Archives for April 2022

Skyrocketing rents are continuing to drive interest from investors of all types towards multifamily properties across the country.

On the heels of record investment sales volume on multifamily properties in 2021, early indications are that deal volume continued to flow during a busy first quarter of 2022.

Last year, the rents residents paid for apartments rose by a whopping 13 percent on average across the U.S., according to the economists the CBRE Capital Markets. That kind of rent growth offset any hesitation by investors due to uncertainties caused by the pandemic or the highest rate of inflation in more than 40 years.

In 2022, investors have even more reason to worry about inflation, but there are also expectations rents will keep rising as well. A new war threatens to push rising prices higher more quickly as Russian oil and Ukrainian grain vanish from the world markets.

But the demand for rental housing in the U.S. remain very strong in the first quarter of 2022. And investors seem grateful to have a safe haven from economic uncertainty as they paid high prices—and accepted low investment yields—for apartment properties.

“We do still expect 2022 to rival 2021,” says Matt Vance, senior economist with CBRE Econometric Advisors and head of multifamily research for CBRE, working in the firm’s Chicago offices.

Investors of all types spent more than they had ever spent before—a total of $335.3 billion—to buy apartment properties in 2021, according to Real Capital Analytics (RCA), a data company based in New York City. That’s more than twice what they spent in 2020, the first pandemic year. It’s also much more money than they spent in the years before the pandemic, which set records at the time, but never totaled more than $200 billion in any given year.

“Multi-housing reigned as the most liquid asset type in the U.S at year-end 2021, underscoring the defensiveness of the sector,” says Geraldine Guichardo director of Americas Living Research for JLL, working in the firm’s Chicago offices.

The incredible growth in apartment rents made many of these deals possible. Effective apartment rents grew nearly 14 percent in 2021 on average in the U.S., according to JLL, as suburban rents continued to rise quickly… while rent concessions also burned off in recovering downtown submarkets that had been hurt by the coronavirus pandemic.

Strong demand for apartments continued in the first quarter of 2022. “We are already observing strong lease trade-outs, ranging from 15 percent to 25 percent in major metros,” says Guichardo, who expects apartment rents to grow another 10 percent on average in calendar year 2022.

Rents are likely to keep growing as high demand for apartments filled hundreds of thousands of new apartments. The percentage of apartments occupied in 2022 is expected to stay at the high level set in 2021 of about 97 percent, according to JLL. Developers are expected to open 300,000 new apartments, compared to the average of about 200,000 per year since 2010. But high demand for apartments is expected to absorb those new apartments.

Rent growth helped investors make deals in 2021—and should continue to help in 2022.

“That rent growth obviously was a significant driver to transaction activity and being able justify higher property values,” says Brian McAuliffe, president of multifamily for CBRE Capital Markets, working in the firm’s Chicago offices. “That benefitted sellers and investors, because they were able to put money to work.”

Strong demand for rental apartments attracted investors who had piled up capital to investor during the coronavirus pandemic. “There has been a big ramp up in the global saving rates and capital accumulation—the wall of capital grew even larger in 2021,” says CBRE’s Vance.

The threat of inflation may draw even more investors to spend money to buy apartment properties—as inflation also threatens to disrupt other parts of the global economy. “Multifamily offers considerable inflation hedging… annual leases allow for rapid adjustment compared to, say, the office sector,” says Vance.

Prices inflation also threatens to bring higher interest rates, however. Federal officials have already promised to raise their benchmark interest rates, in an attempt to slow inflation down and cool an overheated economy, and long-term interest rates, like the benchmark yields on Treasury bonds, are already rising.

“The rise in interest rates in the last 30 days, both fixed-rates and short-terms variable rate, has definitely put a stress on transaction activity,” says McAuliffe.

Buyers of apartment properties are trying to adapt with strategies like floating-rate, to finance deals to buy buildings.

And even the threat of rising interest rates may even be helping at least some deals get done.

“Sellers may bring properties to market if they perceive that the first half of the year might be better than the second,” says McAuliffe. “They may be flexible on prices in their eagerness to transact in an environment where interest rates are still low.”

Source: “Multifamily Deals Continued to Pile In During a Busy First Quarter“

It’s tough to keep moving forward if you don’t consider what is waiting to trip you up.

There are usually multiple ways to look at anything. In the case of the Yardi Matrix National Multifamily Report for March 2022, you could emulate the late lyricist Johnny Mercer: accentuate the positive, eliminate the negative, and don’t mess with Mister In-Between.

But what works for an upbeat song isn’t necessarily good for business planning. There is ample good news of increased asking rents and occupancy rates, but in a sense, that’s all in the past. The question investors and operators must ask is what might be coming.

One big consideration is rent growth. “Asking rents increased by $34 nationally, up 2.1%, in the first three months of 2022, which is record growth for a first quarter,” the report said. However, that’s unlikely to continue for a few reasons. One is slowing economic growth as inflation continues to take a toll on activity. Slower growth will affect incomes, meaning the likelihood of fewer gains to cover costs of higher rents. The war in Ukraine is also an issue, according to Yardi because that could help sustain inflation, especially with the effect on energy prices.

Inflation means higher interest rates as the Fed tries to cool the economy. But multifamily acquisition yields are low, at a 4.5% average and down into the threes for prime locations. “Low cap rates caused little concern when the risk-free rate was 1% and the typical mortgage coupon was 2.5% to 3.5%, but when the cost of capital gets more expensive, low yields can complicate transactions and refinancings,” the report says.

Then there’s household formation. “Although official numbers for 2021 have not been released, some estimates put the number of new households formed in 2021 in the two million range, which makes sense given record multifamily absorption of nearly 500,000,” the report says. “Household growth and absorption are likely to slow to more normal levels in 2022, to about half of last year. That would presage healthy—albeit more moderate—gains in multifamily fundamentals.”

Also, rent growth is not at all nationally even. Migrations to the southeast and west are a big force in rent growth, presumably because there’s a lot of new construction happening, which means higher costs given rising building materials and labor expenses and a steady stream of asking rents not tied to previous occupancy.

Occupancy is cooling in some high-growth metros—that is, the very west and southeast that has led growth because of demographic migration. “Occupancy rates in several markets have decreased over the last year as demand hasn’t kept pace with deliveries,” the report says. “Phoenix showed the largest decrease in occupancy (-0.5%) in March, followed by the Inland Empire and Las Vegas (-0.4%) and Sacramento (-0.3%).”

Source: “Here Come the Multifamily Headwinds“

The pandemic accelerated the use of digital platforms and cloud services, generating a surge in data center development that is attracting tons of capital.

The pandemic helped ramp up data center usage, as businesses suddenly faced a greater need for cloud technology to connect and support remote workers. This increase in cloud migration has accelerated growth and expansion of data centers globally, causing major data center operators to expand their footprints, according to a recent report from commercial real estate services firm Cushman & Wakefield (C&W).

“The reliance on technology platforms over last 24 months is at an all-time high, creating demand for more data center space across the world,” says Phoenix-based Carl Beardsley, senior director with JLL Capital Markets, who notes that the big operators and users are responding by building-out data space and turning it over at a high velocity.

Over the last year, U.S. users absorbed 500 megawatts (MW) of data space, says Dallas-based Bo Bond, executive managing director and leader of C&W’s global data centers team. The majority of that absorption was driven by “hyperscalers”—the largest occupiers of data centers, which are mostly cloud services firms including Google Cloud, Amazon Web Services (AWS) and Microsoft.

JLL tracks both colocation absorption and hyperscale development activity, according to Beardsley. In terms of absorption activity in the colocation space, the top five or six U.S. markets typically see 70 to 80 percent of all activity, he notes. These markets include Northern Virginia, Phoenix, Chicago, Santa Clara, Calif., Dallas, and the Pacific Northwest.

These top markets are all seeing a significant amount of new development, but in recent years both Phoenix and Hillsboro, Ore. experienced an increase in colocation development because they offer competitive tax benefits, low-cost power, relatively low land costs and a quick entitlement process, Beardsley says. These factors also are attracting public cloud users.

Data center developers are looking for additional capital to keep up with the added demand, and they aren’t disappointed, as data centers are currently among the hottest U.S. alternative real estate investment sectors, and a lot of investors are entering this market for the first time.

“Historically, data center capital markets were a mix of data center operators, infrastructure funds, data center REITS and investors that partner with preferred operators,” Beardsley notes. “Now, there is a large influx of institutional capital looking for higher-yield opportunities that performed well through the pandemic that are shifting attention from ‘core’ asset classes to this sector,” he says.

“There is a ton of money going into this sector,” adds Bond, noting other new entrants, including private equity funds, investment funds set up to specifically invest in data centers and sovereign wealth funds all have entered this market. There are also infrastructure funds that have switched from roads and bridges to data facilities and towers.

In fact, there is so much money going into big public data center REITs that they are consolidating and going private. Three of the largest data center REIT portfolio acquisitions ever occurred last year when CyrusOne, CoreSite Realty and QTS Realty were taken private. For example, Blackstone acquired QTS for $10 billion.

A surge in user demand over the last six to 12 months for large blocks of space is driving new development, with some users even taking whole buildings of 250,000 sq. ft. or more, Beardsley says. In fact, demand for single tenant data centers exceeds demand for multi-tenant space in some top markets like Northern Virginia, where 53 percent of users are seeking single-tenant centers.

“It can be difficult for users to forecast future IT loads, so these end users must ensure they are procuring enough space to continue to scale with business demands,” Beardsley says.

Demand for data center space is so strong that Beardsley notes the cloud services providers doing greenfield development are attracting institutional capital.

While hyperscalers lease a lot of data space from colocation operators, Bond says a huge acceleration in cloud-based services is also driving a surge in development by cloud companies. Beardsley notes that the top five hyperscalers are building out in primary markets, as well as areas not dominated by data center operators, such as Iowa, New Mexico, Nevada and Ohio. “These hyperscale users typically buy large land parcels—300-plus acres—and build out a campus with multiple buildings,” he adds, noting that they often require additional resources that can be difficult to obtain at urban in-fill sites.

“As use of cloud-based computing increases, hyperscalers will continue to build out in secondary and tertiary data center markets,” Beardsley says.

For example, Google Cloud plans to build new data centers in Nebraska, South Carolina, Virginia, Nevada and Texas, according to an announcement made by Alphabet and Google CEO Sundar Pichai last May. Apple will also begin construction this year on a $1.3 billion data center in Waukee, Iowa that has been on it drawing board since 2017, reported KCCI Des Moines. And Meta (Facebook) is building a new $800-million data center near Kuna, Idaho, to support its future metaverse, reported Data Center Frontier.

AWS is building data centers in new markets around the world, but its biggest play is right here at home. The tech giant plans to spend $35 billion to build four data centers with more than 1 million sq. ft. on an 80-acre site adjacent to the Manassas mall in Prince William County in Northern Virginia, according to DCD News. The company’s data center revenue increased by nearly 40 percent year-over-year in the third quarter of 2021 to $16.1 billion,

And Microsoft has unveiled an aggressive plan to build 50 to 100 new data centers across the U.S. and around the globe each year for the foreseeable future, reported CRN, as it expands its Microsoft Azure cloud offerings worldwide.

Source: “Growing Demand Continues to Drive New Data Center Development“

The question is, will that trend continue this year?

Global investors poured capital into commercial real estate in droves in 2021, though “it was not exactly a risk-on type of trend in acquisitions,” Real Capital Analytics’ Jim Costello notes in a new analysis.

“Much of this capital was deployed to the asset types viewed as safer in the face of elements of economic uncertainty,” he says. “Some elements of this uncertainty are growing into 2022, but it is unclear how the current environment will impact this momentum of capital.”

Investors focused their energy on what Costello deems “targeted plays on unique assets where income and expense structures were sheltered” last year—and in 2022, it may well be that they turn their focus to assets resistant to inflationary pressures. But “what is unclear is if each property sector can provide such protection broadly or if such safety is only seen in targeted plays,” he says.

Collectively, the top 100 global investors were more active buyers than the overall market, purchasing 83% more than they did the year prior. Costello says that on a net basis, those top investors bought more than they sold and added nearly $180 billion in assets to their portfolios collectively in 2021.

Those investors were also overwhelmingly focused on the apartment and industrial sectors which accounted for 82% of their net investment last year.

“This overweighting to industrial and apartment is nothing new: these two sectors accounted for 78% of the net acquisition of these investors in 2020,” Costello says. “Still, that overweighting in 2020 occurred in a period when the net investment in hotels and offices was falling relative to a year earlier.”

The top investors also re-entered the hotel and office sectors after a tepid 2020, with acquisitions “targeted on plays more resistant to the demand challenges presented in the Covid era,” he says.

“Hotel purchases were more weighted towards automobile-focused properties and vacation-type destinations, and less focused on the big business hotels that struggled as people could not congregate at conferences,” Costello observes. “The growth in investment for the office sector was aided by growing investor interest in life sciences assets which are naturally resistant to remote work challenges.”

Conversely, the RCA analysis notes that net investment in retail properties plummeted from $2.5 billion in 2020 to hit a net deficit of $4.5 billion in 2021, fueled by e-commerce and inflationary concerns.

Source: “Top Global Investors Stuck to Safe Asset Classes in 2021“