According to the latest research from CBRE, multifamily investment in the U.S. is on pace for a record-breaking year, with total sales volume in 2014 on course to surpass the previous high of $105 billion set in 2007.
Multifamily sales volume totaled $27.5 billion in Q3 2014--an increase of 28% year-over-year. The total in the first nine months of the year reached $73.1 billion--3% higher than the same period in 2013. If the current pace of investment continues through the remainder of the year, annual investment could reach $105.2 billion in 2014, surpassing the prior peak of $105.1 billion set in 2007. Multifamily will be the first property sector to return to 2007 sales levels if it reaches this milestone.
Mid and high-rise property sales rose 75% year-over-year in Q3 2014. If this year's pace of sales holds up in the final quarter, 2014 sales of mid/high rise properties will top the record level of $38.1 billion set in 2013. Garden apartment investment rose by 10% year-over-year in the quarter to $17.0 billion. Year-to-date sales of garden apartments reached $46.1 billion; 10% below the peak acquisition year in 2006.
CBRE Senior Managing Director of Capital Markets Brian McAuliffe commented, "Multifamily continues to lead commercial real estate through the recovery and into expansion. Three trends characterize recent investment activity by buyer category. First, private non-institutional buyers' share of total activity has increased from 50% in 2013 to 59% so far in 2014. Second, foreign capital is playing a larger role, accounting for 6% of this year's total apartment investment through Q3 2014--up from 5% in 2013--and 10% of all mid/high-rise investment--up from 3% in 2013. Third, REITs are playing a less active role in the investment arena, with market share of acquisitions falling from 20% last year to 9% this year."
Downward pressure on cap rates and increasing sales price per unit reflect the large volume of capital committed to the sector, as multifamily investors continue to have a favorable view of this asset class. The average apartment sales price per unit was $128,000 in Q3 2014, representing an increase of 5.9% over the prior year.
U.S. multifamily expansion continued to pick up momentum in Q3 2014 as demand--measured by net absorption--grew at an annual rate of nearly 289,900 units. With rentable stock increasing only 256,700 units over the past four quarters, the average vacancy rate edged down year-over-year to 4.3%; 60 basis points (bps) below the historical average (1994-2013). Meanwhile, rent growth remained healthy at 3.0%, annualized.
The market that contributed the most to national demand growth over the past four quarters were Houston, New York, Los Angeles, Dallas, Austin, Washington, D.C., Atlanta, Seattle, Miami, Denver, Phoenix, Raleigh and Orange County--together accounting for more than half of the period's total net absorption. Markets with the strongest growth in demand--over 3.5% from a year earlier--were all in the Southern or Western U.S. regions and included Austin, Raleigh, El Paso, Salt Lake City, Charlotte, San Jose, Richmond and Nashville.
Improving job growth and households' rising propensity to rent were key factors driving demand. Household formation remains weak by historical standards, but as the improving economy and rising incomes continue to unleash pent-up housing demand, the multifamily sector could experience renewed momentum--maintaining and potentially exceeding its recent gains over the next 12-18 months.
CBRE Capital Markets Senior Managing Director Peter Donovan commented, "Consistent with the robust sales activity, we continue to see strong lender demand for multifamily loans. As a result, borrowers are seeing increasingly more attractive debt terms with respect to pricing and interest only. The lending market continues to show underwriting discipline with respect to proceeds and structure."