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Apartment Association of Michigan2019 Multifamily Rental Market Outlook
Presented by Kevin Dillion
Multifamily Review
Client Logo 3Source: Berkadia Research; Real Capital Analytics; Freddie Mac
Multifamily Outlook I Freddie Mac Mid-2019 Outlook
The tight labor market is driving wage growth nationally, fueling household formation.
New supply is scheduled to remain elevated over the coming years. Due to the imbalance of the housing market, this increase in construction isn't necessarily an oversupply concern.
Apartment fundamentals are slated to remain healthy through 2019 and into 2020. While moderation is probable in this stage of the cycle, the upward swing of the economy does not foreshadow any imminent headwinds that would cause major disturbance to the apartment market.
Lower interest rates could entice more households into homeownership. However, this should not cause any significant headwinds in the rental market due to the overall shortage in the national single-family housing inventory.
Client Logo 4Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive; Nestpick
Factors investors should consider:
Homeownership continues to elude many households, especially debt-ridden young adults who are priced out of purchasing a home.
In a highly competitive market, more investors are putting their capital into property sub-types like affordable housing as well as secondary and tertiary markets.
Active adult communities are not as cyclical as other residential asset types as residents in these properties stay between 6 to10 years, compared to 1 year for student housing and 1.5 years for conventional multifamily housing.
Millennials will surpass Baby Boomers as the nation’s largest generation by the end of this year, while Generation Z is forecast to surpass Millennials by 2034. Generation Z and Millennials will combine to create a “Youth Boom” that will drive housing demand, especially in the rental market.
Multifamily Market I Investment Trends Through the first three quarters of 2019, roughly $96.6 billion worth of transactions were made, compared to $96.9
billion from the same time last year. Despite the slight dip, the average price per unit in the third quarter of 2019 reached $174,529, appreciating a robust 9.3% year-over-year.
Canada and Bahrain combined to account for roughly $4.6 billion worth of transaction volume year-to-date.
Client Logo 5Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive; Nestpick
Multifamily Market I Major Transactions
Providence at Harbour ClubBelleville, MI | 1,112 Units
Sale Price: $79,000,000Sale Price/Per Unit: $71,043
Valley RanchAnn Arbor, MI | 480 Units
Sale Price: $70,250,000Sale Price/Per Unit: $182,986
Signature ClubAnn Arbor, MI | 324 Units
Sale Price: $51,900,000Sale Price/Per Unit: $160,185
Alden TowersDetroit, MI | 389 Units
Sale Price: $35,150,000Sale Price/Per Unit: $90,360
Cap Rate Analysis
Client Logo 7
1
101
201
301
401
501
0.0%
2.0%
4.0%
6.0%
8.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Spread (B
PS
)R
ate
Spread (bps) 10 Treasury Rate National Cap Rate Avg. 10 Treasury Avg. Cap Rate
3Q12 Spread: 471 BPS
3Q19 Spread:349 BPS
Avg. 10-Yr Treasury 2004 -2018: 3.12%
Avg. National Cap Rate 2004 - 2018: 6.14%
Source: Berkadia Research; Real Capital Analytics; Federal Reserve of St. Louis
The yield on the 10 Year Treasury fell in the third quarter as global growth fears emerged, trade tensions ratcheted up between the U.S. and China, and expectations the Fed will be more accommodative with regards to policy.
Investment Indicators I 10-Year Treasury vs. National Cap Rate
Client Logo 8
5%
6%
7%
8%
9%
10%
Office Hedonic Cap Rate Apartment Hedonic Cap Rate Industrial Hedonic Cap Rate Retail Hedonic Cap Rate
Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
CRE – Cap Rates
C A P I T A L T R E N D S
Cap Rates 3Q19Office: 6.7%Multifamily: 5.4%Industrial: 6.1%Retail Mall: 6.9%
The hedonic cap rate for multifamily properties was the lowest among the commercial real estate asset types, holding steady at 5.4% through the year
ending in September 2019.
Client Logo 9Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive
Historical Cap Rate Trends
Cap rates fluctuate over time due to economic and capital market conditions. The commercial real estate market experienced declining cap rates and elevated propertyvalues three times over the past four decades: 1982-1990, 2002-2007, and present day. Key factors that drive cap rate swings are:
Taxes
Capital Requirements
Interest Rates
Law reform
Cap Rate Influencers
Key factors currently affecting cap rates swings:
Market driven by interest rates
With a current cap rate spread below the 10-year average, an interest rate hike by the Fed won’t have a significant effect on cap rates, remaining steady due to solid market fundamentals
Current Cycle – Interest Rates
Key factors that drove cap rate swings:
Pension funds, foreign investors, and other institutions investing in CRE
Led to aggressive lending practices and ensuing period of significant overbuilding
Changes to the tax code enhanced depreciation allowances and tax shelters for CRE
Deregulation of the saving and loan (S&L) industry allowed institutions the ability to invest in commercial mortgages for the first time, opening a new source of capital
1980’s – Major Tax Legislation
Key factors that drove cap rate swings:
Significant increases in debt and equity availability
CMBS driven
Reduction in capital requirements on investment banks
Heightened investor demand
Mid 2000’s – Investment Bank Fueled
Multifamily Capital Market Trends
Multifamily Market Capital Trends
Client Logo 11Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
Multifamily Buyer Composition -National
C A P I T A L T R E N D S
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 YTD
Cross-Border Institutional REIT/Listed Private User/Other
Private Capital is and has been the main driver of the multifamily apartment market, making up roughly 66% of all multifamily deal volume through the first
three quarters of 2019.
Client Logo 12Source: Berkadia Research; Real Capital Analytics
*Based on independent reports of properties and portfolios $2.5 million and greater.
($13)
$10
$33
$55
$78
$100
2015 2016 2017 2018 YTD 2019
Bill
ions
Private
Acquistion Disposition Net
($12)
($6)
$0
$6
$12
$18
2015 2016 2017 2018 YTD 2019
Billio
ns
REIT / Listed
Acquistion Disposition Net
($11)
$0
$11
$21
$32
$42
2015 2016 2017 2018 YTD 2019
Billio
ns
Institutional
Acquistion Disposition Net
($4)
$0
$4
$8
$12
2015 2016 2017 2018 YTD 2019
Billio
ns
Cross-Border
Acquistion Disposition Net
Multifamily Capital Flows
Client Logo 13
**Identified units as of 3Q19; 100+ unit developments
Source: Berkadia Research; YardiMatrix
National Multifamily Quarterly Snapshot
M U L T I F A M I L Y
3Q 2019Average
Effective RentAverage
Occupancy
Market Average $1,411 95.8%
Class A $1,553 95.0%
Class B $1,202 96.7%
Class C $1,139 96.7%
YearAnnual
OccupancyAnnual
Absorption
2018 95.4% 329,132
2017 95.0% 304,175
2016 94.9% 233,365
2015 95.2% 263,966
2014 95.1% 315,747
2013 94.5% 188,974
2012 94.4% 215,086
2011 94.0% 106,691
2010 93.7% 370,639
2009 92.0% (6,829)
Total UnitsTotal Units
Under Construction
10,243,989** 607,845**
Barriers to homeownership have pushed numerous residents into the rental market, increasing rent nationwide. Since 2009, the average effective rent rate for
apartment units increased 43.7% through 3Q19, reaching $1,411 per month.
Client Logo 14Source: Berkadia Research; Real Capital Analytics
Multifamily Assets*
* Based on independent reports of properties and portfolios $2.5 million and greater.
$16.
5
$31.
6
$51.
8 $69.
2
$92.
9
$100
.0
$133
.6
$138
.5
$122
.9 $141
.9
$96.
6
Ten-Year Average: $89.9 billion
$0
$40
$80
$120
$160
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
($)
Bill
ions
Annual Sales Volume 10-Year Average Annual Sales Volume
Through the third quarter of 2019, approximately $96.6 billion worth of transactions were made nationwide, down slightly from the same time period last year. Despite the dip, year-to-date
volume is the third-largest figure recorded since 2009.
Annual Transaction Volume I National
Client Logo 15Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
Lender Composition - National
2019
2018
2017
2016
2015
Year
CMBS Financial Private/Other Government Agency Insurance International Bank National Bank Regional/Local Bank
Garden
Mid/Highrise
Student Housing
Seniors Housing & Care
Property Type
CMBS Financial Private/Other Government Agency Insurance International Bank National Bank Regional/Local Bank
Metro Detroit Multifamily Market Trends
Client Logo 17Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
Private Capital is the dominant source of buyer composition in the Detroit metro. From 2009 to 2018, an average of 87% of multifamily transactions
metrowide has been made with private capital.
Multifamily Buyer Composition – Detroit, MI MSA
C A P I T A L T R E N D S
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 YTD
Cross-Border Institutional REIT/Listed Private User/Other
Client Logo 18
*August 2019
**Includes properties w/ 100+ conventional units
Source: Berkadia Research; CoStar; YardiMatrix
3Q 2019Average
Effective RentAverage
Occupancy
Market Average $959 97.0%
Class A $1,391 93.5%
Class B $1,081 97.7%
Class C $865 97.7%
YearAnnual
OccupancyAnnual
Absorption
2018 96.6% 2,058
2017 96.1% 2,130
2016 95.7% 1,122
2015 95.9% 6,216
2014 93.7% (35)
2013 93.9% 545
2012 93.9% 2,565
2011 93.1% 3,564
2010 91.8% 8,979
2009 91.0% (3,312)
Total UnitsTotal Units
Under Construction
155,185** 2,582**
Multifamily Quarterly Snapshot –Detroit, MI MSA
M U L T I F A M I L Y Despite a minute slowdown, rent growth in this apartment market is well above the historical average. Year over year, effective rent increased 3.5% through the third
quarter of 2019, reaching $959 per month.
Client Logo 19
1,06
1
109
347
503
477 55
6 633
1,80
0
1,52
3
761 83
2
90%
92%
94%
96%
98%
0
500
1,000
1,500
2,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
Completions Occupancy
Source: Berkadia Research; CoStar; Axiometrics
Dan Gilbert and his team at Bedrock are developing two of the newest additions to the Central Business District, Monroe Blocks and Hudson’s Site. Both high-rises will bring over 800 units to
Downtown Detroit and change the city skyline for the first time in a generation.
Completions vs. Occupancy I Detroit, MI MSA
Client Logo 20
1,06
1
109
347
503
477
556
633 1,
800
1,52
3
761
832
(3,3
12)
8,97
9
3,56
4
2,56
5
545
(35)
6,21
6
1,12
2
2,13
0
2,05
8
1,76
0
(6,000)
(3,000)
0
3,000
6,000
9,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
Completions Absorption
Source: Berkadia Research; Axiometrics
Despite elevating effective rent, several factors are drawing steady demand for apartments, including employment opportunities and revitalization.
Completions vs. Absorption I Detroit, MI MSA
Client Logo 21
1,52
3
761 99
5
2,91
9
1,59
3
1,37
6
1,39
9
2,13
0
2,05
8
(611
)
320
831
1,03
7
1,61
3
(1,000)
0
1,000
2,000
3,000
4,000
2017 2018 2019 2020 2021 2022 2023
New Supply Demand
Downtown Detroit’s revival has been a source of optimism for local apartment developers. Over the next four quarters, approximately 46% of the apartment deliveries in this region will be focused in the Downtown / Midtown / Rivertown submarket, where nearly 1,000 new units are forecast to open by September 2020.
Source: Berkadia Research; Axiometrics
Projected Supply vs. Demand I Detroit, MI MSA
FORECAST
Client Logo 22
Rank Submarket3Q19 Effective
RentY-o-Y Rent
Change
3Q19 Occupancy
Rate
Y-o-Y Occ. Change (BPS)
1 Troy/Rochester Hills $1,159 6.7% 97.0% 100
2 Clinton Township/St. Clair County $866 5.3% 96.4% 0
3 Westland/Canton/Livonia $959 4.7% 97.1% (50)
4 Farmington Hills/West Bloomfield $1,262 4.5% 97.0% 20
5 Southfield $1,079 3.8% 96.8% 20
6 Pontiac/Waterford/Auburn Hills $925 3.2% 97.5% 30
7 Warren/Roseville $807 3.1% 96.1% 70
8 Downtown/Midtown/Rivertown $1,183 2.9% 96.7% (50)
9 Detroit City $760 2.8% 97.2% 90
10 South Wayne County $843 2.8% 97.1% 20
11 Novi/Livingston County $1,061 2.6% 98.2% 0
12 Royal Oak/Oak Park $968 2.6% 97.2% 20
13 Sterling Heights/Shelby Township $999 2.3% 97.7% (30)
14 Dearborn/Dearborn Heights $978 -2.2% 94.2% 130
Detroit Market Average $959 3.5% 97.0% 20
Source: Berkadia Research; Axiometrics
Quarterly Trends – Rent Growth in Submarkets
M U L T I F A M I L Y T R E N D S
Client Logo 23
$57.
1
$93.
6
$118
.3
$294
.2 $369
.3
$346
.5
$811
.0
$369
.8
$555
.8
$279
.4
$301
.3
Ten-Year Average Annual Sales Volume: $329.5 million
$0
$180
$360
$540
$720
$900
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
($)
Mill
ions
Annual Sales Volume Ten-Year Average Annual Sales Volume
Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
Annual Transaction Volume I Detroit, MI MSAMultifamily Assets*
Many recent trades have been for value-add properties. As a result, most trades have been for Class C properties for prices roughly in line with or lower than recent years.
Client Logo 24
Average Annual Price Per Unit I National vs. Detroit, MI MSA
$84.
1
$85.
4
$93.
3
$101
.3
$108
.3
$113
.6 $130
.0
$140
.4
$145
.4 $157
.9 $174
.5
$29.
4
$36.
8
$37.
4
$34.
4
$39.
3
$40.
5 $58.
3
$61.
7
$85.
6
$85.
8
$66.
3
Metro Detroit Ten-Year Average: $50,909
U.S. Ten-Year Average: $115,981
$0
$40
$80
$120
$160
$200
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
($)
Thou
sand
s
USA Metro Detroit U.S. Ten-Year Average Metro Detroit Ten-Year Average
Source: Berkadia Research; Real Capital Analytics
* Based on independent reports of properties and portfolios $2.5 million and greater.
Multifamily Assets*
As of 3Q19, the average price per unit in Metro Detroit was down from one-year prior, but still outpaced the 10-year historical average of $50,909.
Client Logo 25
67.2
%
66.5
%
65.9
%
65.3
%
65.1
%
63.9
%
63.7
%
63.4
%
63.9
%
64.4
%
64.8
%
73.9
%
73.7
%
73.5
%
73.5
%
71.7
%
71.3
% 74.0
%
71.6
%
70.2
%
70.9
%
71.1
%
45%
55%
65%
75%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19
USA Detroit, MI MSA Linear (Detroit, MI MSA)
Source: Berkadia Research; U. S. Census Bureau
According to the U.S. Census Bureau, the average homeownership rate in the Detroit, MI
MSA was 71.1% in the third quarter of 2019, down 310 basis points year over year.
Homeownership Rate
Client Logo 26
$63,007
$60,845
$61,001
$57,995
$62,096
$57,975
$54,564
$75,058
$59,633
$67,660
$59,496
18.4%
18.7%
18.9%
18.9%
19.1%
19.9%
20.5%
21.6%
23.6%
25.5%
28.5%
$11,591
$11,404
$11,547
$10,981
$11,881
$11,514
$11,182
$16,205
$14,058
$17,250
$16,932
Kansas City, MO
St. Louis, MO
Cincinnati, OH
Indianapolis, IN
Columbus, OH
Detroit, MI
Cleveland, OH
Minneapolis, MN
Milwaukee, WI
Chicago, IL
United States
2019 Median Household Income Rent as % of Income 3Q19 Annualized Effective Rent*
Source: Berkadia Research; Tetrad; Axiometrics
Median Household Income vs. Annualized Effective Rent
Housing Affordability I Midwest Metro Areas
Metro Detroit Economic Trends
Client Logo 28Source: U.S. Census; Bureau of Labor Statistics; Moody’s Analytics
0%
5%
10%
15%
20%
Detroit-Warren-Dearborn, MI Michigan USA
September 2019 | Seasonally Adjusted
Monthly Job Growth
Monthly Unemployment Rate
USA: 3.5%
Michigan: 4.2%
Detroit, MI MSA: 4.6%
Client Logo 29Source: Berkadia Research; Moody’s Analytics
Construction, 4%
Education & Health Services, 15%
Financial Activities, 6%
Government, 9%
Information, 1%
Leisure & Hospitality, 10%
Manufacturing, 13%
Natural Resources & Mining, 0%
Other Services, 4%
Professional & Business Services, 20%
Trade, Transportation & Utilities, 19%Metro Employment
Sectors – September 2019
E C O N O M I C T R E N D S Major employers that have moved to the region include Google, Microsoft, and LinkedIn. Google is building a 53,000-square-foot development center
in Novi for its self-driving car project.
Client Logo 30Source: Berkadia Research; Moody’s Analytics
Metro Employment Sectors – September 2019
E C O N O M I C T R E N D S
Rank SectorSeptember 2019
Employees% of Total Employment
1 Professional & Business Services 396,083 19.5%
2 Trade, Transportation & Utilities 378,115 18.6%
3 Education & Health Services 312,451 15.4%
4 Manufacturing 256,137 12.6%
5 Leisure & Hospitality 205,391 10.1%
6 Government 188,597 9.3%
7 Financial Activities 115,576 5.7%
8 Construction 75,619 3.7%
9 Other Services 74,845 3.7%
10 Information 26,571 1.3%
11 Natural Resources & Mining 1,067 0.1%
Grand Total 2,030,4453 100.0%
September 2019 | Seasonally Adjusted