Investors Keep Piling Into Apartments

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Investors are on trackto buy more multifamily properties this year than they did last year—impressive considering that last year apartment sale topped the peak year of the last real estate boom.

“Markets continue to perform at peak levels… with near-term, pocketed softening on the horizon,” according to the “Multifamily Outlook” for Fall 2014 from Jones Lang LaSalle.

In the first three quarters of 2014, investors have purchased $73.5 billion in apartment properties. That leaves the fourth quarter, typically the busiest of the year, likely to 2014 become another record-breaking year for multifamily sales. Investors bought $105.4 billion in apartment properties in 2013. That’s higher than the $99.4 billion in apartment properties they bought in 2007—the peak year of the real estate boom before the Global Financial Crisis.

Investors are widening their horizons as they hunt to make deals. Two-thirds of the sales of apartment properties so far in 2014 happened in just ten markets. Earlier in the recovery, most sales were concentrated in six top coastal cities. The top ten now includes New York, Los Angeles, San Francisco, Dallas, Atlanta, Seattle, Houston, Washington D.C., Phoenix and Denver. Investors bought more the $2 billion in apartment properties in each of these leading cities.

Select secondary markets are experiencing an uptick in sales velocities. Philadelphia, Orange County and Portland have all doubled their volume so far this year compared to the same period last year, seeing annualized gains exceed 100.0 percent. As a result, these markets have already surpassed 2013 transaction volumes, according to JLL.

Prices continue to rise, driving down investor yields in growing list of primary and secondary markets. Capitalization rates, which represent the income from a property as a percentage of the sale price, now average 5.8 percent nationally, according to JLL.

Strong fundamentals

Strong demand for apartments from people who want to live in them is part of what is driving the eagerness of investors. Rents are expected to keep growing considerably faster than inflation.

“With vacancy stabilizing and the market average of inventory under construction at 4.4 percent and growing, the pace of multifamily tightening is softening with projected rent growth between 2.0 and 3.0 percent over the next 18 months,” according to JLL.

The percentage of occupied apartments rose again to reach 95.8 percent in the second quarter, 2014. Rents grew too, averaging 3.3 percent across the country over the last 12 months.

All markets experienced rent growth in 2014 year-to-date, according to JLL. San Francisco led in rent growth with 6.4 percent growth over the last 12 months. Not far behind came Seattle, Nashville, Denver and Houston, which all annual rent growth of 4.6 percent or more.

Apartment markets nearly past the peak

With thousands of new apartments on the way, Washington D.C. is further along in the cycle of rising and falling rental markets than any other in the country, according to JLL. The metro area is a “peaking market” that is dangerously close to the tipping point of becoming a “falling market.” Boston, New York and San Francisco are following not far behind, according to JLL.

Only a handful of places still count as “rising markets,” which still have considerable upside in the balance of rental supply and demand, according to JLL. The rising markets include Las Vegas, Orlando, Fla., and Tampa Bay, Fla. Jacksonville, Fla., and Memphis, Ala., are also on the mend and have even more room to rise.

In most apartment markets, vacancy rates continue to fall because the demand for new apartments is still stronger than the new supply of new apartments opening their doors. In Las Vegas and Orange County, absorption was more than three times as strong as new construction over the last 12 months.