Apartment Pricing: Any Upside?Apartment Pricing

Apartment Pricing: Any Upside?Apartment Pricing

Apartment Pricing: Any
Upside?
NMHC Research Forum
Washington, D.C.
April 30, 2014
The Apartment Pricing Formula
P=
𝑁𝑂𝐼
𝑛+𝑟𝑝−𝑔
• Gordon Growth Model
• P=price
• NOI = Net Operating Income
• n=interest rate (=i+r, i=expected inflation, r= real rate)
• rp=risk premium
• g=expected growth rate of NOI
The Apartment Pricing Formula
P=
𝑁𝑂𝐼
𝑖+𝑟+𝑟𝑝−𝑔
• i=expected inflation
• 2%?
Source: Federal Reserve Bank of Cleveland
The Apartment Pricing Formula
P=
• r= real rate
• 10yr ≈ 0
𝑁𝑂𝐼
𝑖+𝑟+𝑟𝑝−𝑔
Short Term Real Rate
The Apartment Pricing Formula
P=
• g=expected growth
• 3%?
𝑁𝑂𝐼
𝑖+𝑟+𝑟𝑝−𝑔
The Apartment Pricing Formula
P=
𝑁𝑂𝐼
𝑖+𝑟+𝑟𝑝−𝑔
Current
Recovery
Crisis
Inflation
Stimulus
NOI
1
1.03
1.03
1.03
1.03
Expected Inflation
2%
2%
0%
4%
2%
Real Rate
≈0%
2%
-2%
1%
-2%
Risk Premium
6%
5%
7%
6%
6%
Growth of NOI
3%
2%
-1%
5%
3%
Cap Rate
5%
7%
6%
6%
3%
Price
20
14.7
17.2
17.2
34.3
-26.5%
-14%
-14%
71.5%
% Change
Mean ≈ 4%
Apartment Prices: Any Upside?
Where Are We Now?
NMHC Research Forum
Washington, DC
April 29, 2014
Nicholas Buss
Director, Research
Invesco Real Estate
INVESCO REAL ESTATE
North America: Dallas • San Francisco • Newport Beach • New York • Atlanta
Europe: London • Paris • Munich • Prague • Madrid • Luxembourg
Asia Pacific: Hong Kong • Shanghai • Tokyo • Seoul • Singapore • Sydney • Beijing
Disclosure
This presentation is provided for educational purposes only for the
benefit of NMHC members attending the April 2014 Research
Forum. While all material is compiled from sources believed to be
reliable and current, accuracy cannot be guaranteed. It is not our
intention to state, indicate or imply in any manner that current or
past results are indicative of future results. This presentation does
not represent an offering of any security nor a recommendation of
any investment strategy. It should not be the sole basis for any
investment decision. Unauthorized reproduction or distribution of
this material is prohibited.
2
Apartment Property Price Indices
Regardless of index, apartment pricing now exceeds prior cyclical peak
Apartment Price Trends (Index, December 2000 = 100)
220
200
+84%
-38%
+74%/+8%
+71%
-33%
+61%/+7%
180
160
140
120
100
Moody's/RCA
3
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
80
CoStar
Source: Invesco Real Estate using data from Real Capital Analytics as of April 2014. Both are value weight, repeatsales indexes; Moody’s/RCA index reflects a 3-month rolling average and is based on sales of properties valued at
$2.5 million and greater.
NPI Apartment Capital Appreciation
Strong recovery in values, but still not back to prior cyclical peak
Capital Appreciation Trends (Index, 1Q-2000 = 100)
160
-32%
+56%
+37%/-6%
150
140
130
120
110
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
100
Source: Invesco Real Estate using data from NCREIF as of April 2014. Index based on NPI quarterly apartment
capital appreciation returns.
4
Apartment Cap Rates
Broad market cap rates at record lows; institutional market cap rates still
above prior cyclical lows
Apartment Cap Rates (%)
9.0
8.5
8.0
7.5
7.04%
7.0
6.5
6.0
6.21%
5.79%
6.16%
5.5
5.0
4.79%
NPI Market Weight Valuation Cap Rates
2012
2011
2010
2008
2007
2006
2005
2004
2003
2002
2001
2000
4.0
2009
4.28%
2013
4.5
RCA Transaction-Based Average Cap Rates
Source: Invesco Real Estate using data from NCREIF and Real Capital Analytics as of April 2014.
5
Apartment Rents
Nationally, apartment rents now well above prior cyclical peak
Apartment Effective Rent Trends (Index, 1Q-2000 = 100)
140
+27%
135
+14%/+8%
-6%
130
125
120
+16%/+7%
115
110
105
+16%
100
-8%
Axiometrics
CBRE-EA
Source: Invesco Real Estate using data from Axiometrics and CBRE-EA as of April 2014.
6
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
95
Apartment Rent-to-Income
Nationally, rent-to-income at highest level in a decade
Axiometrics Effective Rent as % of Median Household Income (4QMA, %)
27.0
26.7%
26.5
26.0
25.3%
25.5
24.7%
25.0
24.5
24.0
23.5
23.2%
23.0
22.5
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
22.0
Source: Invesco Real Estate using data from Axiometrics and Moody’s Analytics as of April 2014.
7
Apartment Rent vs. Ownership Costs
Relative to mortgage costs, apartment rents look pricey compared to history
Axiometrics Effective Rent as % of Monthly Mortgage Costs (4QMA, %)
180
160
140
138%
120
111%
100
80
60
Median Home Price
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
40
Average Home Price
Mortgage costs = principal and interest payments. Inputs = NAR median and average home prices, prevailing
Fannie Mae 30Y-fixed mortgage rate; assumes 10% down payment.
Source: Invesco Real Estate using data from Axiometrics and Moody’s Analytics as of April 2014.
8
Apartment Transaction Volume
Transaction volumes back to prior peak levels; investor base broadening
Apartment Transactions – Rolling 12-months ($Bil.)
$120
$100
$80
$60
$40
$20
Source: Invesco Real Estate using data from Real Capital Analytics as of April 2014.
9
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
$0
Multifamily Mortgage Debt
Debt remains readily available, pricing remains historically attractive, and
loan structures are becoming more accommodating
Multifamily Mortgage Debt Outstanding ($Bil.)
$861 Bil
$1,000
$917 Bil
$900
$800
$700
$600
$500
$400
$300
$200
$100
Banks
GSEs/GSE-Backed Pools
CMBS
Life Cos
Other
Source: Invesco Real Estate using data from Federal Reserve Flow of Funds as of April 2014.
10
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$0
National Summary: Where Are We Now?
Metric
Prices
Above Prior
Peak
X
Values
X
Rents
X
Rent-to-Income
X
Rent-to-Mortgage Cost
X
Transaction volume
X
Debt availability
X
Source: Invesco Real Estate as of April 2014.
11
X
Cap rates
Price>Replacement cost?
Below Prior
Peak
X
X
In most coastal markets
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
2014 NMHC Research Forum
April 29, 2014
Brooks Wells, Director
Please note certain information in this presentation constitutes forward-looking
statements. Due to various risks, uncertainties and assumptions made in our analysis,
actual events or results or the actual performance of the markets covered by this
presentation report may differ materially from those described. The information herein
reflect our current views only, are subject to change, and are not intended to be
promissory or relied upon by the reader. There can be no certainty that events will turn
out as we have opined herein.
Confidential – This is for the use of this conference only. Further circulation is prohibited.
Apartment Fundamentals
Vacancy expected to climb above 15-year average in 2016 as deliveries
ramp up
U.S. sector supply and demand, 1999-2018
350
8%
Forecast
300
7%
250
6%
150
5%
100
4%
50
3%
0
Vacant (%)
2%
-50
Indicates recession years
Completions
Net Absorption
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0%
2002
-150
2001
1%
2000
-100
1999
Thousands of units
200
Vacancy
— Deliveries to reach levels last seen in the late 1990s
— Strong rental demand in near-term as job market finally strengthens
— New supply recedes in outer years
Sources: CBRE-EA and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
2
Rent Outlook
Rent growth will continue to moderate thru 2016
Apartment rent growth vs. vacancy
8.0
6.0
7.0
Indicates recession years
Rent Growth
Vacancy Rate
2018
2017
2016
2015
2014
2013
0.0
2012
-8.0
2011
1.0
2010
-6.0
2009
2.0
2008
-4.0
2007
3.0
2006
-2.0
2005
4.0
2004
0.0
2003
5.0
2002
2.0
2001
6.0
2000
4.0
Vacant (%)
Annual Rent Growth (%)
8.0
Forecast
Average Vacancy 2000-2013
— Average effective rents are now 7% above pre-recession peak
— Next 3 years, rent growth to average 2.2%/yr (1996-13 average 2.1%)
— By 2016, rents will be 14% above previous peak (vs. 9% last cycle: 2001-08)
Sources: CBRE-EA, Axiometrics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
3
NOI Outlook
Impacted by rising vacancy and moderating rent growth
Apartment NOI growth
15.0
Forecast
NOI Growth (%)
10.0
5.0
0.0
-5.0
Indicates recession years
NOI
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
-15.0
1997
-10.0
15-Yr Average
— After peaking in 2011 at 10.8%, NOI growth slipped below long-term average (4.3%) in 2013
Sources: NCREIF and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
4
Cap Rate Outlook
Cap rate compression to end in 2014
Apartment cap rates vs. the 10-Year Treasury rate
9.0
Forecast
8.0
7.0
Rate (%)
6.0
5.0
4.0
3.0
2.0
Indicates recession years
Cap Rates
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0.0
1997
1.0
10-Year Treasury Rate
— Virtuous cycle of a declining 10-Year Treasury rate is over
— Strong investor appetite for the sector should keep cap rates firm
— Cap Rate forecast to be 37 bps higher from 2014 lows by 2018
Sources: NCREIF (Moving Average), Moody's Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
5
Cap Rate Spreads
Spread to tighten further as cap rates remain relatively firm while the
10-Treasury rate rises
Apartment cap rate spread over the risk free rate (10-Year Treasury rate)
4.0
Forecast
3.5
3.0
Spread
2.5
2.0
1.5
1.0
Indicates recession years
Spread
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0.0
1997
0.5
Average
— Spread expanded over 362 bps in 2012
— Spread over 10-Year Treasury fall below above historic average (200 bps) in 2015
— Spread narrows to 100 bps in 2018
Sources: NCREIF, Moody's Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
6
Total Return Outlook
Will average 6.5% during forecast - similar to current underwriting
Apartment Total Returns
25.0
Forecast
Annual Total Returns (%)
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
Indicates recession years
Total Return
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-20.0
1999
-15.0
Average
— Moderating NOI growth, coupled with cap rate expansion (albeit modest) will limit Total Return growth
— After posting double-digit returns over the past 4 years (averaging 13.8%), Total Returns will decelerate to the low-single
digits in 2016
Sources: CBRE-EA, Axiometrics, NCREIF, Moody's Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
7
Real of Rate Return Outlook
Will average 4.5% during forecast
Apartment Real Rate of Returns
Annual Real Rate of Returns (%)
20.0
Forecast
15.0
10.0
5.0
0.0
-5.0
-10.0
Indicates recession years
Real Rate of Return
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-20.0
1999
-15.0
Average
— Real returns averaged 11.8% from 2010 to 2013 - similar to the last growth cycle (2004 to 2007)
— Expected to fall below historic average (7.1%) in 2015
— Expect CPI to grow at 2.0% during the forecast
Sources: CBRE-EA, Axiometrics, NCREIF, Moody's Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
8
Apartment Prices
Price appreciation will diminish as pricing expected to adjust to changing
fundamentals
Apartment appreciation (Real Capital Analytics Price Index)
Index
2000 = 100
220
Forecast
200
180
160
140
120
100
80
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Indicates recession years
— By the close of 2014, index will be 10% higher than previous peak values set in 2007
— Modest dip (3%) in middle of the forecast as investors adjust
Sources: Real Capital Analytics, CBRE-EA, Axiometrics, NCREIF, Moody's Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
9
Apartment Price Index
Significant dispersion in price appreciation by market
U.S. average is now 6% above peak.
Seattle
15.8%
Boston
12.7%%
Manhattan
52.2%
Chicago
-6.4%
Oakland
31.8%
San Francisco
42.9%
Midwest ,ex Chicago
-6.5%
Washington DC Metro
15.4%
Denver
22.6%
San Jose, 35.7%
Inland Empire
-3.6%
Los Angeles County, 14.0%
Orange County, 9.4%
Philadelphia/Baltimore
17.9%
West Others
11.8%
Phoenix
-26.6%
San Diego
16.5%
Atlanta
-9.8%
Southeast , ex FL/ATL
4.2%
Dallas/Houston/Austin
28.0%
Colors indicate recovery vs. peak values
Over 20% Above Peak
Less than 10% Above Peak
10% to 20% Above Peak
Below Peak
Miami/South FL
-9.0%
Sources: Real Capital Analytics and Deutsche Asset & Wealth Management. As of December 2013.
Deutsche Asset
& Wealth Management
Apartment Prices: Any Upside?
April 2014
10
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Apartment Prices: Any Upside?
April 2014
11
Apartment Pricing: Any Upside?
National Multifamily Housing
Council
April 29, 2014
Presenter: Melissa Reagen
MetLife Real Estate Investors
Overview and Agenda
• A few key facts about the US multifamily market:
-
Rent growth is slowing after several years of rapid growth
-
Supply is increasing across most markets given strong recovery
-
Apartment prices near or above peak-2007 levels based on various price and
valuation indices (RCA/Moody’s CPPI, NCREIF Property Index, Green Street CPPI)
-
Capitalization rates are low depending on the city and apartment type
-
Demand drivers are strong
• What is an investor to make of these facts?
-
Number of ways to outperform any apartment total return benchmark are likely
fewer today than they were in 2009-2011
-
But they still exist  such opportunities include but are not limited to “emerging”
submarkets and select development in urban or in suburban areas that have urbanlike characteristics
2
Case Study 1 – Koreatown, Los Angeles
The importance of understanding where apartment supply is located
Source: CBRE EA, Axiometrics, LA Times, MetLife Real Estate Investors.
3
Case Study 1 – Koreatown, Los Angeles
• Koreatown has minimal new supply coming online over the next several years
• Downtown LA is facing an oversupply risk
• Basic demographics are similar in both areas with stronger fundamentals in Koreatown
Market Fundamentals
Submarket
2014Q1 vacancy rate
Y/Y effective rent growth
Wilshire District (includes Koreatown)
3.7%
6.7%
Westlake/Downtown
3.2%
1.2%
Los Angeles
4.3%
4.0%
Demographics
Total population
Population change
13-18
Median HH income
2014
Income change 13-18
Koreatown
40,365
5.5%
$32,300
6.0%
Downtown
53,670
3.9%
$25,500
11%
Could a growing ethnic population in the US create an apartment opportunity?
Source: ESRI, Axiometrics.
Demographic analysis is at the zip code level.
4
Rising Ethnic Population Could Generate Demand
for Apartments
Percent of total US
population by ethnicity
Black
Hispanic
Asian
All Other
White
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1960
2010
2060
• Demand for institutional quality apartments, in places like Koreatown, could come from
higher income ethnic households or from higher income households that prefer
“emerging” locations
Source: US Census Bureau, Pew Research “Next America”.
5
Case Study 2 – Bellevue, WA
Downtown Bellevue has a
Walk Score of 77/100 which is
considered to be “very
walkable”.
• Wide range of employers in Bellevue from Expedia to eBay to Microsoft (largest Bellevue employer)
• The Spring District is a planned mixed-used development on a former 36-acre warehouse site
• Sound Transit East Link Extension is slated to move through the District
Source: CBRE EA, www.thespringdistrict.com.
6
Case Study 2 – Bellevue, WA
Suburban location with urban-like features
Submarket
Supply % of stock 2014-2015
Intown Seattle
Capitol Hill/University District/Ballard
North Seattle/Shoreline
Redmond
Bellevue
South Seattle
North Tacoma
Everett
Kirkland/Bothell
Kent/Auburn
Federal Way/Des Moines
Lynnwood/Edmonds/Mukilteo
Renton
Tacoma
9.1%
7.8%
3.7%
3.1%
2.9%
2.9%
2.0%
1.7%
1.5%
0.8%
0.0%
0.0%
0.0%
0.0%
• Supply is concentrated in downtown Seattle
• Bellevue, parts of which are urban-like, has very little new supply with strong long-term
demand drivers such as strong employment drivers and a new rail line
• Opportunities to develop apartments for 200-300 basis point spread over buying core
apartments
Source: CBRE EA.
7
Is There Any Upside in the Apartment Market?
• Yes, but increasing selectivity warranted
-
Supply rising in many urban environments and apartment capitalization rates are
low across almost all locations and types of apartments
• Where is there upside?
-
A strong preference continues to exist among renters to live in urban or urban-like
environments  we believe this will continue
-
Opportunities exist in urban or urban-like locations without significant amounts of
supply, emerging locations within major markets, or in converting one property type
to apartments
-
Rising amount of ethnic groups in the US could shape apartment demand over the
next 20-30 years
8
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that might cause such statements to be wrong include, but are not limited to (1) difficult conditions in global capital markets; (2)
changes in general economic conditions, including changes in interest rates or fiscal policies; (3) changes in the investment
environment; (4) changed conditions in the real estate market; and (5) regulatory, tax and political changes.
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