‘Flood of Capital’ Into Multifamily

The flood of capital into multifamily real estate shows no signs of lessening–especially given large private equity funds’ recent multi-billion dollar acquisitions–reported Yardi Matrix, Englewood, Colo.

“Debt will remain available from a variety of lending sources, though new regulations and a likely uptick in interest rates could raise borrowing costs,” Yardi Matrix’s Winter Outlook said.

The Federal Reserve raised short-term interest rates by 25 basis points in December after holding them at zero for six years. Yardi Matrix said that move reflects the Fed’s confidence in the U.S. economy and noted that the market had long anticipated it. “However, the timing and amount of future rate hikes will remain highly debated and holds the potential to create volatility in the financial markets,” the report said.

Yardi Matrix noted that lenders have loosened multifamily underwriting standards, “but [they] are nowhere near frothy 2007 levels,” the report said. And although multifamily supply numbers look optimistic in some markets, the firm said it expects that demand for apartments will keep pace: “The sector is coming off a period of historically low supply growth, which began in 2010 and endured through the better part of 2013. Furthermore, supply-side concerns are diminished by today’s historically high occupancy rates and expectations for strong renter demand, the result of elevated household formation and reduced homeownership rates.”

Yardi Matrix said the influence of institutional capital sources keeps growing, as shown by a recent spate of large-scale mergers and acquisitions. Recent activity includes:

–Lone Star Funds acquired real estate investment trust Home Properties and its nearly 42,000-unit portfolio for $7.6 billion in October.

–A Blackstone Group partnership purchased New York’s 11,250-unit Stuyvesant Town-Peter Cooper Village for $5.3 billion and a 10,000-unit portfolio of properties from a Greystar Partners-managed fund for $2 billion.

–Partnerships controlled by Starwood Capital Group paid $5.4 billion for 72 properties owned by Equity Residential and $1.9 billion for a portfolio of properties owned by Landmark Apartment Trust.

“These deals indicate that the biggest and most sophisticated investors in commercial real estate are betting on the multifamily sector over the long term,” Yardi Matrix said. “Given that other capital sources traditionally mimic the activities of the Blackstones and Starwoods of the world, it would seem safe to say that there is not likely to be a shortage of equity capital in the sector anytime soon.”