In 2019 IPO Brokered Nearly $250M in Sales Volume
January 6, 2020 – Bloomfield Hills, MI
Endless Summer…This past year provided no shortage of positive news in the multifamily industry. The challenge actually becomes deciding which favorable metrics to spotlight given the abundance of healthy data points; low vacancy rates, strong rent growth, controlled delivery of new units coupled with strong absorption, limited pressure from single-family development, favorable demographic and household formation demand. There are many topics that warrant extensive discussion, yet time and space forbid the depth of dialogue we would prefer to cover in our annual review and forecast.
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, and CBRE, and also attended University of Michigan’s 67th annual Economic Outlook Conference last month to help forecast 2020. We consolidate the critical takeaways for you into this concise newsletter to incorporate into your multifamily investment decisions. Both nationally and locally, the economic outlook for 2020 is healthy and stable. The forecast calls for GDP falling below 2% nationally in 2020, down from 2.5% in 2019, and inflation to remain flat around 1.7%. It is expected the Federal Reserve will make two more interest rate cuts in 2020 to stave off a recession. In 2019, the Big 3 Labor Strike posed a significant risk to the local economy, but with that resolved the only major external threats locally and nationally appear to be the ongoing trade war with China and the FCA merger. With 2020 vehicle sales estimates around the average of 17 million sales per year, there is no expectation that we will experience anything on the local level that is much different than on the national level. Jobs reports look good, consumer confidence is still high, and unemployment low; by virtually every measure, the operating fundamentals and demand for multifamily will be very strong for 2020.
Occupancy for apartments continues to be very strong, with a national Vacancy Rate of 3.6% – the lowest on record since 2000 – and a local rate in Detroit of 2.6%, impressively posting the 2nd lowest Metro Vacancy Rate after New York City. As in recent years, Vacancy Rates are lowest for Class C product, at 3.2% nationwide, versus Class A product, which is at around 5%. Locally we are seeing a meaningful number of new units (6,000 units in Metro Detroit in 2019) delivered into the market, and they are being absorbed quickly as evidenced by the Vacancy Rate. 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 2.9% in 2019, a marginal increase from the 2.6% posted in 2018. Local Rent Growth was stronger, clocking in at 3.7%, earning Metro Detroit an impressive 12th spot on the list of Metros for rent growth, surpassing many high-profile apartment investment metros. Rents in Metro Detroit averaged $998 per unit or $1.15 PSF, compared to the national average of $1,704, or $1.97 PSF. Rent Growth is predicted to dip slightly in 2020, but should be close to 2.5% nationally and 3% locally. It is notable that Class C product lead Rent Growth at 3.2%; Class A at 2.4%.
The supply/demand perspective offers the most significant insights 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 dropped to 63.8% in 2019, down from 64.5% in 2018, 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 needed by 2030 to meet demand trends; 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 2019, there were approximately 284,000 units delivered nationally, a slight decline from 2018. The construction boom appears behind us and is expected to begin to flatten in 2020 to around 250,000 units, as economic growth slows. All across the country 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 2019 was the highest on record since the late 1990’s. Locally we face little risk or threat to operating fundamentals given the limited supply-side pressures, unlike other Metros.
As for transaction and pricing data, cap rates were predicted by many to begin to rise in 2019 as interest rates increased. At the 2019 NMHC Annual Conference in February, industry experts predicted that cap rates would decline in 2019, 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 2019, with a national average Cap Rate of 5.6%, down from 6.3% in 2018, and a local rate of around 6.75%. The decline in interest rates in 2019 undoubtedly helped the compression in rates. The concern over rising interest rates proved untrue and investor demand for multifamily assets continues to impress. This asset class is so strongly preferred above others that it shows in the pricing. Sales volume nationally and locally in 2019 was again remarkable. Final numbers have not yet been posted for 2019, but the estimate is $184 Billion in apartment sales, up slightly above 2018 sales levels based on trending through the 3rd Quarter. When balancing all this data and these trends, we have concluded that given the strength of both operating and sales fundamentals, it is safe to say that good money can 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 2019 IPO had a prolific amount of transactions with another record-breaking year, brokering the sale of 74 multifamily communities across Michigan, Ohio, and Indiana. This represents nearly $250 Million in sales volume, and most importantly delivered some tremendous results for our clients. We are proud of our firm’s strong sales volume as we enter new markets to expand opportunities for our clients – as we did with Indiana this year and Ohio in 2017. Many of our transactions 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 and Cleveland. IPO would like to thank our clients for a year that will go down in the record books, and we wish you happiness and prosperity in 2020. We hope to be your trusted apartment investment adviser for years to come.