Multifamily OutlookUnited States . Summer 2012Strong fundamentals fuelrobust transaction velocityStrong occupancy and rent growth continued across the country duringthe first half of 2012 as economic headwinds moved in support ofrentership versus homeownership.Sales transaction velocity kept pace with 2005 levels, totaling $23billion at mid-year.We anticipate the apartment sectors strong performance to continueover the next 24 months. Competition will push investors intosecondary and tertiary markets and entrepreneurial, value-addstrategies will resurface.
Jones Lang LaSalle • United States Multifamily Outlook • Summer 2012 2United States MultifamilyQ2 2012 performance overviewFundamentals restored to pre-financial crisis levels, recording 50 basis points belowThe U.S. economic recovery moved at an anemic pace during the the 10-year average. Effective rent growth followed suit, reaching wellsecond quarter of 2012 with job growth flat, GDP slowing and another above the peak levels of 2007-2008 to a 10-year high. Rent growthround of economic stimulus in the works. The resulting challenges and occurred in all markets tracked and averaged 1.7 percent across theuncertainty kept the “would be” homeowner population opting to rent. country. Houston and Dallas, in particular, kept up their impressive paceDeep in the hangover of the financial crisis, the nation’s mortgage of rent growth, while absorbing a heavy pipeline of new deliveries.delinquency and home foreclosure rate continued to climb, forcing more Overall, gateway markets in the Northeast and California are leadinghomeowners into the renter pool. Even as the U.S. housing sector is the country with vacancy below 6.0 percent and San Francisco is outshowing signs of improvement with prices easing upward, for-sale ahead of the pack with vacancy at 3.0 percent (3.4 percent below theinventory low and home affordability bottoming, home buying decisions national average) and year-over-year rent growth at 11.4 percent (7.0were put on hold in favor of renting, causing a continued imbalance in percent above the national average).housing fundamentals. While occupancy gains were realized in most markets, it is interesting % loss of net worth and decline in homeownership by age to note that the hardest-hit housing markets continued to show the most significant absorption of units over the last three months. Markets like South Florida, Phoenix, Atlanta and Orlando and Los Angeles saw 20- basis-point vacancy reductions at a minimum and year-over-year employment growth greater than 2.0 percent. Keep in mind that many of these metro’s saw deep employment losses during the downturn and much of this growth could be considered stabilization rather than advancement as unemployment in most markets remains a significant distance (between 5.4 to 8.2 percent) from the peak levels of 2006. Historical housing fundamentals 12.0% Homeownership Rate 70.0% Multifamily Vacancy Foreclosure Rate Vacancy, Foreclosure and Unemployment Rate 10.0% Unemployment Rate 68.0%The second quarter highlighted the impact that the financial crisis has 8.0%had on our population ages 44 and under (a key home-buying Homeownership Ratedemographic) since the housing market collapse. A recent U.S. Census 6.0% 66.0%study pointed out the group’s 58.8 percent decline in total net worth due 4.0%to declining home values, high-unemployment, lower wages and high 64.0%debt-burdens. This segment of the population, returning to the renter 2.0%pool out of necessity, has been a key driver for multifamily occupancygrowth in recent months. With housing challenges far from being 0.0% 62.0%resolved, the apartment development pipeline has amplified and investorappetite for core multifamily properties has pushed towards peak levels.Performance As job growth within the overall economy struggles to regain footing,Nationwide, strong performance in terms of unit absorption and rent tech-heavy markets are setting the pace for employment, occupancygrowth continued during the second quarter of 2012 with vacancy and rent growth. As a result, developers began pursuing opportunities for new development across these markets throughout the country.
Jones Lang LaSalle • United States Multifamily Outlook • Summer 2012 3United States MultifamilyQ2 2012 performance overview cont.According to a recent study by MPF Research, 162,000 units are With treasury yields at historic lows and uncertainty on the forefrontcurrently under construction across the nation, with future inventory globally, Institutions and REITS have been parking money in coregrowth exceeding 10.0 percent in some submarkets. Leading the pack is assets often with the expectations of a minimal yield in exchange forthe North San Jose / Milpitas submarket with over 4,000 units under the safety of a quality asset in a prime location. This “flight-to-safety”construction, which will equate to 45.6 percent inventory growth. The theme continued during the second quarter; however, in an effort tosecond highest would be North Irvine, CA and North Charlotte, NC. Both avoid the saturation and competition that has been compressingareas will see 18.3 percent inventory growth in the near future. From a yields, investor demand for secondary and tertiary assets / marketsmetro-level, Austin leads the country with 3.9 percent of new inventory in began to strengthen.the pipeline, followed by San Jose, Raleigh/Durham, Nashville, Dallas,Seattle and Washington, DC. While there is much concern about A key driver that is keeping multifamily transaction velocity high is theoverbuilding, it is important to note that the amount of construction in our fluidity and availability of financing compared to other property sectorstop U.S. markets is still 10.0 percent to 30.0 percent below the average (office, industrial and retail). This fact is largely supported and fueled byannual rate of construction that occurred during the last two decades. the GSEs; who generally exceed other capital sources in terms ofMetros with their economic fundamentals intact are expected to fare well overall proceeds. During the second quarter, Freddie Mac waseven with this substantial pipeline of new inventory. reportedly lending up to an 80.0 percent loan-to-value ratio (based on the purchase price) for Class A assets in primary locations and a loan-Transaction velocity to-value ratio of up to 75.0 percent for secondary assets and locations.Investor demand for multifamily product continued to surge through the In certain instances, borrowers successfully executed 10-year loans,first half of 2012 with transaction velocity on pace with 2005 levels; with generous interest-only periods, while capturing interest rates belowreaching $23 billion at mid-year. National bulk portfolio sales (totaling 4.0 percent. Along with Fannie Mae and Freddie Mac, CMBS shops are$4.0 billion through H1 2012) were a huge driver behind activity, offering very attractive financing relative to historical standards, but, likeincreasing 320.0 percent compared to the first half of 2011. Baltimore, the agencies, their ability to out-quote other financing sources in termsSan Diego, Jacksonville and Raleigh experienced the largest year-over- of proceeds and rates hinges on their favorable evaluation of both anyear increases with total transaction dollar volume exceeding 100.0 asset and a borrower. Borrowers looking for financing on morepercent from H1 2011. Despite this competitive buying environment, cap. complicated or lower leverage deals will find life companies andrates have remained relatively stable at the national level over the last balance sheet lenders to be as, or more, competitive than agencies and12 months; averaging 5.9 percent. However, according to a recent CMBS shops.survey of investor yield requirements, buyer expectations for leveredIRR’s have significantly compressed in core markets. Looking ahead We anticipate that apartment occupancy will continue to climb as Historical multifamily sales volume and cap rates population growth from two key renter age segments, Echo-Boomers Total $ Volume Average Cap Rate (%) and Empty-Nesters, will aid in the absorption of units through 2020. $40 8.0 Despite the development fever that has hit the multifamily sector $35 7.0 nationwide, at the current levels, we don’t feel as though it will $30 6.0 Average cap rate (%) negatively affect most markets, particularly markets with strong $ volume in billions $25 5.0 fundamentals such as the Northeast, Northwest and the Texas metros. $20 4.0 Overbuilding does however have the potential to threaten fundamentals $15 3.0 in areas that have significant housing and employment challenges $10 2.0 ahead, primarily in the Sunbelt markets, where home affordability is $5 1.0 rapidly decreasing and rent growth is compounding. While our overall $0 0.0 Qtr1 Qtr1 Qtr1 Qtr1 Qtr1 Qtr1 Qtr1 Qtr1 Qtr1 outlook is optimistic, we do anticipate that the compounding occupancy 2004 2005 2006 2007 2008 2009 2010 2011 2012 and rent growth will begin to slow over the next 24 months as lenders
Jones Lang LaSalle • United States Multifamily Outlook • Summer 2012 4United States MultifamilyQ2 2012 performance overview cont.loosen residential lending restrictions and home affordability decreases Year-over-year % change in transaction dollar volumeto levels that sway some renters to pursue homeownership.In particular, there are two areas to watch (“wildcards”) in the coming Baltimoremonths that could significantly impact housing fundamentals across the Bulk Portfolionation. First, the government refinance programs for underwater San Diegoborrowers, such as the HARP 2.0 program, will reduce borrower’sinterest rates and allow “stuck” homeowners to feasibly rent their homes Jacksonville (Florida)and relocate. Second, we anticipate that an increase in for-sale housing Raleigh/Durhaminventory will place continued downward pressure on home prices as New York Cityforeclosures make their way through the pipeline and lenders release Orange County (California)shadow REO inventory to the market. Tampa/St PetersburgOverall, low interest rates and strong multifamily fundamentals will Seattle/Puget Soundcontinue to fuel investor demand over the next 24 months. We anticipate Houstonthat secondary and tertiary asset classes and locales will see a spike intransaction volume as the sentiment toward risk aversion fades, Nashvilleinvestors pursue higher yields and entrepreneurial value-add Charlottestrategies reemerge. South FloridaTop 10 YTD $ volume Total U.S. Atlanta Metro YTD $ volume Orlando Bulk portfolio $3.96B Las Vegas Chicago New York $2.95B Phoenix Washington, DC $1.18B Richmond VA Boston Atlanta $1.04B Los Angeles Phoenix $776M Inland Empire (California) Los Angeles $708M Dallas/Ft Worth Washington, DC South Florida $702M Northern New Jersey Seattle $701M San Francisco Chicago $669M Houston $526M YOY % change in sales volume ($)
Jones Lang LaSalle • United States Multifamily Outlook • Summer 2012 5United States – Multifamily clock Boston, New York, San Francisco, Washington, DC Peaking market Falling market Baltimore, Chicago, Northern New Jersey, Philadelphia Austin, San Jose, Seattle Rising market Bottoming market Charlotte, Dallas, Houston, Los Angeles, Nashville, Richmond, San Diego Atlanta, Inland Empire, Orange County, Phoenix South Florida, Charlotte, Las Vegas, Orlando, Raleigh-Durham, Tampa Bay Jacksonville, MemphisClock description Q2 2012 positions• This diagram illustrates where Jones Lang LaSalle estimates each prime multifamily • All markets experienced rent growth in the second quarter, averaging 1.9 percent market is within its individual rental cycle at the end of the quarter. across the country• Markets can move around the clock at different speeds and directions. • Boston led with 3.5 percent growth.• The diagram is a convenient method of comparing the relative position of markets in • San Francisco and Boston are the nation’s tightest markets in terms of occupancy their rental cycle. • Q2 vacancy was 3.0 and 4.0 percent respectively.• The position is not necessarily representative of investment or development • Houston and Dallas led markets in new deliveries with over 1,500 units delivered in Q2. market prospects. • Houston, ranked third in the country in terms of rent growth, recording some of the• The position refers to prime face rental values. highest occupancy gains nationwide. • South Florida, Phoenix, Atlanta and Orlando and Los Angeles saw 20-basis-point vacancy reductions, at a minimum, and employment growth higher than 2.0 percent year-over-year. • Gateway markets in Southern California and the Northeastern U.S. remained stable with vacancy below 6.0 percent.
Jones Lang LaSalle • United States Multifamily Outlook • Summer 2012 6Q2 2012 vacancy across the U.S. Multifamily sector Seattle Boston New York Northern N.J Philadelphia San Francisco Chicago Baltimore Washington DC San Jose Las Vegas Richmond-Tidewater I.E. Los Angeles Raleigh MemphisOrange County Charlotte Phoenix Atlanta San Diego Dallas Nashville Houston Jacksonville Orlando Vacancy meter Tampa 10.0% + South FL 8.0% to 9.9% 6.0% to 7.9% Top YOY rent growth 5.0% to 5.9% Metro % change < 5.0% San Fran. 11.2% L.A. 7.2% Charlotte 6.5% New York 6.4% Chicago 6.0% Houston 5.9% Boston 5.7% Dallas-FTW 5.4%Source: PPR, Jones Lang LaSalle Research