LOS ANGELES—Demand for multifamily properties strengthened in 2013, thanks largely to a strong showing from secondary markets, the CBRE Group says in its annual report on the sector. The year was also the best for net absorption since 2009.
“There continues to be an abundant supply of equity and debt capital from all types of foreign and domestic players,” says Peter Donovan, senior managing director with CBRE Capital Markets’ Multi-Housing Group. However, the report notes, there’s “a growing sense” that the “easy money” has already been made in the sector, which CBRE defines as including student housing, senior housing and manufactured homes along with apartment properties.
“The relatively low cost basis of 2010 and 2011 is a thing of the past, as land values and construction prices have steadily risen and cap rates have likely bottomed out,” according to the report. “In addition, expectations of increased development, projected slower rent growth and much-anticipated interest rate increases all could have an effect on valuation.”
Meanwhile, capital is “plentiful, nimble and constantly changing,” says CBRE. As a case in point, more than half of the top 15 largest buyers of assets in the sector last year made the list for the first time. “Meanwhile, foreign investors are more prevalent in the US multi-housing market and are willing to invest in older product in non-gateway cities that will likely yield a higher return.”
The year was marked by a number of trends which CBRE expects to prevail this year, as well. Pre-stabilization sales activity has increased noticeably, for one thing. “As buyers try to find opportunities and sellers look to lock in profits, sales have jumped for pre-stabilized assets that have all of their certificates of occupancy but may only be 30%-80% leased,” the firm says. The cap rate premium in these assets runs between 0 and 25 basis points. Similarly, institutions have shown a willingness to finance these pre-stabilized properties, “albeit generally with lower leverage.”
At the same time, scale has become more important for sellers and buyers alike in multifamily. “Given the significant amount of capital available, the need to invest has never been greater,” according to CBRE. As a result, both sellers and buyers are increasingly focused on portfolio sales “that may have more to do with creating investment scale than showing synergy. This can result in a portfolio premium for the seller in certain situations.”
CBRE notes that floating-rate debt has become a more acceptable financing strategy. “Having paid significant yield maintenance costs or been prevented from selling properties due to yield maintenance considerations, more investors see value in the optionality that floating-rate debt provides,” the report states. In particular, the mid-year rise in the 10-year Treasury yield moved some owners to obtain floating-rate debt in order to enhance current returns while achieving their overall projected returns.
Conversely, however, the increase in 10-year Treasuries had “relatively little impact on values,” according to CBRE. “Institutional owners of core assets calculate returns on an unlevered basis and were largely unaffected with the exception of more marginal core locations. However, approximately 15%-20% of deals for older class B product saw a modest pricing impact of around 2%.”