RealPage recently held a webinar where they discussed the differences between the recent performance and the future prospects of the urban core apartment markets compared to the more suburban markets.

Inspiration for this webcast came from the widespread recent speculation that the COVID-19 pandemic had disproportionately impacted properties in the urban core. The presentation was conducted by Greg Willett, Chief Economist at RealPage, and Adam Couch, Market Analyst at RealPage.

Defining terms

For purposes of this analysis, RealPage defined “urban” areas to be densely populated and highly developed areas around the central business districts of major cities. The “suburban” areas are more affordable and less densely populated areas outside the urban core. However, “suburban” areas may still be within the city limits.

Tracking occupancy

RealPage presented information on occupancy dating back to 2011. It showed that occupancy in urban properties was significantly higher than that in suburban properties at the beginning of the period. However, urban occupancy remained at about the same level, with seasonal variations, while suburban occupancy rose. Starting around 2015, suburban occupancy exceeded that in urban areas, a trend that is still in place today.

Although occupancy has fallen in both urban and suburban areas since the pandemic started, the impact has been more pronounced in the urban areas. This is shown in the first chart from the webinar, below.

occupancy urban apartment markets and suburban apartment markets

Source: RealPage

While the chart shows the overall occupancy difference between the two regions, the occupancy difference varies by apartment class. Suburban class A and B apartments achieve higher occupancies than their urban core counterparts, but urban class C apartments actually have higher occupancy than their suburban equivalents. However, the higher prices of urban apartments mean that there are fewer class C apartments available there than in the suburbs, so the overall average occupancy for the suburbs remains higher.

Urban flight

Despite reports of people fleeing the urban core, RealPage’s analysis indicates that this is not generally true. Much of the loss in occupancy being seen is the result of young people who are experiencing unemployment moving in with their parents or with roommates. Therefore, the fall that is being observed in occupancy is not so much due to households relocating as it is to the number of rental households decreasing.

While urban flight may be overstated in general, there are metro areas where it is taking place. RealPage identifies these as expensive gateway metros. The second chart, below, identifies several of them and illustrates the extent of their occupancy losses.

occupancy changes select urban apartment markets and suburban apartment markets

Source: RealPage
Tracking pricing

In addition to occupancy, pricing changes are a key metric to examine in assessing the disparate impact of the pandemic on urban versus suburban apartment markets. RealPage presented the next chart showing the long term trends in annual changes in effective asking rents for new leases for both markets.

asking rent growth urban apartment markets and suburban apartment markets

Source: RealPage

The chart shows that rent growth has been stronger in suburban areas than in urban areas since 2013. While rent growth has fallen in both areas recently, overall rent growth has remained positive in suburban areas while it has fallen to -1.7 percent in urban areas.

Despite the years of higher rent growth in suburban areas, absolute rents remain higher in the urban apartment markets. RealPage estimated the average rent for an urban apartment at $1,955 per month while the average rent for a suburban apartment was estimated at $1,349 per month.

One key to the higher rent growth of suburban area apartments is illustrated in the next chart. It shows the average annual inventory growth rates in the two regions. The much higher inventory growth rate for apartments in the urban core since 2012 has been a factor in dampening rent growth in those markets and in keeping occupancy lower than in suburban apartment markets.

inventory growth urban apartment markets and suburban apartment markets

Source: RealPage
Looking ahead

The next chart is the most surprising of the presentation. It depicts the shares of total apartment demand supplied by the urban and suburban markets. The chart shows that the suburban apartment market is much larger than is the urban apartment market. In 2011, over 80 percent of apartment demand was provided by the suburban apartment market. In recent years, that share has fallen to around 75 percent.

demand share urban apartment markets and suburban apartment markets

Source: RealPage

While the bars in this chart always add to 100 percent, the actual total number of units being absorbed quarter by quarter could be substantially different. These figures were not provided as part of the presentation.

The chart provides a projection of future demand. It predicts that the share of total demand being supplied by the urban apartment market will rise significantly during the quarter we are now completing and during the next two quarters. This is a little surprising since the attractions of the urban environment: the clubs, restaurants, bars and entertainment, continue to be impacted by COVID-19 related shutdowns.

The next chart projects how occupancy will change through the end of 2021. It is consistent with the previous chart in that it shows occupancy rising in the urban apartment markets over the next two quarters while it continues to fall in the suburban markets. By 2021, it shows apartment occupancy returning to its usual annual cycle, albeit at lower levels of occupancy than in the recent past.

future occupancy urban apartment markets and suburban apartment markets

Source: RealPage

The final chart projects how rent growth will change through the end of 2021. It predicts that the worst is yet to come for rental housing providers, with rent growth in both urban and suburban markets turning negative by the first quarter of 2021. It does not project overall rents to increase until some time in 2022.

future rent growth urban apartment markets and suburban apartment markets

Source: RealPage

call for offers Due: Wednesday 9/30/20 @ 5 PM

 

 

 

Victorian Apartments

800-834 Victoria Dr. Montgomery, IL 60538

Listing Price: $14,500,000

Cap Rate 6.38%
Number of Units 152
GRM 8.30
Occupancy 92.8%
Price/Unit $95395
Price/Gross SF $135.14
Gross SF 107200

View Listing Documents

Investment Highlights

  • 152 Unit Suburban Multifamily Property
  • 32 Studios, 72 One-Bedrooms & 48 Two-Bedrooms
  • Clubhouse with Office, Laundry Facilities, Fitness Area, Outdoor Pool, and Courtyard
  • Located in Montgomery Illinois | 40 Miles Southwest of Downtown Chicago
  • Many Upgraded Kitchens and Baths
  • Tenant Paid Electric Baseboard Heat
  • Value-add component, upside in rents

Map Overview

Investment Overview

Marcus & Millichap is proud to present to market Victorian Apartments, a 152-unit apartment community located in west suburban Montgomery, Illinois bordering Kendall County to the South, the fastest growing county in Illinois, and the City of Aurora, IL to the East, the second-largest city in Illinois. The subject property is approximately 40 miles southwest of downtown Chicago.

Victorian Apartments consists of 16 two and three-story apartment buildings and clubhouse spread out over almost 10 acres; offering 32 large studios, 72 one-bedrooms, and 48 two-bedroom apartment homes.​​​ Community amenities include a clubhouse, an on-site management office, laundry facilities, a fitness area, an outdoor pool, a central courtyard area with a playground, and ample off-street parking.​​​

Each unit has separately metered, tenant paid, low maintenance, electric baseboard heating, and ac sleeve units.​​​ Approximately 60 percent of units have recently updated kitchens & baths as well as other capital improvement made including new windows, parking lot repairs, replacement of all deck footings & supports and updated intercom system with integrated Alexa. Roofs are in good condition approximately 10-12 years old.

There is investor upside in this multifamily offering through the continued renewal and releasing of under-market rents and continued updating of units accounted for in a proposed 5-year capital budget updating ten units per year which have averaged $5-$7,000 per unit. Further upside may also be realized in future years from job growth and economic development in the area through the redevelopment of the recently sold 350-acre former Caterpillar manufacturing complex minutes from the property.

 

Washington, D.C. – The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found 86.2 percent of apartment households made a full or partial rent payment by September 13 in its survey of 11.4 million units of professionally managed apartment units across the country.

This is a 2.4-percentage point, or 279,457-household decrease from the share who paid rent through September 13, 2019, and compares to 86.9 percent that had paid by August 13, 2020. These data encompass a wide variety of market-rate rental properties across the United States, which can vary by size, type, and average rental price.

“While it remains clear that many apartment residents continue to prioritize their housing obligations and that apartment owners and operators remain committed to meeting them halfway with creative and nuanced approaches, the reality is that the second week of September figures shows ongoing deterioration of rent payment figures – representing hundreds of thousands of households who are increasingly at risk,” said Doug Bibby, NMHC President.

“This sadly comes as little surprise given that Congress and the Administration have failed to come back to the table and extend the critical protections that supported apartment residents and the nation’s consumer base during the initial months of the pandemic.

“Instead of being satisfied with a half-baked nationwide eviction moratorium which does nothing to deal with renters’ real underlying problem – financial distress – lawmakers should instead look to the successful model of the CARES Act and provide economic support to those who need it most – the tens-of-millions that call an apartment home, revitalizing the recovery at the same time.”

The NMHC Rent Payment Tracker metric provides insight into changes in resident rent payment behavior over the course of each month, and, as the dataset ages, between months. While the tracker is intended to serve as an indicator of resident financial challenges, it is also intended to track the recovery as well, including the effectiveness of government stimulus and subsidies.

However, noteworthy technical issues may make historical comparisons imprecise. For example, factors such as varying days of the week on which data are collected; individual companies’ differing payment collection policies; shelter-in-place orders’ effects on residents’ ability to deliver payments in person or by mail; the closure of leasing offices, which may delay operators’ payment processing; and other factors can affect how and when rent data is processed and recorded.

 

Source: National Multi Housing Council September 16, 2020

The Q2 2020 NAHB Home Building Geography Index reveals a notable multifamily construction shift to the suburbs/exurbs.

Data from the Q2 2020 NAHB Home Building Geography Index shows a notable multifamily construction shift to the suburbs/exurbs. During the first quarter of 2020, over two-thirds of all multifamily permits were concentrated in higher-density markets. However, after COVID-19 hit in the second quarter, the balance changed, shifting to lower-density markets, including exurbs of large metros and smaller metropolitan areas, says Litic Murali of NAHB’s Eye on Housing blog.

For the second quarter, the multifamily HBGI regional geography posting the highest year-over-year gain (on a four-quarter moving-average basis) was the exurbs at 27%, with suburbs of small metro areas, rural markets, small towns, and core counties of small metro areas trailing at still positive growth rates of 26%, 19%, 9%, and 8% rates respectively. Moreover, exurbs of large metro areas were the only region to record an increasing construction growth rate when moving from the first quarter to the second (increasing from 13% to 27%).

As a result of these changes, the market share for multifamily construction in the broad set of low-density areas (exurban areas of large metro markets, small metro core and suburbs, small towns, and rural markets) increased from 32.9 percent a year ago to 34 percent.

These market shares are slow to change, thus making a one-percentage increase significant and noteworthy. As shown above, quarterly changes for the low-density multifamily residential construction market share have been small, with levels ranging from 30.5% to just above 34.0% for the history of the HBGI. What is interesting to note, then, is the standard deviation-scaled changes of the data. For Q2 2020, the change was equal to 1.18 of the historical standard deviation, making the Q2 2020 shift to lower density markets a notable shift for the series.

 

Source: Multifamily Executive Posted on: September 15, 2020

Market or MAKE a Market for Your Property

The housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums.

The cap rates for small multifamily properties barely budged between the first and second quarters of 2020, according to a new report by Chandan Economics and Arbor Realty Trust.

Cap rates narrowed by 5 bps in the second quarter, landing at 5.8%, explained the article, which was published on lender Arbor Realty Trust’s website.

“In the first quarter, cap rates widened by 21 bps, and there was some concern that they would further inch up as the economic downturn continued. However, small multifamily cap rates held steady due to a pricing tug-of-war,” said the article.

Cap rates are influenced both by falling risk-free interest rates, and by operational risks, it explained.

“When both phenomena happen at the same time, the net result is cap rate stability,” said the article.

Chandon examined the difference between cap rates and Treasury yields to estimate what the risk premium is in small multifamily properties. Although the spread was the highest level on record in the second quarter, when you compare it to the first quarter, it barely budged.

The article said the housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums. But there are repeated debate about how resilient property cash flows will be when the protective measures expire.

For example, one survey in mid-July said that 39% of renters who earn less than $75,000 per year had no confidence or slight confidence that they would be able to pay their rent in August, the article said. That rate was 5% higher than a survey in the middle of June.

In higher income brackets, there is less concern about the ability to pay rent.

“Small multifamily renters tend to earn less than their large multifamily neighbors, increasing the concern for rent collections with this asset class,” said the article. “Simultaneously, small multifamily renters are comparatively less transient and less likely to transition into homeownership over the medium-term. With COVID-19 causing many young households to reconsider their housing location preferences, the small multifamily subsector may prove more resilient in re-leasing and maintaining stable occupancies over the medium term.”

The article warned that because there are so many moving parts, there will be an ongoing discussion about how the small multifamily market deals with the risks, compared with the rest of the industry.

 

Source: Globe St Angela Morris | September 08, 2020, at 05:43 AM