Multifamily Returns See Record Growth
SitusAMC, New York, reported multifamily investment returns grow in the third quarter as rents grew to record highs.
Multifamily cap rates plunged to a record-low 4.5 percent–nearly 180 basis points below their long-term average–during the quarter, SitusAMC said.
“Though the industrial sector remains the superstar performer among all commercial real estate segments, the apartment sector’s growth is extraordinary,” said SitusAMC Insights Senior Director Peter Muoio.
Jamie Woodwell, Vice President of Commercial Real Estate Research with the Mortgage Bankers Association, agreed the multifamily sector is firing on all cylinders. “Property fundamentals are remarkable, as is investor sentiment,” he said. “That interest has brought a strong pipeline of new development but for the time being even that is having trouble keeping up with demand.”
Woodwell noted every investor group on the lending side has a strong appetite for multifamily loans, “which pushed third quarter borrowing and lending to a record level,” he said.
Apartment returns as measured by the NCREIF Property Index shot up 290 basis points from the second quarter to 6.5 percent in the third, a new record. The sector recovered its pandemic-related losses within two quarters and its performance has risen steadily since then, increasing more than 600 basis points from a year prior. Returns now stand 450 basis points over the long-term average.
“Capitalization rates for national, institutional-quality properties generally compressed over the last three years, but the COVID-19 pandemic accelerated the trend,” said Jen Rasmussen, Vice President with SitusAMC Insights.
SitusAMC reported Sun Belt metros including Las Vegas, Phoenix, Riverside, Calif., and Tampa, Fla. showed some of the highest returns, as did Charlotte and Raleigh, N.C., and Memphis and Nashville, Tenn. “One of the reasons for high returns has been the influx of new residents moving into the areas,” the report said. “The Phoenix market, for example, experienced the largest increase in household migration nationwide during 2020. It also tied for the top spot in total migration with California’s Inland Empire, which benefitted from residents moving east from Los Angeles to Riverside.”
Cap rate compression was greatest in Phoenix, Tampa and Charlotte, SitusAMC said. All three markets experienced a 100-plus-basis-point decline from the prior quarter.
In the south, garden apartments skyrocketed to 9.5 percent returns, more than 700 basis points above the long-term average. “High-rise apartments in the south scored their best performance in over two decades while low-rise apartments performed the best in 11 years,” SitusAMC said. The average high-rise return was 5.5 percent, 350 basis points above the long-term average, while the average return for low-rise apartments was 6.4 percent, more than 400 basis points above the long-term average.