Multifamily Industry Expects Strong 2011

Investor interest in multifamily properties has been on a roll in 2010, and a JLL survey predicts that momentum isn't going to slow down next year.

Investor interest in multifamily properties has been on a roll in 2010, and the Jones Lang LaSalle 2011 Multifamily Investment Survey predicts that momentum isn’t going to slow down next year. Nearly 93 percent of respondents–multifamily owners, investors and developers–predict their investment allocation into multifamily will increase in the coming year, up slightly from the 90 percent who answered similarly last year.

For many of that 93 percent, the increase will not be slight. Nearly 40 percent of the respondents who plan to increase investment in the sector said it will be by 75 percent or more in 2011. Twenty-seven percent say they’ll put their investment capital towards value-add investments. Close behind are opportunistic plays (20 percent), new development (20 percent) and core-product investments (19 percent). An overwhelming majority of respondents (90 percent) say that a year ago they planned to pursue opportunistic investments.

More than 100 respondents participated in the survey this year, and they were considerably more optimistic about apartment fundamentals for the coming year than during this time last year. More than 63 percent believe that apartment rents will rise by 5 percent in 2011, for example. This stands in marked contrast to last year’s results, when not a single respondent predicted any increase in rent whatsoever–a sentiment that turned out to be too pessimistic.

Predictions about the movement of cap rates in 2011 were more mixed. Thirty-four percent of respondents believe the market will see an increase in multifamily cap rates of zero to 50 basis points, while another 24 percent believe that number will rise from 50 to 100 basis points. Conversely, 21 percent predict cap rates will fall by zero to 50 basis points.

Will development return in 2011? Or, more to the heart of the matter, will financing for development return? A fair number of respondents, 37 percent, said that liquidity and pricing equilibrium has already returned, while another 30 percent say it could take another six to 12 months–most of 2011, in other words. Another 22 percent say liquidity will be waylaid for 18 months or more–that is, until 2012 at least. Last year, no respondents agreed liquidity had been restored, and more than half (55 percent) said restoration of liquidity would be achieved only within the next 12 to 18 months.

“Multifamily development will take place over the next 12 months,” Denny St. Romain, managing director with the Real Estate Investment Banking practice in Jones Lang LaSalle’s Capital Markets Group, tells MHN. “With the exception of a few markets, supply delivered through the latter half of the last decade was generally below historical levels, and so the last few years was not a supply-centric problem. It was a demand problem as people sought homeownership in record levels. When the economy fell off the rails and people lost their jobs, this heightened the demand problem.”

Now demographics are moving in multifamily’s favor, and homeownership is returning to historical norms, Romain continues. “Development of apartments will occur in 2011 in major markets in locations that have real barriers to entry. We’re already seeing the construction lending and equity windows opening for projects in these locations,” he says.