Building on a record-breaking 2018, U.S. multifamily investment is experiencing its most active start to a year, with $38.3 billion in transactions in Q1, according to the latest report from leading professional services firm, JLL.
The multifamily sector was the only asset type to post year-over-year gains, lifting its share of total U.S. real estate transaction volumes to 41.5 per cent.
With multifamily absorption keeping pace with unit completions, allowing fundamentals to strengthen for the sixth consecutive quarter, the report cites that nearly 300,000 units were leased up over the past year. The expanding renter base has pushed vacancy rates to a new low of 4.6 per cent, marking a 30.0-basis-point decline from one year ago.
Urban multifamily submarkets saw rent gains accelerate for the seventh consecutive quarter, at 3.3 percent as of Q1 2019. That said, urban submarkets still lag the national growth rate of 4.5 per cent due to heightened completions of luxury and Class A multifamily assets in the urban core.
As a region, the Sun Belt commanded the highest average effective rent growth at 5.5 per cent, led by Las Vegas, Phoenix and Tampa. Concurrently, the Northeast corridor witnessed the largest effective rent growth gains, up nearly 175 basis points from Q1 2018.
Transactions
U.S. multifamily transactions totaled $38.3 billion in the first quarter of 2019, representing a 13.0 per cent increase from Q1 of last year. The quarter saw an 8.8 per cent increase in single-asset transaction size on an annualized basis, while strong liquidity among domestic private and institutional investors has driven the groups’ average transaction size by 13.0 and 14.4 per cent, respectively.
On an annualized basis, portfolio sales accounted for 25.4 per cent of multifamily activity, the largest share since 2016, as investors seek to gain exposure to the sector at scale.
Primary markets, which recorded a rebound in investment in recent quarters, saw their share of activity decline in Q1 2019. This was largely driven by concerns over exit price assumptions, which led investors to seek to gain exposure outside of top markets.
Tertiary markets captured a growing share of capital, accounting for 21.8 per cent of deal flow, challenging the previous cyclical high. Annualized growth in liquidity was notable in Cleveland, Columbus and Cincinnati, which notched $2.6 billion in transactions over the past year.
As investors recognize strong multifamily fundamentals, positive economic conditions and a balanced supply-demand environment in the Northeast and Mid-Atlantic, this region’s share of quarterly investment grew to the highest proportion in over three years.
Private investment continues to pour into the space, representing 72.2 per cent of total multifamily volumes in Q1 2019. Rising appetite for midrise assets contributed to the increase in private capital, as Class B assets are expected to outperform other asset classes in the mid-term.
Rising 23.8 per cent from one year ago, annualized cross-border investment activity remains near record levels at $14.6 billion. Canada-, Bahrain- and Singapore-based investors drove continued investment, contributing 67.5 per cent of quarterly foreign capital in Q1 2019. Additionally, growing familiarity with non-gateway markets has led to growth in foreign investment in secondary and tertiary markets.
With completions expected to peak in the coming quarters, select asset types are expected to experience short-term imbalances. Even though average national vacancy rates in urban locations have declined in recent quarters, the heightened development pipeline in select urban submarkets is expected to cause multifamily demand fundamentals to soften in the near term.
