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Multi-Housing Real Estate - A look at the Equity and Debt Markets in 2015

Tuesday, January 06, 2015

Entering 2015, the commercial real estate industry continues to face a seemingly insatiable appetite for all product types across all classes and markets, but most especially the multi-housing sector. Equity allocations for real estate investment have never been higher and the pool of prospective investors is broader and deeper than any time in history.

Where For Art Thou Core Multi-Housing Investment Opportunities?

Never has this been truer than in the demand for core quality multi-housing communities. Despite 86-percent growth in AUM of closed-end funds that now exceeds $400 billion, these same funds have more than $110 billion to invest, according to Preqin. NCREIF states that open-ended core investment funds have grown by over 27 percent since the last peak in 2008 and now approach $220 billion in AUM with active queues of new investors wanting to participate.

Another important and growing contributor to the new record high watermark pricing seen for multi-housing product in markets across the country is increasing cross-border investment. A new depth of international investors includes several active sovereign wealth funds that individually boast real estate AUM that exceeds the market capitalization of domestic closed and open-ended funds. Investment demand in tax advantaged, minority interests from this faction in 2014, particularly in large, single-asset and portfolio transactions should only grow in 2015.

All CRE Investors Underweight and Increasing Allocations

The dramatic increase in core-focused investment capital has resulted in a changing definition of "core." Investors have broadened focus away from traditional gateway cities to include many secondary and even some tertiary markets that exude the core qualities such as stable fundamentals, job growth and governors on future supply. The search for the industry's version of the holy grail, a combination of core-quality product, location and cash flow has transformed into an "either or" endeavor in which investors compromise in order to find success acquiring assets. In 2014, investors seeking ways to distinguish themselves, increasingly pursued high-quality assets prior to achieving occupancy and operational stabilization, requiring buyers to accept additional market and timing risks lease-up.

Increased Multi-Housing Investment Sales

In 2014, total multi-housing investment sales activity exceeded $65 billion according to Real Capital Analytics, representing the highest transactional activity experienced in the sector across the past eight years and the third highest volume year in history. The $65 billion in volume included $12.6 billion in the sale of Class A properties built during the current cycle.

Open-End Core Fund AUM Now Exceeds $200 Billion

Construction activity in the current cycle can be first tracked to those markets that recovered most quickly from the Great Recession including major markets like Washington, D.C., New York City, Boston, Houston and Dallas as well as fundamentally strong secondary markets such as Nashville. Multi-housing construction activity expanded even more broadly as multi-housing and employment markets have improved.

Approximately two-thirds of the multi-housing rental stock being added to the market is being developed with a "merchant build" strategy. In other words, these new projects are being built with the primary intent to capitalize on value creation upon completion (and sometimes stabilization) rather than holding the assets, post stabilization, for the long term.

Increased Class A Sale Offerings

As illustrated by the graph, a steady increase in the number and value of Class A sale offerings developed in the current cycle has occurred across the 20 highest volume construction markets. 

The 2014 sale of $12.6 billion in Class A apartment communities built in the current cycle is the highest total in history and represents a 30 percent increase over the $8.4 billion sold in 2013. While the illustration above is reflective of the 20 most active markets for new construction, smaller volume markets, many with even better fundamentals, will serve as microcosms of opportunity for investors.

In conclusion, the multi-housing industry continues to see unprecedented levels of investment equity being raised for multi-housing investment. Ready to meet this wall of capital head-on is an increasing supply of high quality apartment communities.

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