1. Introduction to Multifamily Investments:

Multifamily properties, encompassing apartment complexes, condominiums, and townhouses, represent a cornerstone of the real estate market. These assets offer investors the opportunity to generate consistent rental income and benefit from long-term appreciation. Despite occasional fluctuations, multifamily investments have historically demonstrated resilience, making them an attractive option for both institutional and individual investors.

2. Current Market Landscape:

Over the past several weeks, various market indicators have hinted at a potential inflection point for multifamily valuations. This comes against the backdrop of broader economic recovery efforts and evolving investor sentiment. Here’s a closer look at the key factors shaping the multifamily market:

• NMHC Sentiment Survey:

The National Multi Housing Council’s Quarterly Survey of Apartment Conditions serves as a barometer of investor sentiment within the multifamily sector. The latest survey data, particularly from January, suggests a notable improvement in the perceived availability of debt and equity capital. While challenges persist in operating fundamentals, the uptick in capital availability signals growing confidence among investors.

• Federal Reserve Policy and Interest Rates:

The Federal Reserve’s monetary policy decisions play a significant role in shaping real estate markets, including multifamily investments. Following the December Fed meeting, where Chairman Jerome Powell hinted at a potential end to interest rate hikes, market expectations have shifted towards anticipated rate cuts in 2024. These expected rate cuts, with the first projected for June, could have far-reaching implications for multifamily valuations and investor behavior.

• Private REIT Market Trends:

The private Real Estate Investment Trust (REIT) market provides additional insights into investor sentiment and capital flows within the real estate sector. Recent trends indicate a gradual improvement in capital inflows, particularly among large private REIT managers. Shareholder redemptions have shown signs of slowing down, reflecting a shift in investor sentiment towards greater confidence in the market’s stability.

3. Implications for Investment Strategy:

Against the backdrop of these market dynamics, it’s essential for investors to reassess their investment strategies and position themselves strategically within the multifamily sector. At Elevation Investment Group, we advocate for a proactive approach that takes into account both short-term market trends and long-term fundamentals. Here are some key considerations for investors:

• Portfolio Diversification:

Diversification remains a cornerstone of prudent investment management. While multifamily properties offer stability, investors should complement their holdings with exposure to other asset classes to mitigate risk and enhance overall portfolio resilience. Strategies such as incorporating alternative assets like private equity and real estate can provide diversification benefits and enhance risk-adjusted returns.

• Focus on Fundamentals:

Amidst market fluctuations, it’s crucial not to lose sight of the underlying fundamentals of multifamily investments. Factors such as location, property condition, tenant demographics, and rental demand continue to drive long-term value appreciation. Investors should conduct thorough due diligence and prioritize assets with strong fundamentals and growth potential.

• ESG Integration:

Environmental, Social, and Governance (ESG) considerations are increasingly influencing investment decisions across all sectors, including real estate. At Elevation Investment Group, we recognize the importance of sustainability and responsible investing practices. Integrating ESG criteria into our investment strategies not only aligns with our values but also enhances risk management and long-term value creation.

4. Long-Term Outlook and Strategic Positioning:

Looking ahead, the multifamily market is poised for continued evolution and adaptation to changing economic conditions. While short-term fluctuations may occur, the long-term outlook for multifamily investments remains favorable. Factors such as demographic trends, urbanization, and evolving lifestyle preferences support sustained demand for rental housing, particularly in urban centers and high-growth regions.

At Elevation Investment Group, we remain committed to leveraging our expertise and insights to navigate the multifamily market’s complexities successfully. Through rigorous analysis, disciplined investment strategies, and a focus on delivering value to our clients, we aim to capitalize on opportunities while managing risks effectively.

Conclusion:

In conclusion, multifamily investments present compelling opportunities for investors seeking stable income streams and long-term capital appreciation. By staying attuned to market trends, integrating ESG principles, and maintaining a diversified portfolio, investors can position themselves strategically to navigate the multifamily market’s dynamics effectively.

At Elevation Investment Group, we stand ready to assist investors in achieving their financial objectives through tailored investment solutions and proactive portfolio management. As we continue to monitor market developments and assess emerging opportunities, we remain committed to delivering superior results and fostering long-term partnerships with our clients.

1. Refinancing Challenges

• Maturing CMBS Office Loans: In 2023, approximately 84 percent of $7.8 billion in fixed-rate CMBS conduit loans for offices are set to mature. These loans are likely to face difficulties when refinancing¹.
• Interest Rates and Economic Fundamentals: While the economy remains robust, CRE sales volumes, lending volumes, and asset values have declined. High interest rates exacerbate the situation, making refinancing a daunting task.
• National Office Vacancies: Office vacancies reached 19 percent in Q1 2023, a level not seen in nearly three decades. The pandemic’s uncertainty and the prevalence of hybrid work contribute to this predicament¹.

2. The Office Sector’s Struggles

• Price Correction: Moody’s Analytics predicts a 25 percent expected price correction for office properties. Distressed sales are likely, adding downward pressure to average price indices¹.
• San Francisco and Beyond: Some office properties in San Francisco and other areas are trading at significant discounts. The focus isn’t merely on rents and vacancies but on valuation amid pandemic-induced uncertainty¹.

3. The Residential Real Estate Buffer

Now, let’s address the impact on residential real estate:

• Divergent Trajectories: While office buildings face headwinds, residential real estate follows a different trajectory. Here’s why:
  • Remote Work Dynamics: The pandemic accelerated remote work, leading to increased demand for residential properties. People seek larger homes with dedicated workspaces.
  • Supply Constraints: Residential inventory remains tight, supporting property values. Unlike office spaces, residential properties aren’t grappling with oversupply.
  • Consumer Behavior: Homeownership remains a priority for many, driving residential real estate stability.

4. Charts and Visuals

Unfortunately, I can’t provide actual charts here, but imagine a line graph depicting office vacancies rising alongside a bar chart showing maturing CMBS office loans. The gap between these trends highlights the impending crisis.

Conclusion

In summary, mortgage-backed office buildings face a rocky road ahead, while residential real estate stands resilient. As we navigate this landscape, keep an eye on how these dynamics evolve.

Remember, this analysis is based on current data, and market conditions can shift. But for now, residential real estate remains a safe harbor amidst the stormy seas of office foreclosures.

President-elect Joseph Biden unveiled a nearly $2 trillion stimulus relief package late yesterday afternoon, less than a week before he is set to be inaugurated as the country’s new commander-in-chief. The proposed legislation includes several measures that will have an impact on the multifamily industry, including billions toward emergency rental assistance, an issue industry leaders have focused on for months.

The $1.9 trillion package, dubbed the American Rescue Plan, proposes $350 billion in state and local government aid, $170 billion for K-12 schools and institutions of higher education, $50 billion toward COVID-19 testing, $20 billion for a national vaccine program in partnership with states, localities and tribes, and increasing the federal minimum wage to $15 per hour.

MEASURES IMPACTING MULTIFAMILY

Several measures within the proposed relief bill have a big impact on renters and the multifamily industry. They include:

• Extending the eviction and foreclosure moratoriums through the end of September
• $30 billion in emergency rental and utility assistance
• $1,400 stimulus checks for qualifying adults
• Increasing federal, weekly unemployment benefits to $400 through the end of September
• $5 billion in emergency assistance for people experiencing homelessness

Additionally, the proposal would further expand unemployment insurance benefits, provide a 15 percent increase in food assistance programs like SNAP, and increase the Child Tax Credit.

MORE RELIEF NEEDED

As news of the proposed bill reached the housing industry, some organizations were quick to praise the measures included that would provide much-needed relief to renters struggling financially, while others had mixed reactions.

“All of these resources and protections are badly and urgently needed,” tweeted Diane Yentel, the president of the National Low-Income Housing Coalition. She added that there is still more needed from the government “to ensure housing stability” for low-income renters and those experiencing homelessness.

In a statement to Multi-Housing News, the National Multifamily Housing Council’s Senior Vice President of Government Affairs, Cindy Chetti, said that the organization is in the process of reviewing President-elect Biden’s relief proposal.

“While we are encouraged by the additional $25 billion in rental assistance and other important supports including extended unemployment benefits and additional stimulus checks, we are seriously concerned with a potential extension of the national eviction moratorium,” said Chetti.

The proposed relief bill comes less than a month after President Trump signed a $900 billion relief package into law Dec. 27. The bill allocated $25 billion to an emergency rent relief fund, sent $600 stimulus checks to most Americans, extended the eviction moratorium until the end of January, and added an additional $300 a week to unemployment benefits, among other measures.

News of the proposed legislation also came on the same day that an industry trade group representing owners of more than 400,000 rent-stabilized apartment units in New York City said renters owed an estimated $1.1 billion in rent arrears. The Community Housing Improvement Program (CHIP) released the results of a survey of its members yesterday which found that 19.4 percent of apartment renters in the city are more than two months behind in rent.

According to CHIP’s survey, the average renter owes around $6,173—about four-and-a-half months rent. The figure is a more than 300 percent increase from last February, when 6.1 percent of rent-stabilized residents were more than two months in arrears.

“We have a clear blueprint to protect renters from eviction and the housing system from collapse. The government needs to pay the rent for those who can’t afford it,” said Jay Martin, executive director of CHIP, in prepared remarks.

While last month’s stimulus relief package was a sigh of relief for both landlord and renter advocates, worries about back rent were still top of mind. NMHC’s Caitlin Sugrue Walter told Multi-Housing News late last month that the $25 billion in emergency rental assistance included in the legislation was “a fraction” of what was needed to make up an estimated $70 billion in back rent nationwide, especially in light of rent collection numbers that have been slowly trending downward.

CBRE report shows top 20 markets for apartment completions

The top three markets for multifamily construction all saw more than 20,000 units completed in 2018.

Coming in at No. 1 on the list of the markets where the most apartments were built last year was the New York metro area, where there were 32,300 new units constructed in 2018. And there’s a pretty significant gap between first and second place.

Second on the list was Dallas-Fort Worth, where there were 20,500 units completed. Third on the list and just barely behind DFW was the Los Angeles area, where there were 20,000 units completed.

After Los Angeles, there’s another significant drop before you get to the fourth metro area on the list, Seattle where there were 14,400 units completed in 2018.

Fifth on the list was Washington, D.C., where there were 13,600 apartments built last year, followed by Denver with 11,700 units completed, Boston with 9,700 units built, and Miami, where 9,500 units were completed.

Those eight markets make up nearly half of all the units completed in 2018.

Here’s the full list of the top 20 markets the most apartments were built last year:

1. New York Metro – 32,300 units completed
2. Dallas/Ft. Worth – 20,500 units completed
3. Los Angeles/Southern California – 20,000 units completed
4. Seattle – 14,400 units completed
5. Washington, D.C. – 13,600 units completed
6. Denver – 11,700 units completed
7. Boston – 9,700 units completed
8. Miami/South Florida – 9,500 units completed
9. San Francisco Bay Area – 9,300 units completed
10. Chicago – 8,900 units completed
11. Orlando – 7,700 units completed
12. Austin – 7,400 units completed
13. Charlotte – 7,000 units completed
14. Atlanta – 6,900 units completed
15. San Antonio – 6,800 units completed
16. Phoenix – 6,400 units completed
17. Minneapolis – 6,300 units completed
18. Tampa – 6,100 units completed
19. Nashville – 5,900 units completed
20. Portland – 4,900 units completed

According to CBRE’s report, based on recent data on multifamily construction starts and under construction totals, multifamily construction is expected to remain elevated near 2018’s figures through the first half of 2020, at least.

Rents are likely to rise faster for older, class-B apartments in 2019 than for any other class of apartment property.

“We expect Class-B to continue to have the strongest average rent growth, as it has through recent history,” says Andrew Rybczynski, senior consultant at research firm the CoStar Group.

Rents continue to rise for new class-A luxury apartments as well. Strong demand is quickly filling new units as they open and, as a result, rents are rising faster than inflation. At the same time, rent growth is finally slowing down for class-C and class-D apartments—simply because many of those renters are already paying as much as they can afford.

“While occupancy is sky high in class-C product, rent growth in that sector is beginning to slow a little,” says Ron Willett, chief economist for MPF Research, a RealPage company.

Less competition for luxury renters

In many parts of the country, developers cannot find enough construction workers to finish their apartment projects on schedule. They are likely to open fewer new class-A apartments in 2019 than they have in prior years, according to Rybczynski. In 2018, developers also faced construction delays, which allowed a return in rent growth at the top of the market.

“Until those delays work themselves out, class-A rent growth will perform better than the relative lows at the end of 2016 and through 2017,” says Rybczynski. He predicts rents will grow 2.9 percent in 2019 for class-A apartments, compared to 2.7 percent last year.

“Class-A units gained a bit of momentum in pricing power during 2018, reflecting that lease-up of new supply progressed so well, especially in the last half of the year,” says Willett. He says rents grew by 3.2 percent on average in 2018. He anticipates slower rent growth in 2019, in the middle to high 2 percent range.

“Another year of sizable deliveries when job production is expected to slow should result in some cooling of class-A rent growth in 2019,” says Willett.

Class-B apartments in the lead

Class-B apartments have generally stayed fully occupied, even in markets where developers have built thousands of more expensive, class-A units. So, rents at class-B communities have moved steadily higher, while many landlords at class-A buildings have had to offer steep discounts.

That’s because class-B apartments are usually priced several hundred dollars lower than new class-A properties. “Class-B benefits from being cheap relative to class-A, while experiencing relatively little supply risk,” says Rybczynski. He predicts rents will rise in the high-2-percent range for class-B apartments in 2019. That similar to the 3.1 percent average growth in 2018.

According to Willett, “Class-B properties should experience the strongest rent growth in 2019, with the expected performance level holding near 2018’s growth rate of 3.5 percent.”

Slowdown for class-C apartments

Rents will probably not grow as quickly for class-C apartments in 2019, compared to the year before.

“That reflects affordability constraints for the renters who live in that lower-end product,” says Willett. Many of the people who live in class-C apartments are already paying a large share of their income in rent. Rents climbed 2.9 percent for class-C apartments in 2018. “The 2019 result likely will slip a little more to around 2.5 percent.”

CoStar predicts rents will rise 2.6 percent for class-C units in 2019, on averages. That’s up slightly from 2.6 percent the year before.

Top neighborhoods and markets

Across the U.S., rents are likely to rise the fastest in neighborhoods with a large number of older, class-B apartment units renting at relatively low prices and little new construction.

Often these neighborhoods can be found in smaller cities or suburban areas, far from the overbuilt downtown areas of larger cities.

“On average,e the strongest rent growth is in the suburbs,” says Rybczynski. “This is more a supply story than demand. Over the past cycle an outsized share of supply has flowed to urban environs, and that continues to be the case.”

“Located just south of downtown San Jose, Foundry Commons provides residents immediate access to major employers, public transportation and excellent retail, dining and entertainment venues,” said Salvatore Saglimbeni, IPA senior director. “The property is situated among many expanding technology companies, including the proposed new Google campus, currently estimated to bring up to 25,000 new jobs.”

Salvatore Saglimbeni, Stanford Jones, Phil Saglimbeni, Greg Harris, Kevin Green and Joseph Grabiec, all with IPA, represented the seller, Cityview. The buyer is Tilden Properties.

“The number of potential new jobs and additional office space that Google’s proposed campus is slated to bring will greatly impact the area around Foundry Commons,” said Jeff Tripaldi, managing partner with Tilden Properties. “It’s estimated that 50 percent of the people who would work in the Google village will live within a short distance of their jobs. We are also excited about Adobe breaking ground on their fourth tower in 2019. These expansions, among others we are seeing in downtown San Jose, will continue to transform the area.”

“As the ‘Capital of Silicon Valley,’ San Jose and its downtown area are ideally positioned for robust employment, entertainment and cultural growth,” said Sean Burton, Cityview’s chief executive officer. “When we broke ground in 2014, we were extremely bullish on the idea of providing a highly amenitized community adjacent to this urban core location.”

Completed in 2016, Foundry Commons features well-appointed interior finishes and extensive common area amenities highlighted by an expansive common area courtyard with an outdoor kitchen, lounge area with gas fire pit, sports courts and a resort-style swimming pool.

With a network of senior-level investment advisors located throughout the United States, Institutional Property Advisors (IPA) is qualified to meet the needs of institutional and major private investors. IPA’s combination of real estate investment and capital markets expertise, industry-leading technology, superior support services and acclaimed research offer customized solutions for the acquisition and disposition of institutional properties and portfolios.

Facebook first publicly announced the lease was in negotiations to the City of Burlingame Planning Commission in August and the lease was fully executed shortly thereafter in the fourth quarter of 2018. Mike Moran and Clarke Funkhouser of Cushman & Wakefield represented Kylli in the transaction. JLL represented the tenant.

Moran said, “We couldn’t be more excited that one of the world’s leading technology firms has selected Burlingame Point to expand their Northern California footprint. This is a testament that strong design elements do make a difference to the discerning tenant.”

Burlingame Point will execute on the City of Burlingame’s intent to activate their waterfront. In addition to four new Class A office buildings with bay views, the project will include public amenities such as an improved Bay Trail, a vibrant pedestrian promenade, and a safer roadway for cyclists and motorists. Fisherman’s Park also receives a facelift as a result of the project.

Funkhouser said, “Now that construction is well underway, it is more evident that this project will be an exceptional example of the forward-thinking of both Kylli and their world class team of partners.” He added, “Believed to be one of the largest lease transactions ever on the San Francisco Peninsula, the project scale, location and quality were all factors that helped to solidify this lease.”

Expected to open in 2020, Burlingame Point is the first Class A office campus developed by Kylli in the Bay Area. They also own 225 Bush in San Francisco (former Standard Oil Building) and 43 acres in Santa Clara currently going through re-entitlement for a very large mixed-use office, retail and residential development.

About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.