In 2018 IPO Brokered the Sale of 91 Apartment Communities
Let the Good Times Roll…There is so much good news pouring out of the multifamily industry that it becomes a challenge to sort through all the favorable metrics, and to decide which ones to focus on when reviewing the past and forecasting the future. From low vacancy rates, strong rent growth, controlled delivery of new units coupled with strong absorption, limited pressure from single-family development, to favorable demographic and household formation demand, there are abundant topics that all warrant extensive discussion, yet time and space forbids the depth of dialogue we would prefer to cover in our annual review and forecast.
We condense a significant amount of research into the critical takeaways for you in this concise newsletter in order to provide these benefits for you to incorporate into your multifamily investment decisions. IPO focused our investigation on transactional volume, sales price, cap rate, effective rent growth, occupancy rate, new housing supply, interest rate, and housing choice, both on the national and local levels. At the time this was written, 2018 year-end data had not fully posted, so much of the analyses were based on outcomes and trends through Q3. What follows is IPO’s distillation of an assortment of metrics – sales transactions, and rent or construction data – that we feel demonstrate the most important takeaways from 2018, and are indicators for 2019 and beyond. Virtually every measure we see shows the operating fundamentals and demand for multifamily will be very strong for the foreseeable future.
Apartment occupancy continues to be very strong, with a national vacancy rate of around 5%, and a local vacancy rate of around 5.4%. As with recent years, vacancy rates are lowest for Class C product, at 4 % nationwide, versus Class A product, at around 8%. Locally we are seeing a meaningful number of new units (5,600 units in Metro Detroit in 2018) delivered into the market and they are being absorbed quickly. The local new construction is virtually all Class A or Senior Product, thus Workforce Housing is not threatened by the additional supply. Rent growth has clearly cooled off from its peak of 5% in 2015, but still remains strong. The national average rent growth was 2.6% in 2018, a marginal increase from the 2.4% posted in 2017. Local rent growth was stronger, clocking in at 3.7%, earning Metro Detroit an impressive spot of 12th on the list of Metros for Rent Growth, surpassing many high-profile apartment investment metros. Rents in Metro Detroit averaged $948 per unit or $1.04 PSF, compared to the national average of $1,634, or $1.91 PSF.
The supply/demand perspective offers perhaps the most significant insight into where the apartment business is now, and where it is heading in the future. The most important metric to track is the home ownership rate, which climbed to 64.5% in 2018, up from 63.7% in 2017, and well above the low of 62% posted during the recession. This presents the biggest threat to multifamily demand. However, offsetting this fact is the amount of new households formed annually (1,000,000 per year) and the continued demographic preference towards renting over owning by younger generations and empty-nesters. Furthermore, since 2011 the number of new renters entering the market is averaging 1.7 million, and this demand is not slowing down. The National Multifamily Housing Council (NMHC) predicts 4.6 million new apartments will be needed by 2030 to meet demand trends, therefore there will be plenty of renters to go around for the foreseeable future.
Delivery of new multifamily units nationally is still well below the 30-year average of around 400,000 units per year. In 2018, there were 316,000 units delivered nationally, marking the highest level of output in 18 years. The construction boom appears to be behind us and is expected to begin to flatten in 2019, and beyond, as supply catches up with demand. All across the country, and locally, absorption has exceeded deliveries – a good sign of the health of the business and disproving the threat of supply-side pressures. The absorption rate in 2018 was the highest on record since the late 1990’s.
As for transaction and pricing data, cap rates were predicted by many to begin to rise in 2018 as interest rates increased. However, at the 2018 NMHC Annual Conference in February, industry experts predicted that cap rates would decline in 2018, due to the enormity of investor demand for multifamily investments – and that is exactly what happened. Cap rates went down slightly nationally and locally in 2018, with a national average cap rate of 6.3% and a local rate of around 7%; for institutional product the average cap rate was 5.5%. This is because the concern over rising interest rates quelling investor demand was not true because the opportunities in multifamily assets outweigh the lower returns from higher rates. This asset class is so strongly preferred above others that it shows in the pricing. Sales volume nationally and locally in 2018 was again remarkable. Final numbers have not yet posted for 2018, but it appears this year will be close to 2017 sales levels based on trending through the 3rd quarter. 3Q of 2018 was actually the highest quarterly sales volume ever posted for multifamily, laying to rest the concern that sales are cooling off. When balancing all of this information and the trends, we have concluded that given the strength of both operating and sales data, it is safe to say there is ample money to be made as either a buyer or seller of apartments in the current marketplace. That is why the transactional volume has been so robust.
In 2018 IPO had a prolific amount of transactions making it another record-breaking year – brokering the sale of 91 multifamily communities across Michigan and Ohio, representing over $300 Million in sales volume, and most importantly delivering some tremendous results for our Sellers. We nearly doubled our sales volume from 2017 ($170 Million); this is a clear indicator of how rapid and strong our firm’s growth is as we enter new markets to expand opportunities for our clients.
Many of our transactions were acquired by international and out-of-state investors, demonstrating the depth of our marketing reach. Our sales cover all of the major local markets, including Detroit, Metro Detroit, Lansing, Kalamazoo, Grand Rapids, Saginaw, Bay City, Flint, Columbus and Cleveland. Our firm continues our expansion as a regional multifamily brokerage, and will begin covering the Indiana market in 2019. IPO would like to thank our clients for a year that will go down in the records books. We wish you happiness and prosperity in 2018, and hope to be your trusted apartment investment adviser for years to come.