Chicago—JLL’s latest research indicates the multifamily sector’s first quarter of 2016 was the strongest first quarter ever recorded, with figures reaching $34.5 billion.
The power of private equity is one reason multifamily is continuing its more than six-year boom period. The investor group accounted for more than $8.2 billion in activity during the first quarter, more than doubling comparable activity from the first half of 2015. Suburban, garden-style properties are the primary target of the group.
“Private equity in particular has demonstrated an appetite for suburban, garden-style assets, and it largely boils down to a play for yield and the strategy to diversify investments,” David Williams, JLL’s leader of multifamily capital markets, told MHN.
“Compared to CBD product, suburban, garden-style assets deliver higher yields and often have lower rents, which mirror renters’ preference toward more affordable rents,” he said. “In addition, the REITs have been net sellers of their older suburban assets evidenced by an increase in portfolio activity which has tripled year-over-year. The suburban value-add play on the transit corridors and in the best school districts are highly sought after by renters [who] are being priced out of the core.”
Secondary market strength is also contributing to the ongoing robustness. Investment sale volumes in secondary markets reached almost $8.9 billion during the first quarter, up 30.6 percent year-over-year compared to the first quarter of 2015.
“Secondary markets are enticing to investors for reasons similar to suburban, garden-style assets; they present the opportunity to diversify holdings and secure higher yields. Portfolio activity also plays into secondary market activity since many portfolios that traded during the first quarter featured locations in Atlanta, Charlotte, Nashville, Orlando, Raleigh, Tampa, Dallas-Fort Worth, Austin, Denver and Silicon Valley,” Williams said.
“In particular, secondary markets across the Sunbelt are demonstrating strong fundamentals and pricing gains. For example, Atlanta, Charlotte and Fort Lauderdale all experienced year-over-year absorption gains and rent growth gains, while Orlando saw pricing growth over 40.0 percent,” he continued. “The Western region also performed well, luring investors to secondary markets like Sacramento, Portland and Seattle, which saw rent growth gains of 11.4 percent, 8.7 percent and 8 percent, respectively over the past 12 months.”
Portfolio acquisition activity was especially worth noting. Volumes increased 17.9 percent quarter over quarter and essentially tripled from the year-earlier period.
Markets in the Sunbelt took the lead on absorption and rent growth. A number of Sunbelt markets witnessed upticks in absorption year over year of 50 to 100 basis points. As a result, rent growth gains are being driven above the national average.
The report also stated there are signs of a pullback in multifamily construction. Culminating in March was a six-month trend of multifamily construction starts falling at or below current 12-month rolling averages. Another indicator of starts, multifamily permits, dropped 12.4 percent year over year.
JLL found that multifamily vacancy rates continue to be low, while rent growth is high. Vacancy in 2015 finished at 4.4 percent, the fourth year in a row of lower than 5.0 percent vacancy nationwide. Meantime, rent growth grew 80 basis points nationally year over year to 4.7 percent.
“Multifamily continues to be the straw that stirs the drink,” the JLL report stated, noting that the multifamily asset type had almost $35.4 billion of investment sales activity during Q1. That figure represents an 8.6 percent hike vis-à-vis first-quarter 2015 and, according to JLL, “is the largest first-quarter volume on record.”
As well, Q1 sales volumes represent the second-largest figure of the last 15 quarters. They were topped only by the unprecedented fourth-quarter of 2015.
As noted, “private equity transactions demonstrated a sizable shift toward suburban, garden-style product, which has lagged behind the largely urban-centric expansion thus far fueled by investments across acquisitions of existing product and new developments,” the JLL report concluded.