CREW SPECIAL REPORT: M-F Industry Will Decelerate in 2013, Panelists Agree
By Keat Foong, Contributing Editor
The year 2012 will go down in the record books as a chart-popping year for the multi-family sector, but the exuberant levels of multi-family rent increases, transactional activity and equity investments are due for a slowdown over the next year, suggested speakers at the 2012 CREW Network Convention and Marketplace, held in Chicago.
“This is one of our best years ever,” said Debbie Corson, principal, Apartment Realty Advisors.
Corson was the moderator on a panel focusing on the multi-family sector. Absorption has accelerated in 2012 and as a result, rents have continued to increase in 2012 even in the Midwest, said Corson. The level of transactions, meanwhile, has risen significantly from the lows hit in 2009 and 2010. This year, $16.2 billion in sales were registered in the second quarter. The average cap rate, 6.2 percent in the second quarter, continues to experience compression pressure, according to Corson.
2012 is “pretty much as good as it gets,” agreed David Schwartz, managing member of Waterton Associates. Schwartz said revenue growth for Waterton’s portfolio is 7 percent. However, he predicted that the rate of rent increases for his company’s properties will decrease in 2013 from 5 percent in 2012 to 3.5 percent; a level he noted is closer to historical rent growth averages of 3 percent a year.
Schwartz suggested that the causes of decreases in the rate in rent growth next year will be increases in the level of multi-family construction, which is occurring in most major cities, and a slow-growth economy, in which GDP increases will continue to be sub-3 percent. However, Schwartz said his company is not assuming a recession for the U.S. economy next year, whether it is caused by the fiscal cliff and/or the European economic crisis.
Susan Blumberg, senior vice president and managing director, NorthMarq Capital, agreed that revenue growth in the apartment industry in 2013 has been robust, increasing by 7 percent to as high as 15 percent. Rent growth has been generated by both rent increases as well as burn off of concessions, she said. Blumberg said annual rent growth of about 4 percent is expected going forward.
The prices at which properties exchange hands are now exceeding replacement costs, but “credit has not boomed,” said Blumberg. Unfortunately, banks are not ready to execute a lot of construction financing yet, she noted. Blumberg said she did not seriously expect the fiscal cliff–involving large scale spending cuts and tax increases–to ultimately occur. “No one will have to jump,” she said.
Matt Wakenight, senior vice president investments, at Equity Residential, said that he was bullish with regards to prospects for the sector. Rent growth for EQR’s portfolio is 4 to 5 percent, he reported. Wakenight acknowledged there was a lot of apartment supply being delivered in the major markets, but the REIT expects that apartment supply in its markets will be absorbed very quickly.
Young people want to live in the cities, and household formation will occur, he said. Wakenight said one of EQR’s New York City properties leased up in eight months, and is 97 percent occupied.
Panelists also agreed that the level of apartment investments have and will come down somewhat, at least until U.S. and global uncertainties are lessened. ARA’s Corson said that investors are holding onto capital, and they are bidding at lower pricing and higher yields.
Corson said that some slowdown in transactional volume was experienced in the last quarter. However, there are still a lot of private equity seeking yields–but these players are exiting the “Sexy Six” to go to the secondary markets.
Schwartz noted that pension funds are “pretty cautious” now, and they are “holding onto cash” in view of the fiscal cliff, slowdown in China and European recession. He said the Mideast instability and European crisis will have to move towards resolution before the pensions will “feel better about the world.”
Wakenight said there was previously typically “a long line out the door” of investors wanting to purchase non-major market properties being unloaded by EQR. The interest from investors is still there, but they are more constrained by limits to the maximum price they are willing to pay, Wakenight said.