U.S. Economic and Institutional Apartment Market Overview and Outlook January 7, 2015
Emerging Economic Trends
Inflation Adjusted Crude Oil Prices In Alignment with Long-Term Average Price per Barrel (Nov. 2014 Dollars) $160 $120 $80 $40 $0 Long-Term Average: $53.17 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* * Through December Oil prices for West Texas Intermediate crude Sources: Marcus & Millichap Research Services, Energy Information Administration, BLS
U.S. GDP Growth Accelerates Numerous Drivers in Unison Annualized Quarterly Percent Change Industrial Starts (in millions) 10% 5% 0% -5% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015** * Estimate ** Forecast Sources: Marcus & Millichap Research Services, BEA
Confidence Rising Will Support Economic Momentum Consumer Confidence Small Business Optimism Consumer Confidence Index 160 120 80 40 0 Budget Set Until Sept 2015 Debt Ceiling Locked In Until Mar 2015 120 110 100 90 80 Small Business Optimism Index 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * Through November Index: December 2002 = 100 Sources: Marcus & Millichap Research Services, The Conference Board, NFIB
Employment Gains Accelerating Likely to Lift Wage Growth in 2015 Quarterly Job Growth (Millions) 0.9 0.0-0.9-1.8-2.7-8.7 Million +8.2 Million +10.6 Million* 2015 Forecast: 3.1 Million 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015** * Estimate ** Forecast Sources: Marcus & Millichap Research Services, BLS
National Employment Rank by Metro Y-O-Y Absolute Change Through November 2014 Top 10 Metros Absolute Change Percent Change Bottom 10 Metros Absolute Change Percent Change Houston 126,700 4.5% Dallas-Ft. Worth 114,600 3.7% New York 80,200 2.0% Seattle 61,200 3.4% Los Angeles 58,200 1.4% Atlanta 56,500 2.3% Phoenix 53,100 2.9% Orlando 48,100 4.5% Boston 46,926 1.8% San Diego 43,600 3.3% U.S. Total 2,734,000 2.0% Philadelphia -2,000-0.1% Columbus 3,200 0.3% Northern NJ 8,200 0.4% Kansas City 10,300 1.0% Cleveland 12,400 1.2% Detroit 14,100 0.8% Palm Beach 14,300 2.6% Washington, D.C. 15,100 0.5% Jacksonville 15,800 2.6% Tampa 15,900 1.3% U.S. Total 2,734,000 2.0% Sources: Marcus & Millichap Research Services, BLS
Emerging Economic Trends
National Housing Market Flattening Home Sales May Accelerate in 2015
Housing Market Flattening; Financing Availability May Boost Activity Median Home Prices Existing Home Sales $250 Single-Family Condo 650 Single-Family and Condo Median Price (000s) $225 $200 $175 Y-O-Y Change +6% +1% Home Sales (000s) 550 450 350 Y-O-Y Change +2% $150 2006 2007 2008 2009 2010 2011 250 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2003 2004 2005 2012 2013 2014* 2003 2004 2005 * Through November Sources: Marcus & Millichap Research Services, National Association of Realtors
$1,800 Median Home Payment Likely to Rise; Gap With Apartment Rents to Widen in 2015 Home Payment Apartment Rent $1,500 Monthly Payment $1,200 $900 $600 $596 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 * Estimate ** Forecast; assumes 0.5% rise in mortgage rates Mortgage payments based on quarterly median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors -$138 2011 2012 2013 2014* 2015** $96
Lower Risk Markets Based on Home Mortgage Payment and Rent Gap Least Affordable Markets 3Q 2014 Monthly Home Payment 3Q 2014 Average Rent Affordability Gap Manhattan* $7,300 $3,261 $4,039 San Francisco $5,857 $2,690 $3,167 San Jose $4,919 $2,271 $2,648 Oakland $4,015 $1,787 $2,228 Orange County $3,877 $1,699 $2,178 San Diego $2,825 $1,532 $1,293 Los Angeles $2,484 $1,738 $746 Seattle $2,000 $1,263 $737 Washington, D.C. $2,173 $1,576 $597 Portland $1,624 $1,035 $589 U.S. Average $1,176 $1,166 $10 * Includes condominiums Mortgage payments based on 3Q 2014 median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors, Douglas Elliman Real Estate
Higher Risk Markets Based on Home Mortgage Payment and Rent Gap Most Affordable Markets 3Q 2014 Monthly Home Payment 3Q 2014 Average Rent Affordability Gap Detroit $482 $828 -$346 Cleveland $686 $807 -$121 Chicago $1,147 $1,258 -$111 Tampa $863 $931 -$68 Cincinnati $769 $812 -$43 Atlanta $887 $915 -$28 St. Louis $782 $801 -$19 Indianapolis $821 $752 $69 Columbus $866 $785 $81 Kansas City $887 $802 $85 U.S. Average $1,176 $1,166 $10 Mortgage payments based on 3Q 2014 median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors
National Housing Market Flattening Home Sales May Accelerate in 2015
Interest Rates Could Emerge as a Major Factor
10-Year Treasury Bouncing Near 30-Year Trough Rate 16% 12% 8% 4% 0% 1984 1985 1986 30-Year High: 13.56% * Through January 2 Sources: Marcus & Millichap Research Services, Federal Reserve 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 30-Year Average: 5.8% 30-Year Low: 1.53% 2014 2015*
Core Inflation vs. 10-Year Treasury 4% Core Inflation 10-Year Avg. Core Inflation 10-Year Treasury 10-Year Avg. 10-Year Treasury 3.35% 3% Rate 2% 1.93% 1% 40-Year Average Core Inflation: 4.07% 10-Year Treasury: 6.78% 10-Year Average Core Inflation: 1.93% 0% 10-Year Treasury: 3.35% 2010 2011 2012 2013 2014* * Through November Sources: Marcus & Millichap Research Services, Federal Reserve, BLS
6.0% U.S. Wage Growth Trends Y-O-Y Percent Change 4.5% 3.0% 1.5% Long-Term Average: 3.1% 2.12% 0.0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* * Through 3Q Sources: Marcus & Millichap Research Services, BLS
Fed Holdings and 10-Year Treasury Rates $4.8 6.0% Fed Holdings (Trillions) $3.6 $2.4 $1.2 4.5% 3.0% 1.5% 10-Year Treasury $0.0 0.0% 2007 2008 2009 2010 2011 2012 2013 2014* * Through December 24 Sources: Marcus & Millichap Research Services, Federal Reserve TIPS/TIPS Inflation Compensation/Agencies/Bills MBS Notes & Bonds 10-Year Treasury
Interest Rates Could Emerge as a Major Factor
Significant Construction to Remain a Risk Factor in Some Metros
Apartment Vacancy vs. Construction 250 Completions Vacancy Rate 10% Completions (000s of Units) 200 150 100 50 8% 6% 4% 2% Average Vacancy Rate 0 93 94 95 96 97 98 99 00 * Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research 01 02 03 04 05 06 07 08 09 10 11 12 13 14* 15** 0%
Permit Issuance/Unit Completions (000s) 32 24 16 8 0 Dallas-Ft. Worth Houston New York 2015 Multifamily Permit Issuance vs. Number of Completions Seattle Washington, D.C. Los Angeles Austin Phoenix Denver Unit Completions Boston Atlanta San Antonio Chicago Northern NJ Orlando Minneapolis Portland Miami Charlotte San Francisco Ft. Lauderdale Orange County Multifamily Permit Issuance Philadelphia San Jose Indianapolis Kansas City San Diego Salt Lake City West Palm Beach Columbus Jacksonville Baltimore Milwaukee Pittsburgh Cincinnati Louisville Las Vegas St. Louis Oakland Detroit Cleveland New Haven Inland Empire Sacramento * Forecast Sources: Marcus & Millichap Research Services, MPF Research, U.S. Census Bureau
Apartment Construction Modest Risk 2014/2015 Completions and Job Growth Per Unit Top 10 Metros 2014* & 2015** Completions 2014* & 2015** Job Growth Jobs Per Unit 2015 Vacancy Rate** Inland Empire 2,600 64,000 24.6 4.0% Las Vegas 2,400 52,000 21.7 6.4% Sacramento 1,400 30,000 21.4 3.2% Oakland 2,600 53,900 20.7 2.3% St. Louis 2,600 50,000 19.2 6.0% Detroit 1,500 25,000 16.7 4.1% Cleveland 2,000 28,500 14.3 3.8% Milwaukee 3,300 38,000 11.5 4.3% Salt Lake City 5,200 58,000 11.2 4.4% Los Angeles 18,700 199,000 10.6 3.0% U.S. Total 448,000 6,000,000 13.4 4.8% * Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research
Apartment Construction Elevated Risk 2014/2015 Completions and Job Growth Per Unit Bottom 10 Metros 2014* & 2015** Completions 2014* & 2015** Job Growth Jobs Per Unit 2015 Vacancy Rate** Northern NJ 12,300 28,000 2.3 3.4% Washington, D.C. 29,900 80,500 2.7 5.2% Charlotte 12,400 37,000 3.0 5.4% Austin 23,000 69,200 3.0 4.3% San Antonio 13,300 44,700 3.4 7.3% Kansas City 5,200 17,500 3.4 5.3% Columbus 6,200 24,400 3.9 4.0% Seattle 22,000 105,000 4.8 4.0% Denver 16,800 83,000 4.9 4.3% Boston 15,000 83,200 5.5 4.0% U.S. Total 448,000 6,000,000 13.4 4.8% * Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research
Significant Construction to Remain a Risk Factor in Some Metros
Sales Trends Robust; Continued Macro Level Cap Rate Pressure
U.S. Apartment Investment Trends Transaction Activity by Price Tranche $1M-$10M $10M-$20M $20M+ 16 Total Transactions (000s) 12 8 4 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14* * Trailing 12-months through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
Primary Markets Share of Apartment Dollar Volume $15M+ Trending Downward $20 Primary Market Dollar Volume Percent in Primary Markets** 70% Dollar Volume (Billions) $15 $10 $5 60% 50% 40% Percent of Dollar Volume $0 30% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 * Through 2Q ** Trailing 12-month average Includes sales $15 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc. 2011 2012 2013 2014*
U.S. Apartment Price and Cap Rate Trends $125 Average Price Cap Rate 8% Average Price per Unit (000s) $100 $75 $50 7% 6% 5% Average Cap Rate $25 4% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * Trailing 12-months through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.
Average Cap Rate 9% 8% 7% 6% 5% U.S. Apartment Cap Rates by Class Class A Preferred Markets Class A Class B/C 4% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14* * Through 3Q Includes sales $1 million and greater Assumes properties less than 10 years old at time of sales to be Class A, properties older than 10 years assumed to be Class B/C Preferred Markets Include: NY, DC, BOS, SD, LA, OC, SJ, SF, SEA Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
U.S. Apartment Cap Rates by Class Primary Markets 9% Class A Class B/C Average Cap Rate 8% 7% 6% 5% 4% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14* * Through 3Q Includes sales $1 million and greater Assumes properties less than 10 years old at time of sales to be Class A, properties older than 10 years assumed to be Class B/C Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
U.S. Apartment Cap Rates by Class Secondary/Tertiary Markets 10% Class A Class B/C Average Cap Rate 9% 8% 7% 6% 5% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14* * Through 3Q Includes sales $1 million and greater Assumes properties less than 10 years old at time of sales to be Class A, properties older than 10 years assumed to be Class B/C Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
9% Repricing of Risk by Quality Reflected in Apartment Cap Rate Trends by Market Preferred Primary Secondary Tertiary Average Cap Rate 8% 7% 6% 5% 4% 04 05 06 07 08 09 10 11 12 13 14* * Through 3Q Includes sales $1 million and greater Preferred Markets Include: NY, DC, BOS, SD, LA, OC, SJ, SF, SEA Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.
National Apartment Rank by Metro Average Cap Rate Change Since 2010 Top 10 Metros 2010 Cap Rate 3Q 2014* Cap Rate Basis Point Change Detroit 10.9% 8.4% -250 Orlando 8.8% 6.4% -240 Salt Lake City 7.6% 5.4% -220 Minneapolis 8.5% 6.5% -200 Miami 8.4% 6.5% -190 Milwaukee 9.5% 7.6% -190 New York 6.6% 4.8% -180 Atlanta 8.3% 6.6% -170 Austin 7.7% 6.1% -160 Cincinnati 9.4% 7.8% -160 U.S. Average 7.2% 5.7% -150 * Trailing 12-months through 3Q 2014 Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
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U.S. Economic and Institutional Apartment Market Overview and Outlook January 7, 2015