Equity Flocks to Multifamily … For Now

Strong fundamentals keep investors focused on apartment investments, but there are some indicators that should be watched, according to JVM Realty Corp.'s Jay Madary.
Jay Madary  Image courtesy of JVM Realty Corp.

If you asked me to sum up the availability of equity in today’s multifamily marketplace in one word, the one that comes to mind is: plentiful.

But don’t take just my word for it. In the National Multifamily Housing Council’s most recent quarterly survey of its members about the state of the apartment market—which was conducted and released in April—the Equity Financing Index was 53. A reading above 50 indicates that, on balance, equity is more available when compared to three months earlier, while a number below 50 means that equity is less available. A reading of 50 means conditions are unchanged.

The survey marked the sixth straight quarter in which the index came in at 50 or above, NMHC says.

First-quarter investment sales figures also provide evidence of an enthusiastic equity market. According to Newmark Knight Frank’s first-quarter Multifamily Capital Markets Report, U.S. multifamily investment sales totaled $36.4 billion in the first three months of this year, up 1.3 percent from the same period in 2018.

Considering the apartment industry’s fundamentals, equity investors’ interest in the sector makes abundant sense. The national occupancy rate for stabilized apartment communities stood at 94.9 percent at the end of April, according to Yardi Matrix. This is, of course, despite the noticeable uptick in construction the industry has seen in recent years.

In the Midwest, where JVM owns and operates our portfolio of Class A apartment communities, we continue to see strong interest from private equity groups and funds comprised of high net worth individuals. These investors have long been attracted to the solid operating fundamentals and reliable rent growth found in the region’s secondary and tertiary markets.

But other equity investors are moving into the region, in search of returns and deal flow they can’t find in coastal, primary markets. According to Marcus & Millichap: “Although Midwestern markets have taken longer to generate appreciation relative to the near-peak pricing achieved in late 2008, they have offered investors particularly high yields.”

Considering the solid overall shape of the apartment market, I expect equity investors to remain interested in the U.S. and Midwest apartment markets throughout the rest of this year and beyond.

Below, however, are three dynamics that could, to one degree or another, increase or decrease the availability of equity for apartment companies. 

The job market

We still are in the midst of historically low unemployment rates. In May, the U.S. unemployment rate was 3.6 percent. But only 75,000 jobs were created, below what analysts were predicting.

Hopefully, May’s job creation total was just a blip. But job growth is one of the foundations of strong renter demand, and more sluggish numbers might give some equity investors pause.

Interest rates

Most people in the industry probably assumed we’d see a couple of rate increases this year from the Fed. Now, it seems as though we may see them go down again at some point in 2019.

A drop in interest rates could be a game-changer for some investors and create yet additional interest in multifamily real estate.

Real estate tax assessments 

This issue may be somewhat under the radar, but many local jurisdictions in Midwest metros such as Kansas City and Chicago have become significantly more aggressive in the amount and manner in which they assess commercial properties.

Since real estate taxes can be the largest single expense for a multifamily property, an unforeseen increase or a change in an assessor’s valuation methodology can have serious implications for property values and investor returns. Uncertainty may create some hesitation in investor activity; however this has yet to be seen.

These are interesting times in the multifamily marketplace. Because of the history of strong returns, it’s a desirable choice for many equity investors. Now, more than ever, it’s important for investors to seek multifamily sponsors and managers with experience effectively managing through all the dependent variables of multiple economic cycles.    

Jay Madary serves as president and CEO of JVM Realty Corp., an Oak Brook, Ill.-based owner and operator of apartment communities throughout the Midwest.