CAP RATE VS IRR WHAT’S THE DIFFERENCE
Sizing up a potential real estate investment is no easy task and there are a number of things investors must consider before closing a deal. Two of the most critical factors are the cap rate and the IRR or internal rate of return. There are some similarities between the two but it’s important to understand exactly what they measure and why they’re important. Continue reading "CAP RATE VS IRR WHAT’S THE DIFFERENCE"
Shifting Strategies: Multifamily Investors Adjust To Sector Slowdown, Mature Cycle
Investor confidence in the stability of the multifamily sector this year remains strong, despite robust new supply levels and concerns regarding rising inflation and aggressive interest rate hikes.
As the cycle continues to mature, investors are shifting their investment strategies to focus less on appreciation to generate crazy returns, and more on stability and betting on assets that will generate steady cash flow.
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2018 Marcus and Millichap North American Multifamily Forecast
Apartment investments will maintain a positive outlook in 2018 as the combination of steady job creation, healthy demographics and an accelerating pace of household formation sustains renter demand. The consistent flow of newly developed units, a top of mind consideration for many investors, increased competition for Class A apartment assets in cities with disproportionate deliveries. The effects of the additions tend to be concentrated, and the deliveries will wane in the coming year, supporting sound performance metrics in most markets. Class B and C workforce housing will continue to outperform as vacancies in these properties remain at historical lows, enabling owners to justify strong rent growth.
A combination of job growth, healthy demographics and accelerated household formation creates a rosy outlook for apartment investments in the coming year. For Chicago, location and property type should be taken into consideration. This is according to Marcus & Millichap's 2018 Multifamily North American Investment Forecast.
As unemployment hovers around 4 percent, companies face significant staffing needs. These tight labor conditions should place additional upward pressure on wages, potentially boosting inflationary pressure in the coming year. For the multifamily sector, this combination of strong employment market, rising wages and elevated confidence levels could unlock accelerated household formation, particularly by young adults.
The housing sector added just 3 percent to the economy last year, about two-thirds of the normal level. The new tax laws should accelerate this trend as they disincentivize new home construction, causing homebuilders to reduce construction and thus shifting a portion of the housing demand from homeownership to rentals.
From a national perspective, rising development costs in the coming year, tighter construction financing and mounting caution levels will curb the pace of new additions from the 380,000 units delivered in 2017 to approximately 335,000 apartments. Although the pace of completions will moderate in 2018, additions will still likely outpace absorption.
Class A vacancy rates advanced across the country to 6.3 percent in 2017 and will continue their climb to the 6.8 percent range over the next year. Vacancy rates for Class B and C assets will rise less significantly in 2018, pushing to 5.0 percent and 4.7 percent, respectively. Average rent growth will taper to 3.1 percent in 2018 as concessions become more prevalent, particularly in Class A properties.
For investors, the looming interest rate escalation could weigh on buyer activity. Cap rates have held relatively stable over the last two years, and the sturdy outlook for apartment fundamentals is unlikely to fundamentally change this year. Investors are broadening their search for investment options with upside potential, opening up their portfolios to include a variety of Class B and/or C assets, outer-ring suburban locations and properties in secondary or tertiary markets.
Across Chicago, robust construction in the core outpaces net absorption and vacancy will edge higher in the city this year as completions reach new highs. More than half of all deliveries will be in the urban core, pushing vacancy up in the Loop and other downtown neighborhoods as supply outstrips demand.
The influx of luxury and high-tier rentals will increase the use of concessions and moderate rent growth as units begin to lease. However, further corporate expansions in the Loop, including Walgreens and Amazon, are luring additional residents downtown, which should minimize any significant uptick in the area’s vacancy. In the suburbs, relatively lower rents will keep vacancy below 5 percent despite a growing construction pipeline. Potential first-time homeowners may continue to rent in the face of rising property and utility taxes, further benefiting apartment demand.
Favorable cap rates spur investor interest in Chicagoland and first-year returns that trend above gateway markets will entice a diverse pool of buyers this year. Institutional investors will propel transactions in the urban core and a jump in completions may provide additional opportunities for top-tier assets. Luxury buyers (between $1 million and $10 million) that have been priced out of downtown may pursue properties along “L” stops and near the northern lakefront where cap rates in the high-5 percent area can be found.
Less risk-averse buyers will chase yields near 9 percent in southern Chicago suburbs. These neighborhoods typically maintain vacancy rates below 4 percent. Metro-wide, demand has pushed valuations beyond the previous cycle’s peak and buyers have begun to show resistance to higher prices. These widening expectations between buyers and sellers may slow deal flow this year. Additional headwinds include concerns about rising taxes due to state and local budget issues, which could prompt some owners to list.
Source: RE Journals | Staff Writer | By Matt Baker
Labor market at turning point as wage growth hits recovery high. Meaningful wage growth has been a missing ingredient in the expansion for the past eight years. Yet now, with unemployment holding steady at 4.1 percent, employers are finally feeling the pressure to increase wage hikes to attract and maintain their human capital. Further evidence of tight labor conditions can be found in job openings at or near record levels of 6 million positions over the past 12 months.
Existing single-family home sales increased a modest 1 percent over 2017 as limited for-sale inventory kept the market from gaining traction. While many of the factors contributing to a restriction in sales velocity remain the same, changes to the tax code remove some of the incentives to homeownership, and anticipated interest rate increases this spring will bring additional challenges to the future of the housing market.
Booming Construction Pipeline Edges Apartment Vacancy Up
Apartment conversions bring new life to old office buildings. Led by numerous corporate relocations from the suburbs, job growth in Chicago’s core has ignited apartment construction as young professionals seek an urban lifestyle. Development remains significantly elevated above the previous five-year average and will peak in 2018, placing upward pressure on vacancy metro-wide. While many high-rise structures will be added to the skyline, several developers are re-purposing old office spaces into rentals amid limited land availability in the core. The Century & Consumers Buildings and the Insurance Center Building are two of several projects slated to bring hundreds of apartments of converted office space online. Continue reading "Multifamily Research Market Report Chicago Metro Area Fourth Quarter 2017"