Last year may have been a record year for multifamily transactions, both in terms of volume and pricing, but 2016 is shaping up to have slower deal flow.
Sure, the apartment market’s fundamentals remain solid as apartment demand continues to outpace supply and the market remains liquid. However, caution is creeping into the sector as investors take stock of a variety of factors, from the turmoil in the markets abroad and the uncertain interest rate environment at home to the slower rent growth and hefty price tags attached to multifamily assets.
“From what we’re seeing, I would expect transaction volumes will be down [this year],” said Philip Martin, vice president of market research with Waterton, during a session at the 2016 NMHC Research Forum. “Globally, investors are dealing more than they were last year.”
Roughly 13 to 14 percent of multifamily investment last year was from foreigners, which compares with a historical average of about four percent, Martin said. This surge in foreign capital makes multifamily more susceptible to the fluctuations in markets like Europe and China. Moreover, changes to the Foreign Investment in Real Property Tax Act (FIRPTA) could create additional hurdles for foreign capital.
This is leading multifamily investors to zero in on their targets, making it less about macro forces or geographic markets and more about the details of the individual assets and how they perform relative to other options in the market.
But for as much as there is some degree of hesitation on the side of investors, owners are also sitting tight more than last year. “In a lot of cases, people might not want to sell,” said Jim Clayton, Ph.D., head of investment strategy and analytics for Cornerstone Real Estate Advisers. “If you’re nervous, you don’t want to sell your best assets. So, a lot of the activity will be in the value add.”
As higher prices have recalibrated returns, many investors have moved from new development to redevelopment in search of yield. Martin, for one said, that his value-add product is targeting a levered 13 to 14 percent IRR.
In response, Clayton said, “If you’re not doing the ‘B,’ you’re not reaching anywhere near that figure.”
“It’s the replacement value story,” Martin explained. “We have to have a relative housing value edge-versus apartments and homeownership. ... We’re typically looking for a deal that is ten to 15 percent below median rents, where it’s a nice home at great value against all housing options.”