Apt. Volume Sets Records; Momentum Set to Continue

LOS ANGELES—A record-setting fourth quarter of 2014 capped the strongest year for multifamily investment since 2007, CBRE says. Some of the performance metrics behind the uptick in buying last year are strongly evident in a pair of new reports from apartment data firms Axiometrics and MPF Research, bearing out CBRE's expectation that deal volume in 2015 will match the prior year's tally.

Not surprisingly, multifamily was the first commercial property sector to surpass the previous 12-month peak. CBRE says US investment volume last year totaled $106 billion, compared to the high watermark of $105.1 billion set in '07. It also represented a 7% year-over-year increase over 2013. An even bigger Y-O-Y improvement was seen in Q4, when the quarterly investment volume of $34.1 billion exceeded the year-ago period by 10% and set a new quarterly investment record.

In short, “Multifamily investment soared to new heights in 2014,” says Brian McAuliffe, executive managing director, institutional properties with CBRE Capital Markets. “The sector continues to show its resilience as a safe haven for global investors looking to make their way into the US.”

That same view of US commercial real estate, and multifamily in particular, is likely to prevail as the current year progresses. “In 2015, we anticipate total investment volume to match or exceed '14 levels,” thanks to deployment of capital into real estate from new investor types, McAuliffe says. He cites growing momentum among “insurance groups from China and Taiwan, and Chinese property companies.”

Property-level metrics support this viewpoint. CBRE notes that last year, 261,700 multifamily units were absorbed nationwide. New York City, Houston, Los Angeles, Dallas and Austin were the year's largest contributors to net absorption, with each market recording more than 10,000 units of positive net absorption.

Dallas-based Axiometrics said Wednesday that annual effective rent growth nationally measured 5.0% last month, its highest level in 44 months. It also represented a gain of 16 basis points on January's annual effective rent growth.

“The market dynamics from '14 are continuing for several reasons,” says Stephanie McCleskey, VP of research at Axiometrics. “The apartment metrics reflect continued job growth throughout the nation. With 295,000 new jobs added in January and the headline unemployment rate down to 5.5%, more and more people are out there looking for apartments.”

McCleskey adds that this February had a meteorological advantage over the year-ago period. “Though Boston suffered record snowfall, winter weather in the rest of the nation was nowhere near the 'snow-pocalypse' of last year. That meant movement and construction proceeded at a normal pace for February.”

Another metric that displayed impressive growth in February was tenant retention rates, otherwise known as renewal conversion rates. Carrolton, TX-based MPF Research says they reached a 10-year high of 54.5% last month, continuing a five-year upward trend.

Renewal conversion rates have been climbing since the apartment market recovery started, says MPF Research. They surged in early 2010, and have continued to tick upward ever since.

On a YO-Y basis, renewal conversion jumped 80 bps as of February. The metric has seen a 22-month stretch without negative Y-O-Y change.

Jay Parsons, director of analytics at MPF, calls the low turnover rate “especially impressive given that new apartment supply is plentiful and that rents continue to increase substantially. Brisk lease-up velocity in new apartments combined with low resident turnover at existing properties speaks to the depth of demand for apartments and to the fact that most properties have not hit a ceiling on rents—not yet, anyway.”