Search this blog:
Follow Avison Young:

Monday, October 30, 2017

Multi-family real estate: past, present and future

By Gary Lyons and Craig Cadwallader (Raleigh-Durham)

As most readers understand, the multi-family property sector has been on a tear for the last seven years with primary growth indicators reflected in the last five years across much of the United States and, certainly, in Raleigh-Durham’s Research Triangle region.

Overall, the Triangle market has been fueled with an influx of new residents (and capital) seeking affordable and/or short-term housing solutions until they determine their long-term plans; many of the newcomers are millennials and baby boomers who are considering downsizing their homes. Between 2010 and 2015, the Raleigh-Durham area’s population grew by 16.5%, making it the fastest-growing metropolitan area in the nation, according to MPF Research.

As millennials quickly become the majority of the new entrants into the job market and family formation continues to be delayed, there is a continued increase in the relative demand for rental properties of all types, with apartments continuing to lead the way.

Developers have responded with a historic level of construction, delivering an average of 4,600 units per year between mid-year 2012 and mid-year 2017 with another 5,550 units slated to be completed over the next four quarters. In spite of this record level of deliveries, occupancy levels have held consistently between 94% to 95% since 2012, while lease rates have been climbing at an average of 3.5% per year since then, according to MPF Research.

Well-capitalized developers have had no problem securing favorable short-to-long-term financing solutions from a wide variety of lenders, including Fannie Mae, Freddie Mac, the Federal Housing Administration/Department of Housing and Urban Development, commercial mortgage-backed securities (CMBS), the U.S. Department of Agriculture and insurance-related loan product types. Lending terms have been extraordinarily favorable with common loan-to-value ratios of 65% to 75% and interest rates ranging from 3.26% to 4.85% based on loan type. For bridge loans, interest rates have ranged from 8.99% to 13.00%, with limited fixed periods available, and construction loans have hovered around 5.25%. Lenders’ overall appetite for writing new loans has diminished somewhat and will impact some developers’ ability to finance new projects, but we believe that there is no short-term end in sight to the continued growth of the sector in the Triangle.

According to a recent National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) study, North Carolina will need an additional 220,000 apartments by 2030. If one were to assume that the Triangle region will supply approximately a third of the statewide inventory, our region would need to add a total of 73,333 units, or 5,641 units per year, by 2030. If, however, the Triangle’s demand equates to 40% of the statewide production, developers would need to deliver an average of 6,769 units per year.

Finally, investors continue to be enthralled with our region’s multi-family assets with approximately $1.4 billion worth of inventory trading in 2016, according to MPF Research. Volume and prices have cooled from the peak of 2016 with volumes down 41.9% on average and prices down 6.5% ($125,000 per unit) year-over-year. As of mid-year 2017, the national average sales price was $151,000 per unit versus $125,000 per unit in the Triangle, with prices varying based on product type.

In recognition of the strong demand for multi-family properties, Avison Young is expanding its multi-family service offerings in Raleigh as part of a companywide initiative to expand Avison Young’s footprint in the sector.

(Gary Lyons and Craig Cadwallader are both members of Avison Young’s capital markets team in Raleigh-Durham. Lyons is a senior vice-president specializing in the marketing, disposition and acquisition of investment properties. Cadwallader is a vice-president specializing in multi-family properties. Recognizing the appeal of multi-family properties among the global investor community, Avison Young recently hired Cadwallader, a 15-year commercial real estate veteran, to lead the company’s multi-family practice in the Triangle.)

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.