As capital markets conditions evolve, new listings come on the market and sales activity picks up following the initial COVID-19 pandemic hiatus; large individual and portfolio sales are leading the multifamily space. Berkadia’s investment sales advisors have been extremely busy over the past several months fielding interest from multifamily investors looking for acquisition opportunities. BOV activity has picked up significantly and Berkadia has been engaged to market a number of large individual and portfolio sales opportunities.
So, what’s driving the heightened interest we’re seeing and the increase in large individual and portfolios coming on the market?
Sidelined capital is chomping at the bit to get back into the market
Most multifamily investors remain extremely well-capitalized and are ready to return to “business as usual” with minimal or no impact of historical indicators of value. We are seeing more investors underwrite new acquisitions at or near pre-pandemic levels and return metrics. This is fueled by existing investors with capital, and also by $38 billion of new capital raised by real estate investment funds during the second quarter of 2020, according to Institutional Real Estate Inc. More specifically, 26 of the funds raised more than $1 billion during the quarter. It is important to note that the capital raised is largely focused on property types less impacted by COVID-19, such as industrial and apartments. The popularity of these asset classes should be no surprise due to the perceived elasticity of the multifamily sector and e-commerce, which is principally underpinning the industrial sector.
Multifamily has proven its mettle
Multifamily was surely tested when COVID-19 struck and one of the early stories of the pandemic has been its surprising resilience, as demonstrated by the strength of rent collections in the early months. Certainly, much remains to be seen as the benefits of the CARES Act have lapsed and the prolonged impact of the pandemic evolves, but investors remain cautiously optimistic about the long-term outlook for the multifamily sector.
The truth is, most markets are still largely undersupplied and underlying apartment fundamentals remain strong. Why? There is unmet demand for multifamily housing supported by strong demographic trends, homeownership rates and attractive interest rates. According to the Dodge Data & Analytics Supply Track, more than 476,000 apartments are expected to be delivered in 2020. While that may seem like a lot, it is still not enough. The market needs millions of new apartment units across the spectrum of high-end luxury to affordable to keep up with demand.
Household formation is expected to grow by 12.2 million between 2018 and 2028 according to the Joint Center for Housing Studies of Harvard University. In addition, rising housing costs relative to stable to declining household incomes is causing many households to rent versus own. This structural shift away from homeownership, due to the lack of affordability in most markets along with inherent flexibility, is something that we will need to contend with for some time. All of this bodes well for multifamily sector over the near and long term.
Demand for data is exploding
Right now, we are also seeing a flight-to-quality phenomenon as investors are taking a defensive approach to multifamily investing. Specifically, investors are mainly searching for high-quality, core and core-plus opportunities in strong markets and locations with stable underlying fundamentals/operations, because they feel these deals can transcend market cycles. Value add has become less attractive over the past six months as investors today are less willing to take on added risk. Both property and market data analytics are essential for investors to make data-driven real estate decisions, provide clarity and confidence to further support their evolving investment strategies.
We’re seeing an unprecedented thirst for data as investors seek more information and analysis when vetting acquisition opportunities during the pandemic. Investors want to be “smarter” and having real-time actionable insights empowers them to make better informed decisions. Portfolios often offer more data to consume in terms of understanding property performance, local market conditions and fundamentals, etc. We also advise clients on national market conditions including rent trends and potential economic impacts, while at the same time drilling into how individual sub-markets may be impacted by COVID-19 based on renter wallet share, unemployment figures, employer composition, historical occupancy and rent trends, and other relevant statistics amid COVID-19.
It surely has been an interesting year for the multifamily market, to say the least, but we remain confident in the asset class and the risk-adjusted returns it can offer investors. As investment activity continues to gain momentum following the earlier pause, there are opportunities aplenty for today’s discerning multifamily investors.