Apartment Demand Hits Five-Year High As Home Sales Decline (#GotBitcoin?)
Demand grew particularly in Chicago and Houston. Apartment Demand Hits Five-Year High As Home Sales Decline (#GotBitcoin?)
Demand for rental apartments reached a five-year high this spring, spurred by new household formation and lagging home sales.
The number of new apartment move-ins in the second quarter of 2019 increased 11% over the same period last year, according to a national report scheduled to be released Monday by real-estate analytics firm RealPage . The demand surge drove the national occupancy rate to 95.8%, compared with 95.4% at the end of the second quarter of 2018, the report said.
RealPage’s chief economist Greg Willett attributed the increase in the second quarter partly to economic uncertainty that slowed the market in the first quarter. “This is catch-up,” he said.
Demand grew particularly in Chicago and Houston. Move-ins in those markets outpaced apartment construction by nearly 3 to 1, RealPage data showed.
Monthly rental prices nationwide shot up 3% from the second quarter of 2018 to the same period this year. Many small metros saw bigger increases. Rents rose 7.4% in Wilmington, N.C., and 6.4% in Huntsville, Ala., according to the report.
Although apartment construction is near the highest it has been in 30 years, much of that new supply is targeting higher-income earners, Mr. Willett said.
With little new affordable supply, the market for lower-cost rentals is much tighter. Most of the new supply “doesn’t really help the consumer in [lower-end] housing where it’s already full,” said Mr. Willett.
The volume of existing-home sales on an annualized basis has fallen for 15 straight months. But the asking price of homes is still increasing at a rate that is faster than income growth.
The shallowing buyer pool and the lack of affordable homes has helped fuel the demand for rentals, said Calvin Schnure, economic analyst at the National Association of Real Estate Investment Trusts. “There’s a shortage of every type of housing,” he said, noting construction hasn’t kept pace with population growth.
Last week, the Trump administration announced it would explore using federal programs to reduce local barriers to housing construction, such as restrictive zoning. Freddie Mac also released a survey showing that American renters increasingly believe they will never afford to buy their own home.
Apartment Values Stay Solid In Private Market Despite Falling Rents
Recent CIM deal shows some buyers still willing to pay near pre-pandemic prices in certain areas.
Some investors are willing to pay near pre-pandemic prices for rental apartment buildings despite the weak economy’s downward pressure on occupancies and rents.
Consider one of the biggest multifamily deals of 2020 announced Monday by Los Angeles-based CIM Group: its purchase of Southern Towers, a 2,346-apartment property including five 16-story towers in Alexandria, Va.
The price was about $505 million, which is in the range of what market participants expected Southern Towers to go for pre-Covid, according to people familiar with the matter. One of these people said that CIM is paying a discount in the single percentage points off the highest nonbinding bid that the seller received before the pandemic hit.
So what gives? Southern Towers has held its value partly because it is located in a relatively strong employment market. It is close to Washington, D.C., and the Pentagon as well as the second headquarters Amazon.com Inc. is developing in Northern Virginia.
Just as important, the average rent at Southern Towers is about $1,400 a month for a one-bedroom apartment, a relatively low price for the region. Demand tends to be stronger for more affordable apartments during a recession because a large number of renters who are worried about their jobs trade down from more expensive units.
Southern Tower rents are at a low level for the region, said Avi Shemesh, a principal and co-founder of CIM, a private-equity firm with $30 billion worth of mostly real-estate assets under management. “You have a lot more takers.”
In the years leading up to the coronavirus pandemic, rental apartments were one of the hottest property types thanks to low vacancies and rent increases that typically outpaced inflation. Prices of apartment buildings soared, and the public multifamily real-estate investment trusts, such as Equity Residential and AvalonBay Communities Inc., enjoyed buoyant share prices.
Things are different now. Even stronger markets are seeing declines of about 5% in effective rent rates, which takes into account landlord concessions like months of free rent when leases are signed, according to John Pawlowski, an analyst with Green Street Advisors.
In harder-hit markets, like New York and San Francisco, effective rents are down 15% to 20%. Shares of public REITs have fallen about 30% since mid-February when Covid-19, the illness caused by the new coronavirus, began spreading in the U.S., Mr. Pawlowski said.
But the sale prices of apartment buildings are holding up relatively well. In healthier markets, values have only fallen in the single digits in percentage terms, Mr. Pawlowski said. In harder-hit markets like Orlando and Houston, the decline has been in the low-double-digit range, he said.
“Apartment values have not seen much of a hit in the private markets,” Mr. Pawlowski said.
The former owners of Southern Towers, the Caruthers and Snell families, put the property on the market last year through CBRE Group Inc. CIM was one of the prospective buyers that looked at the deal before Covid-19 hit, but moved to the sidelines in the early weeks of the pandemic’s economic shock waves.
CIM has adjusted its cash flow projections for Southern Towers because of the recession and the likelihood of higher delinquencies. Landlords in the short term “may not be able to raise rents as much,” Mr. Shemesh said. “You may have more people with issues that lost their job, which we believe will be impactful” to landlords’ bottom lines.
But CIM is making up for lower-than-expected revenue with a 30-year loan from Freddie Mac with a rate of Libor plus a little more than 2 percentage points, reflecting today’s low interest rates. Debt makes up more than 60% of the purchase price, a relatively high amount of leverage for CIM, which the firm was willing to accept because of the low rate and the long term, Mr. Shemesh said.
CIM also believes demand will stay strong for Southern Towers because they are located on 40.5 acres with two large swimming pools, tennis courts and other amenities. This outdoor space will be particularly attractive during the pandemic, especially for tenants of affordable housing that don’t have money for expensive vacations or second homes.
Mr. Pawlowski of Green Street says that rental apartments are looking attractive to investors partly because alternative investments, like buying bonds, produce such a low return. “Corporate bonds are yielding in the low 3% range,” he said.
An apartment portfolio might have yields in the mid-to-high 5% range. “That spread looks pretty juicy right now,” he said.
But Mr. Pawlowski warned that the sharp decline in the shares of the public apartment REITs suggest that stock investors believe there is more risk in multifamily than private investors. He pointed out that the disconnect between the public and private valuations has extended for about six months.
“That suggests that there’s risk [for private investors], and they’re not out of the woods yet,” he said.
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