Top Five Trends of 2015 That Apartment Investors Must Track January 7, 2015
Millennials Drive Housing Demand
U.S. Population 20-34 Year Olds 20-34 Year Old Population (Mil.)
70
5-Year Growth: 1,400,000
Millennial Propensity to Rent**
66
62
68%
58
* Forecast ** 2013 American Community Survey Sources: Marcus & Millichap Research Services, U.S. Census Bureau, BLS
20 14 20 16 * 20 18 * 20 20 *
20 12
20 10
20 08
20 06
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
54
Rental Demand Growth
Population Growth
400
2.0%
300
1.5%
200
1.0%
100
0.5%
0
0.0%
* Estimate ** Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau
20 13 20 14 * 20 15 **
20 12
20 11
20 10
20 09
20 08
20 07
20 06
20 05
-1.0%
20 04
-200
20 03
-0.5%
20 02
-100
20-34 Year Old Population Growth
Young Adult Rental Demand Growth (000s)
Growth in Rental Demand From Young Adults vs. 20-34 Year Old Population Growth
0.9 -8.7 Million
0.0 +10.6 Million*
+8.2 Million
-0.9
-1.8
* Estimate ** Forecast Sources: Marcus & Millichap Research Services, BLS
20 13 20 14 * 20 15 **
20 12
20 11
20 10
20 09
20 08
20 07
20 06
20 05
20 04
20 02
20 01
20 03
2015 Forecast: 3.1 Million
-2.7
20 00
Quarterly Job Growth (Millions)
Employment Gains Accelerating Likely to Lift Wage Growth in 2015
Young Adults Finding Work as Unemployment Tightens Unemployment Rate
Millennial Unemployment Rate**
13%
255 bps
8%
6%
Long-Term Average: 7.4% 130 bps
Rate
11%
180 bps Unemployment Rate: 5.8%
Long-Term Average: 6.1%
Long-Term Spread: 130 bps
19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 14 *
3%
Millennial Unemployment Rate: 7.6%
* Through November ** 20-34 age cohort Sources: Marcus & Millichap Research Services, BLS
National Rank by Metro Five-Year Millennial Apartment Demand Growth* Propensity to Rent**
20-34 Year Old Population Growth
Potential Demand Growth
Dallas-Ft. Worth
71.6%
122,200
87,500
Phoenix
67.2%
102,100
68,600
Atlanta
67.2%
100,400
67,400
Houston
68.6%
89,800
61,600
Los Angeles
82.9%
73,100
60,600
Washington, D.C.
68.6%
71,600
49,100
New York
85.3%
56,400
48,100
Las Vegas
72.1%
60,800
43,800
Orlando
70.1%
61,400
43,100
Charlotte
65.3%
62,300
40,700
U.S. Total
67.7%
1,432,000
969,400
Top 10 Metros
* 2015-2019 ** Based on 2012 American Community Survey; 2013 for U.S. total Sources: Marcus & Millichap Research Services, U.S. Census Bureau
Millennials Drive Housing Demand
Housing Market May Begin Shift
Six-Year Plunge in Single-Family Construction Has Generated Strong Pent-Up Demand Household Growth
2.0 2000-2007 Oversupply: 2.0M
2008-2015* Undersupply: 3.9M
1.5
1.0
0.5
0.0
19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 1 20 4* 15 *
Single-Family Home Completions (Mil.) and Household Growth (Mil.)
Single-Family Home Construction
* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau
Housing Market Flattening; Financing Availability May Boost Activity Median Home Prices
650
Condo
$225
$200
$175
20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 13 14 *
$150
Y-O-Y Change
+6% +1%
Single-Family and Condo
550
Y-O-Y Change
450 +2%
350
250 20 2003 0 20 4 2005 0 20 6 2007 2008 0 20 9 2010 1 20 1 2012 20 13 14 *
Single-Family
Home Sales (000s)
Median Price (000s)
$250
Existing Home Sales
* Through November Sources: Marcus & Millichap Research Services, National Association of Realtors
Median Home Payment Driven by Interest Rates Gap With Apartment Rents Likely to Widen in 2015 $1,800
Home Payment
Apartment Rent
Monthly Payment
$1,500
$1,200
$596
$96
-$138
$900
20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 * 15 **
$600
* 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
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
$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
Chicago
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
Housing Market May Begin Shift
Interest Rates Could Emerge as Major Factor
$160
$120
$80 Long-Term Average: $53.17
$40
* Through December Oil prices for West Texas Intermediate crude Sources: Marcus & Millichap Research Services, Energy Information Administration, BLS
20 12 20 14 *
20 10
20 08
20 06
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
19 88
$0
19 86
Price per Barrel (Nov. 2014 Dollars)
Inflation Adjusted Crude Oil Prices In Alignment with Long-Term Average
10%
5%
0%
-5%
* Estimate ** Forecast Sources: Marcus & Millichap Research Services, BEA
20 13 20 14 * 20 15 **
20 12
20 11
20 10
20 09
20 08
20 07
20 06
20 05
20 04
20 03
20 02
20 01
-10% 20 00
millions) Percent Change Annualized Starts (inQuarterly Industrial
U.S. GDP Growth Accelerates Numerous Drivers in Unison
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%
2%
1.93%
1%
4.07%
10-Year Treasury:
6.78%
Core Inflation:
1.93%
10-Year Treasury:
3.35%
40-Year Average
10-Year Average
* Through November Sources: Marcus & Millichap Research Services, Federal Reserve, BLS
20 13
20 12
20 11
0% 20 10
Core Inflation:
20 14 *
Rate
3%
$0.0
0.0%
20 14
*
1.5%
20 13
$1.2
20 12
3.0%
20 11
$2.4
20 10
4.5%
20 09
$3.6
20 08
6.0%
20 07
$4.8
TIPS/TIPS Inflation Compensation/Agencies/Bills MBS Notes & Bonds 10-Year Treasury
* Through December 24 Sources: Marcus & Millichap Research Services, Federal Reserve
10-Year Treasury
Fed Holdings (Trillions)
Fed Holdings and 10-Year Treasury Rates
Interest Rates Could Emerge as Major Factor
Significant Construction Remains a Risk Factor
Apartment Vacancy vs. Construction Vacancy Rate 10%
200
8%
150
6%
100
4%
50
2%
0
0%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 * **
250
* Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research
Average Vacancy Rate
Completions (000s of Units)
Completions
Permit Issuance/Unit Completions (000s)
0 Dallas-Ft. Worth Houston New York Seattle Washington, D.C. Los Angeles Austin Phoenix Denver Boston Atlanta San Antonio Chicago Northern NJ Orlando Minneapolis Portland Miami Charlotte San Francisco Ft. Lauderdale Orange County 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
2015 Multifamily Permit Issuance vs. Number of Completions Unit Completions Multifamily Permit Issuance
32
24
16
8
* Forecast Sources: Marcus & Millichap Research Services, MPF Research, U.S. Census Bureau
Apartment Construction – Modest Risk Ranking 2014/2015 Completions and Job Growth Per Unit 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%
Top 10 Metros
* Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research
Apartment Construction – Elevated Risk Ranking 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 Remains a Risk Factor
Cap Rates Compress at Macro Level Flat Trends for Some Markets
U.S. Apartment Price and Cap Rate Trends Cap Rate
* Trailing 12-months through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.
20 13 20 14 *
20 12
20 11
4% 20 10
$25 20 09
5%
20 08
$50
20 07
6%
20 06
$75
20 05
7%
20 04
$100
20 03
8%
20 02
$125
Average Cap Rate
Average Price per Unit (000s)
Average Price
Primary Markets’ Share of Apartment Dollar Volume $15M+ Trending Downward Percent in Primary Markets** 70%
$15
60%
$10
50%
$5
40%
$0
30%
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 *
$20
* Through 2Q ** Trailing 12-month average Includes sales $15 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.
Percent of Dollar Volume
Dollar Volume (Billions)
Primary Market Dollar Volume
Preferred
Primary
06
08
Repricing of Risk by Quality Reflected in Apartment Cap Rate Trends by Market Secondary
Tertiary
Average Cap Rate
9% 8% 7% 6% 5%
* 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.
14 *
13
12
11
10
09
07
05
04
4%
U.S. Apartment Cap Rate Trends Average Cap Rates vs. 10-Year Treasury Apartment Cap Rate
10-Year Treasury Rate Cap Rate LongTerm Avg.
Average Cap Rate
10% 8%
380 bps
390 bps 430 bps 390 bps
6%
100 bps
450 bps
4% 2%
350 bps 10-Yr Treasury Long-Term Avg.
19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 14 *
0%
* Through December 31 Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve
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
2015 National Apartment Report Now Available www.MarcusMillichap.com
Top Five Trends of 2015 That Apartment Investors Must Track January 7, 2015