February 21, 2020
Integra Realty Resource’s (IRR) 2020 Viewpoint National Multifamily Report could be summed up in one sentence: “Multifamily specialists are upbeat for 2020.” Based on survey responses, IRR analysts noted several reasons for this assessment, which boiled down to a steady stream of renters, demand outpacing supply, and continued household formation that isn’t necessarily interested in homeownership.
This, in turn, has led to a continued interest in multifamily investment. With “abundant capital in search of attractive product” being the main 2019 storyline, IRR researchers broke down the interest by area. Specifically, “investor activity is exploding across the South and West,” especially in areas such as Atlanta, Dallas and Phoenix. Investors are also targeting tertiary markets, as the smaller metros accounted for $27.7 billion in deals through November 2019, according to Real Capital Analytics.
Who are the buyers of these assets? The IRR analysts indicated that private equity funds, managed by Blackstone, Goldman Sachs and Bridge Investment, made up two-thirds of 2019’s buyer pool. Institutional investors — Brookfield, TIAA and Invesco — were also active in multifamily asset trades, while “cross-border investors (captured) 7.1% of deal volume,” the report noted.
That the distribution of apartment sellers closely resembled that of buyers led IRR to conclude that:
Investors are relying on asset substitution, as opposed to asset reallocation, across asset categories.
Existing properties, as opposed to new construction, “are the supply-side to be considered in the multifamily capital investment space,” meaning flow of funds could continue “at quite a high level in 2020.”
Finally, IRR analysts noted that, “consistent with market fundamentals, cap rate contraction . . . seemed irreducibly low,” leading to “risk premiums that did not compensate investors adequately.” However, cash-flow characteristics, combined with conditions of market demand and careful loan-to-value ratios are indicating “careful risk management in the sector,” the report said, adding that survey respondents aren’t anticipating additional cap rate compression in 2020.
Overall, the report concluded, if, indeed, the multifamily cycle is starting to decelerate, “the industry seems to be saying, let’s make the most of it.”
Anthony Graziano, Chairman and CEO with IRR, will be the keynote presenter at Connect Media’s upcoming Connect South Florida conference. To register, click here.
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