Fundamentals to Hold Steady in 2012 for U.S. Multifamily Investments

---

According  to RealShare/Jones Lang LaSalle's Apartments Outlook 2012 Survey, the future looks bright for multifamily owners and investors as cap rates stabilize, interest rates remain low, and home ownership rates decline.

Many investors expect demand to continue at a similar pace in 2012 and beyond for this highly desirable property sector. The survey was completed by more than 150 private investors, real estate brokers, developers, REIT and institutional investors this fall.

The survey asked respondents where they anticipated multifamily cap rates trending in 2012 for the most competitive markets.  A majority of respondents (39 percent) said we're in a holding pattern, with cap rates staying stable, while another 21 percent say they'll decrease less than 50 basis points.  Another 15 percent felt cap rates will decrease more than 50 basis points, while the same amount (15 percent) say cap rates will rise by less than 50 basis points.

"I think cap rates are going to stay the same in 2012, for two reasons:  one is the economy--it's going to basically stay the same next year and interest rates are the lowest we've ever seen and I just don't see that changing soon, " said Paul Belden, President and Principal, WLA Investments.

What is changing is investors' appetite for yield.  With interest rates hovering around four percent--respondents were asked to peg the breaking point for them to leave the market as cap rates fall.  Half of all respondents (50 percent) said that number falls between 5 and 6 percent, while another 26 percent say if cap rates fall to between four and five, they're out.  Just 14 percent say cap rates below four percent is the only way they'll leave the market.

Jones Lang LaSalle's Managing Director Faron Thompson says lending in 2012 will be prolific with plenty of opportunities, but the low cap rates could affect transaction rates.

"The first part of this year, supply and demand was very geared toward demand, without much supply.  Properties that came to market got bid up and very aggressively priced.  Folks saw that pricing, but now the market has flipped--there's now more supply on the market so you're not quite seeing the same high pricing parameters," said Thompson.  "Moving into 2012, it will be an interesting dynamic to see how that balances out... there's plenty of transactions to go around and lending will be very flush in 2012."

The fallout from the subprime mortgage crisis made many wonder if Americans had given up on the "American Dream" of owning a home.  Jones Lang LaSalle's survey asked respondents when the propensity of renting versus owning would likely shift back to home ownership.  A majority of respondents (44 percent) say that won't happen until at least 2015 or later, while another 32 percent say the market will reach a balance in 2013--with a shift towards buying in 2013.  Just 15 percent say that market balance comes next year, with a shift to buy in 2013.

Bob Hart, President of KW Multifamily Management Group, Kennedy Wilson, says multifamily in recent years has benefitted from the "echo boomer" effect of consumers not buying homes due to job loss and the desire to not bear the burden of owning a home.

"Because of the dislocation in the market of subprime debt, we've seen a decline in home ownership from its peak of 69 percent, moving down to about 64 percent, and we've added about 4 million new renters to the rental market.  I think that will plateau and as soon as there's absorption in the home ownership market, we'll start to see people buying new homes again," said Hart.  "Right now, the supply of new homes is at an all time low.  There are only about 300,000 new homes to buy in the whole country right now, so I think it's going to take awhile for people to gain more confidence and then we'll start to see them return.  I don't think it'll return to the levels of where it was at, but I think it will start to climb up again."