Q4 cap rate trends

US multifamily deals top office again in 2018

Tuesday, February 26, 2019

Canadian investors acquired USD $9.8 billion worth of multifamily properties in the United States last year, a jump of more than USD $3 billion over the previous record high in 2015. Even so, they underwrote a fairly small fraction of total multifamily transactions as the sector captured the largest investment share among commercial properties for the third consecutive year.

JLL reports USD $167.5 billion in multifamily deals for 2018 versus USD $132 billion for office. Year-over-year investment volumes rose most dramatically in New York, at 73.3 per cent, but Houston. Los Angeles and Phoenix also experienced gains in excess of 31 per cent. Meanwhile, Dallas-Fort Worth captured the second highest dollar value, in excess of $7.5 billion, despite a drop of more than 21 per cent from 2017.

Rent and vacancy trends were generally positive nationwide with 4.2 per cent rent growth and a 30 basis point drop in vacancy despite an addition of 287,000 new units coming onto the market. In fact, absorption surpassed completions by 12.6 per cent.

“Investors recognize the sector’s outperformance and defensive nature,” JLL analysts conclude. “The multifamily sector is expected to see the most favourable year-over-year investment trends of the real estate asset classes in 2019, underpinned by solid wage growth and what continues to be an under-supplied housing market at the national level.”

A sizable jump in completions — up to 319,000 new units — is projected for the coming year, which is expected to cool rent growth somewhat. Analysts expect that will occur in both primary and secondary markets, while investors continue to favour the former.

“The expanding interest in high-rise assets is the result of investors’ less-risky approach of capital deployment concentrated in primary markets,” they observe — and foresee a similar trend in the office sector.

“Investment in the office sector, in particular, is evidencing a flight to quality. Buyers will shift their focus to lower-risk markets, pursuing longer-term-hold assets that can weather cyclical changes,” they forecast.

That’s reflected in a 2.5 per cent jump in transaction volume in primary markets, to hit nearly USD $63 billion last year versus an 11 per cent decline in activity in the secondary and tertiary markets for a combined sales volume of just less than USD $57 billion. JLL analysts attribute this to “investors’ preference for best-of-best assets in secure and liquid markets”. Overall, there was an 5 per cent uptick in transaction volume from 2017, with single-asset deals accounting for more than 78 per cent of the year’s sales value.

A 10 per cent decline in office transaction volumes is projected for 2019. Foreign investors are expected to be most interested in industrial portfolios, office in secondary markets, multifamily and select retail. Yields are pegged “at or near cyclical lows” with a “reassessment of pricing” anticipated for some assets and in some markets.

Office absorption, completions and rent growth were uniformly positive last year, while the vacancy rate declined by 40 basis points. “Despite hiring and talent shortages, leasing activity is showing few signs of a slowdown. Office leasing reached 36.1 million square feet in the fourth quarter, marking one of the strongest quarters over the past two years,” JLL analysts report.

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