CREJ

Page 4 — Multifamily Properties Quarterly — February 2020 www.crej.com A s we enter 2020 in the lon- gest bull market run since World War II, there is little question we have entered uncharted waters in the investment landscape, particu- larly for those of us in the multi- housing space. The tidal wave of capital chasing deals in Denver is unprecedented, a trend mirrored in many other desirable metro areas nationally. We hear the term “buyer fatigue” over and over, as investors find themselves stretching their underwriting and pushing pricing to new thresholds, only to get beaten out during multiple rounds of bid- ding. Immense competition has pushed pricing for multihousing assets in Denver to an all-time high of $260,709 per unit in 2019, while average cap rates compressed another 17 basis points from 2018 to 4.68%. Current market conditions have led many investors to rethink their investment strategies as they try to make sense of the current market while weighing the need to deploy capital – we’ve seen every- thing from smaller, value-add syn- dicators aggres- sively targeting core and core-plus opportunities to move up the quality curve to global institutional investors acquir- ing 1990s-vintage deals in core funds. All of this is great news for sellers but has made buying in Den- ver increasingly difficult. These trends are not unique to Denver by any means. Look- ing at the sales volume of the top 20 metro areas, 11 markets saw notable decreases in investment sales since 2018 with an average 20% decrease. While some of this decline can be attributed to public policy uncertainty (think rent con- trol in New York and California, and adverse taxation in Chicagoland), much can be ascribed to elevated pricing making it challenging for investors to realize adequate risk-adjusted returns. As the cap rate spread between primary and secondary markets has nar- rowed close to an all-time low, investors increas- ingly are targeting smaller secondary and “tertiary” markets where competition tends to be lower to meet their return hurdles. Tertiary markets com- manded an all-time high 26.2% of total multihousing market share in 2019. These markets, on aver- age, offer cap rates 119 basis points above major metro areas and 54 basis points above secondary mar- kets, which, paired with cheap debt, has caught the interest of investors across the spectrum. To demonstrate this point, we analyzed Real Capital Analyt- ics sales data for smaller multifam- ily markets (2018- 2019 sales volume $500 million to $1.5 billion) nationally looking at growth in two-year sales volume from 2016 to 2019. The 20 markets that expe- rienced the largest increase in sales volume have, by and large, been overlooked by insti- tutional investors this cycle. How- ever, some of these markets (such as Boise, Idaho; Fort Myers, Florida; Charleston, South Carolina; and Columbus, Ohio) have seen grow- ing interest over the last two years due to strong employment growth and millennial in-migration, while markets like Cleveland; Richmond, Virginia; and Pittsburgh, slow to recover from the recession, are in the midst of transformative down- town revitalizations buoying renter demand. Across these 20 markets, the average sale price over the last two years was $118,819 per unit, 26% below the national average of $160,148. Another common theme across these markets is their rela- tive affordability. With ample job opportunities available and the growth of telecommuting (up 159% since 2005), smaller metro areas have become magnets for millen- nials, particularly those offering an attractive quality of life and revi- talizing urban cores. In fact, ULI’s Emerging Trends in Real Estate 2020 noted several of these 20 metro Market Update Brian Mooney Director, Capital Markets, JLL Englewood | Steamboat Springs calconci.com | We Build: MULTI-FAMILY Coming Soon Sage Corner Apartments Lakewood, CO Coming in February Providence at the Heights Aurora, CO Coming Soon 2065 Cherokee Denver, CO Tertiary markets see influx of investment activity Mack Nelson Director, Capital Markets, JLL Chris White Director, Capital Markets, JLL