities.
The luxury condos at 15 Central Park West sold out in four years to buyers including Goldman Sachs CEO Lloyd Blankfein, hedge fund billionaire Daniel Loeb, Spanx billionaire Sarah Blakely, the musician Sting, and actor Denzel Washington. The tower even inspired a book:House of Outrageous Fortune, by Michael Gross, which documented a supposed war for one of its penthouses between Loeb and activist investor Carl Icahn.
The Zeckendorfs are hoping for another home run, but there is a real question of how much more luxury the New York City market can take. Several other high-rise residential luxury developments are underway just south and east of Central Park, including Extell’s One57 tower at 57th Street, Harry Macklowe’s 432 Park Avenue, and the super-skinny 111 West 57th Street, which will be just 60 feet wide. The first of the super towers, One57 quickly sold half its apartments in 2012, but now stands at only about 70% sold, sources tell Forbes.
“My gut feeling is that there’s only so much demand for this type of product,” says Ben Thypin, director of market analysis at Real Capital Analytics. “One 57 is seeing trickling demand.”
Read More: http://www.forbes.com/sites/erincarlyle/2014/09/24/manhattans-new-most-expensive-listing-a-130-million-park-avenue-penthouse/
It’s been a common question as the apartment recovery matured: When will cap rates stop falling in the so-called “sexy six” markets of New York, Boston, Washington, Los Angeles, Northern California, and Seattle?
Well, if you guessed the first half of 2014, you were wrong.
In its “Apartment Mid-Year Review,” New York-based firm Real Capital Analytics (RCA) reported that cap rates fell to 4.4 percent in the second quarter, equaling the historic low established in the second half of 2006. For mid- and high-rise properties, yields came in at 3.9 percent after they blew past previous lows in 2013. So much for fears cap rates were getting too low in the gateway markets.
“There is so much capital pouring into those big six markets that even if many investors are concerned about valuations, there are plenty of investors still competing fiercely for those properties that the investors with concerns have passed on,” says Ben Thypin, director of market analysis at RCA.
Read More: http://www.multifamilyexecutive.com/dispositions-and-transactions/cap-rates-fall-to-historic-lows-as-investors-chase-yield-far-afield_o.aspx?dfpzone=home
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.