Multifamily Property Fundamentals
Multifamily properties had another exceptional year in 2019 and fundamentals are expected to remain healthy in 2020; however, growth is expected to moderate. Despite a significant amount of new supply over the last four quarters, vacancy rates have held steady and many markets remain tight entering 2020. Rent growth remains healthy at the national level and across most major metropolitan areas. Investors have started to chase yields in secondary and tertiary markets resulting in increases in rent growth in some of those markets as well.
RCA CPPI: Multifamily Property Values Continue to Surge
Multifamily property values have increased at a rate greater than all other property types overall. The following chart shows the indexed growth of multifamily properties over a twenty-year period, culminating in a spread that has increased over time. **
National All-Property and Apartment
U.S. commercial property prices increased by 7.8% in December compared to the previous year, marking the sixth consecutive month of accelerating growth, according to data from the latest RCA CPPI. At 12.1% year-over-year (YoY), the industrial sector again led the pack, outpacing the apartment sector despite a strong 9.6% increase over the past year. In fact, the multifamily sector logged the strongest price growth in the past decade, climbing a cumulative 163% – well beyond Office-CBD, which increased by 108%.
Record-Breaking Deal Volume
2019 was a record-breaking year for multifamily properties. Based on data from Real Capital Analytics, the multifamily sector saw a 4.4% YoY increase in transactions, totaling $184 billion. The majority of the volume was from single-assets, rather than portfolio sales – a reliable indication of a strong market. Many of the top markets saw an increase in volume; however, New York City saw the largest decline in sales volume.
Cap rates continued to compress throughout 2019; however, the movement was minimal. Property prices continued to grow due to solid multifamily fundamentals, and strong investor-demand resulting from the low-interest-rate environment. These characteristics will likely continue to drive demand for multifamily investments through 2020.
A Closer Look at NYC
2019 was a wild year for the New York City real estate sales market, especially in regards to multifamily properties. Spurred on by the news of Amazon’s decision to pull out of Long Island City for its new east-coast headquarters. Investors, along with most city officials, were excited for the good-fortune that was sure to befall the Queen's real estate market. Doubling down on the bad fortune, NYC real estate investors and developers suffered another body-blow from newly passed rent-control regulations. To put it plainly, landlords are not happy. The proof is in the transactions.
Regulations Taking a Bite Out of Big Apple Investors
Several regulations have been passed in the last twelve months, ranging from rent-control to the limiting of security deposits, and most-recently, how broker fees are paid. These sweeping rent reforms brought with them concerns of larger-scale upheaval within the multifamily sector. The new legislation limits the ways in which landlords can increase rents for regulated units. The legislation also removed the vacancy bonus, along with other programs for both major capital improvements and individual unit improvements. More-recently, the State Department declared that prospective tenants would no longer be required to pay the hefty broker fees that have long been required – fees that brokers have, typically, passed on to renters is now to be paid by the landlord. But it's important to note that if the prospective tenant hired the broker themselves, this would not apply.
"We have seen evidence that appetite for rent-regulated multifamily assets has plummeted in NYC from the highs over the past several years. Cap rates have risen due to the significant reduction in upside from the new rent regulation law. As a result, we have also seen investors move to markets outside the traditionally safe NYC MF market to places like South Florida, Ohio and Pennsylvania where rent regulation is not as restrictive. The impact of all these investment dollars leaving NYC has not been realized yet, but we can be sure tenant and landlord lobbying groups are going to have this law as their top priority especially in an election year."
Sherif Elshoubri, MAI
Senior Vice President, Valuation
The Housing Stability and Tenant Protection Act of 2019 was enacted in mid-June, creating shockwaves in the second-half of the year. Uncertainty around this sweeping rent regulation reform significantly affected the multifamily investment sales market, with all volume metrics trending down YoY.
Based on data from Ariel Property Advisors, the multifamily market across the five boroughs recorded $6.91 billion in transactions across 451 buildings. For comparison, total volume saw a decrease of 40% and transactions decreased by 36% YoY. This is the lowest volume since 2011, when $5.2 billion in transactions were recorded.A
As per usual, Manhattan posted the highest dollar volume of the five boroughs, with $2.4 billion across 105 buildings. This represents a YoY dollar volume decrease of 52%, while transaction volume declined 23%, and building volume declined 36%. The majority of these transactions were unregulated units. And in terms of pricing, both price per square-foot, and price per unit increased.
NYC Multifamily Rent Growth
Multifamily rents in the New York metro area increased at an annual rate of 3.3% in 2019, based on data from CoStar; however, not every submarket followed suit. The chart below displays the rent growth of each submarket in comparison to the metro average. For example, rents in the Long Island City submarket outpaced the metro average by 4.2%; whereas the Flatbush submarket had annual rent growth that was 2.8% below the market average. Additionally, submarkets that under-performed over the last year have, typically, under-performed over the long-term, as indicated by the five year growth rate.
1-yr Rent Growth vs. New York Metro Avg.
(New York Metro 1 Yr Rent Growth Rate = 3.30%)
On the Horizon
Growth in the multifamily market should remain healthy throughout 2020, but be wary of elevated levels of new inventory, which should lead to vacancy rates leveling out and a slow deceleration in rent growth. Shifting demographics, spending habits, and lifestyle preferences have created strong demand for multifamily rental units. Also, a lack of affordable housing for purchase has kept potential homebuyers on the sidelines in the rental market. This theme is expected to carry forward throughout the years to come. A shift in lifestyle preferences has started to occur, and will be important to watch moving forward. Where, and how do seniors prefer to live? Will co-living catch on and go mainstream? Should apartments come packaged with hospitality-type services? While the multifamily sector is buzzing along at a steady rate, there are changes coming.