In 2020 IPO Brokered Over $255M in Sales Volume
December, 2020 – Bloomfield Hills, MI
What a Year…
It would be altogether too easy to make the focus of our annual review and forecast about all the challenges that COVID-19 brought to the apartment industry – both operationally and transactionally – but we have firmly concluded that the real story from 2020 is the remarkable strength and resiliency of multifamily assets. Decades of academic research have reinforced the idea that the risk-adjusted return for multifamily assets significantly outperforms the other asset classes when evaluated over longitudinal studies. We cannot think of better evidence for this academic argument than what we observed this past year. The challenges that arose were met, and while delinquency and collections are still a concern, we are “out of the woods” with multiple vaccines hitting the market and are passing a presumptive $900 Billion Senate-Approved final round of Stimulus to assist renters and low-income households through this temporary situation. There are many topics about the impact of COVID and the recovery that warrant extensive discussion. However, we are limited by time and space, and so have elected to focus our analysis and commentary on the abundance of positive takeaways from 2020 and moving forward into 2021.
We condense a significant amount of research on apartment and economic data (local and national) from a host of sources such as CoStar, Real Capital Analytics, Congressional Budget Office, and University of Michigan’s 68th annual Economic Outlook Conference (remotely attended of course) to help forecast 2021. We consolidate the critical takeaways into this concise newsletter for you to incorporate into your multifamily investment decisions. Both nationally and locally, the economic outlook for 2021 is projected as nearly a return to “normal”. The forecast calls for GDP rising by an impressive 4.2%, which is truly remarkable considering all that has transpired over the last year. At one point in 2020, GDP had contracted by 36%, and it finished the year at only -3.6%, which is perhaps even more remarkable than the projection for 2021 GDP growth. Inflation understandably plummeted to about 0.2% in 2020 and is forecasted to return to a healthy level of 1.3% in 2021. The Federal Reserve is doing its part with Monetary Policy, with the Federal Funds Rate at nearly zero, and projected to remain well below 1% until 2027. This gives commercial real estate investors considerable comfort when booking short-term loans in an uncertain market. The Federal Reserve is expected to make two more interest rate cuts in 2020 to stave off a recession. Consumer spending has rebounded to almost pre-COVID levels (down only 3%) and Personal Income has actually gone up (due to Federal stimulus). Locally, light vehicle sales are projected to rebound to around 16 million units in 2021 – on par with the 5-year average – which is good news for our local automotive economy. Unemployment numbers have also seen a huge drop, peaking close to 15% and now down to 6.5% nationally and 8.6% locally. We are not worried about this number because we see too many “Now Hiring” signs and suspect this will tighten back to under 5% once the stimulus rounds end in 2021. Given the economic landscape in April, it is hard to conceive a more dramatic turnaround, all things considered.
Now for a look at local Market Fundamentals and Sales Transactions. Occupancy for apartments continues to be very strong, with a national vacancy rate around 6.5% and local rate of 5.3%, representing over 100 bps below the country. Local demand is so strong that only 4.0% of properties are offering concessions compared to 25.0% nationally. This is a modest increase from 2019, both nationally and locally. Vacancy rates are lowest for Class B product, at 4.4% nationwide, versus Class A product which are around 11%. Moreover, Class A units and urban locations have been the hardest hit on vacancy and rent growth from COVID-19. Locally, we are seeing a meaningful number of new units (6,700 units in Metro Detroit in 2020) delivered to the market and they are being absorbed at a record-breaking pace. Construction is virtually all Class A, Urban, or Senior product, thus Workforce housing is not threatened by the additional supply. Rent Growth was almost 0.0% percent nationally, but locally posted a remarkable 3.6% increase in 2020, a testament to the strength and stability of the Midwest. Rents in Metro Detroit averaged $1,038 per unit or $1.21 PSF, compared to the national average of $1,808, or $1.97 PSF. Rent Growth is predicted to dip slightly in 2021, but it is expected to be around 3% locally, while nationally is projected to be flat.
The Supply/Demand perspective offers the most significant insights into where the apartment business is currently and where it is heading in the future. The most important metric to track is the homeownership rate, which jumped significantly to 67.4% in 2020 (and to nearly 70% in the Midwest), up from 64.8% in 2019, and well above the low of 62% posted in 2010. This rate presents the biggest threat to multifamily demand. However, offsetting this fact is the number 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; meaning 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 2020, there were approximately 265,000 units delivered nationally, which is a slight decline from 2019. The construction boom appears to be behind us and is expected to begin to flatten in 2020 to around 250,000 units, as economic growth slows. Another local success story was absorption: 2Q and 3Q marked record-breaking absorption for the Detroit MSA with leases exceeding deliveries – a good sign of the health of the business and disproving the threat of COVID-19 related supply-side pressures. Nationally the story was much different. Locally we face little risk or threat to operating fundamentals given the limited supply-side pressures, unlike other metro areas. Local tenant demand is still very high for new and vintage product. The only sizable vacancy is new units in Downtown (11%) and Midtown (14.5%) Detroit. Vacancy is predicted to inch up at a negligible rate locally in 2021 and beyond, but both national and local rates are projected to stay below 7% as far as 2024.
The biggest difference in the apartment business between 2019 and 2020 was transactional, not operational. As for transaction and pricing data, Cap Rates were predicted by many to begin to rise sharply in 2020 after the COVID-19 pandemic outbreak. However, the market proved how dead-wrong all “opportunistic” buyers seeking “COVID discounts” were, and they quickly learned that was a daydream. The real story of 2020 is that Cap Rates have drastically decreased in response to COVID-19. Yes, you read that right. When your asset class is fundamental to survival and the cost of financing decreases by upwards of 25%, and the stock market looks overinflated, what you get is a stampede of equity seeking to acquire apartments. While there is no doubt the Fiscal Stimulus helped buoy rental collections (down only 1% year-over-year according to NMHC Rent Tracker) the inherent value of the multifamily asset class was on full display for the investment world as it rose as a shining star in a stormy economic sea. Aside from a NNN industrial building with a 20-year lease to Amazon, there was no safer and more profitable place to be than apartments in 2020. Cap Rates went down slightly nationally and locally in 2020, with a national average Cap Rate of 5.5%, down from 5.8% in 2019, and a local rate of around 6.65% in 2020, down from 6.8% in 2019. The decline in interest rates in 2020 undoubtedly helped the continued compression in rates.
Sales volume nationally and locally dropped off the map. Final numbers have not yet been posted for 2020, but through November local sales appear to be on track for around $150M, compared to $353M in 2019, and over $400M in 2018 and 2017; a dramatic reduction. We are very proud to report IPO beat the market; we had a record-breaking year in several respects. When COVID erupted we had 27 deals under contract and only 7 survived. By 3Q we had rebuilt our pipeline with 47 pending apartment sales. Costar shows that not only did IPO handle the largest apartment sale in the Detroit MSA in 2020 (Glengarry Apartments, Waterford, MI/February 2020/$22M/75k per unit), we also handled 2 of the top 3, and 3 of the Top 5 largest apartment sales in the local market. As a market-share frame of reference, with 33 sales in Metro Detroit, IPO brokered over double the amount of transactions as the next brokerage and more than the next 3 combined! It is clear that we are gaining market share because of the superior results we deliver.
In 2020, IPO closed a prolific number of transactions with another record-breaking year, brokering the sale of 83 multifamily communities across Michigan, Ohio, and Indiana. Included in this volume were 7 large portfolios. This represents over $255 Million in sales volume ($170M in MI, $70M in Ohio, $20M in Indiana), and most importantly we delivered some tremendous results for our clients in perhaps what will someday be viewed as the most challenging landscape for an investment brokerage to close sales in – an international pandemic that created economic disruption of unprecedented proportions. As a frame of reference, total apartment sales volume for Detroit MSA was $122M in 2020. We are proud of our firm’s strong sales volume in 2020, as we enter new markets to expand opportunities for our clients – as we did with Indiana this year and Ohio in 2017 – targeting expansion into Illinois and Kentucky in coming years as we evolve into a Regional powerhouse. Many of our transactions in 2020 were acquired by international and out-of-state investors, demonstrating the depth of our marketing reach. Our sales cover all the major regional markets including Detroit, Metro Detroit, Lansing, Kalamazoo, Grand Rapids, Saginaw, Bay City, Flint, Indianapolis, Columbus, Akron, and Cleveland.
IPO would like to thank our clients for a year that will go down in the record books in many different ways, and we wish you health, happiness, and prosperity in 2020. We hope to be your trusted apartment investment advisor for years to come.