Orange County

Construction Momentum Varies Greatly Across U.S.

Multifamily development is still very active nationally and close to peak levels.

Completions of 259,600 units in the four quarters ending in Q2 2019, however, represented a 9.7% decline from one year ago. While the 259,600-unit total is the lowest four-quarter total in three years (since Q3 2016), it is still 7.5% above the five-year average.

CBRE Econometric Advisors forecasts the four-quarter trailing totals to rise over the second half of 2019 and first half of 2020, reaching a new peak for this cycle of 330,200 units in Q2 2020. After that, CBRE EA projects completions to slowly decline.

While I generally agree with this outlook, I expect the second half of 2020 to remain at peak levels of deliveries given the active development pipeline and only modest decline in construction starts this year. Completions should then slow in 2021.

Construction momentum varies significantly by metro, however. The extent to which industry players should be concerned about completions and potential oversupply varies greatly by metro (and by submarket).

Completions Close to Stable Across Tier I Markets

Tier I markets, as a group, had the smallest year-over-year decrease of multifamily completions among the three tier groups (-3.5%).

Construction slowed more noticeably in Tier II and Tier III markets, overall, with completions declines of 13.0% and 15.5%, respectively.

However, within all tier groupings, the markets exhibited significant variation.

Inland Empire & Seattle Lead for Largest Unit Gains

For the 66 markets analyzed, completions for 22 markets were higher on a year-over-year percentage basis for the year ending in Q2 2019, one-third of the total.

Another 32 markets had lower levels of multifamily deliveries. Completions were essentially stable in 12 markets.

Among all markets, absolute gains on a year-over-year basis were largest in Seattle (3,400 units), the Inland Empire (3,300), Tampa (2,400), Philadelphia (2,300), Miami (1,900) and Portland (1,700).

The largest percentage increases in multifamily unit completions among Tier I and II markets were in the Inland Empire, Ventura, San Jose, Tampa and Philadelphia. All of these markets experienced increases of 60% or more.

The leading Tier I and II metros for declines in deliveries were Orange County, San Diego, Baltimore, Nashville, Houston and Dallas, all with declines of 35% or more.

For Tier III metros, Birmingham, Colorado Springs, Hartford, Jacksonville and Detroit experienced the largest percentage gains. Many of the gains, however, were off a very low base, but are notable nevertheless.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

The Car is Dead, Long Live the Car…?

The emergence of disruptive modes of transportation in recent years has fueled much discussion around the future of transit, including commuting patterns and parking requirements for office tenants

In my hometown of San Francisco, ridesharing providers Uber and Lyft, private commuting service Chariot and eScooter companies Bird and Lime emerged seemingly overnight in recent years to enthusiastic reception from local residents.

In a geographically constrained, economically booming city such as San Francisco, parking rates are high, prompting residents to seek out other, often more convenient and less expensive modes of getting around – both public and private. The city is also the home base of many of these disruptive providers and traditionally an early adopter of modern technologies. According to recent research from ULI and Green Street Advisors, the number of auto trips in single occupant vehicles in San Francisco declined from 62% in 2009 to 50% in 2015, and is projected to decrease to 40% by 2019, in part due to the growth of these new modes of transportation.

So, does the meteoric rise these types of services mean that the traditional solo car commuter is a thing of the past? Overall, the answer is no. As discussed in our U.S. & Canadian Mobility 2018 report, 85.7% of U.S. commuters still traveled to work in a car in 2016, down only 40 basis points from three year earlier. Furthermore, 76% of workers commuted alone in a vehicle as of 2016, on par with the corresponding share in 2013. In other words, in most of the country, parking is still a necessity for office tenants.

What is clear also from the data, though, is that there are significant differences in commuting patterns and preferences across the country. The New York-Northern New Jersey, San Francisco-Oakland, Boston, Washington, D.C., Chicago and Seattle-Tacoma metro areas have the lowest proportions of workers commuting via vehicle among the markets we studied, ranging from 57% to 79%. These markets also had the largest decreases in workers commuting via vehicle between 2013 and 2016. In other words, the markets with the lowest usage rates of vehicles for commuting are becoming even less vehicle-dependent.

This is not to say that new, tech-enabled transportation options are the sole reason for these changes, but they likely are part of the story. These markets have many mutual characteristics that facilitate and encourage the use of other forms of transportation, including established or growing public transit systems, density, high parking costs and/or strong economic growth in recent years. Public and private shared transportation options, used individually or in concert, are often convenient, cheaper and preferable to a solo car commute in these locations.

But the same story can’t be told in all markets. In more spread-out metros like Houston, Dallas and Atlanta, over 87% of commuters travel by vehicle. And in Houston and Los Angeles-Orange County, the share of commuters traveling alone actually increased between 2013 and 2016. Reflecting these trends, prevailing office parking ratios in these markets, particularly in the suburbs, are among the highest reported in our U.S. & Canadian Mobility 2018 report.

So what does all of this mean for office owners and occupiers? Well, the data indicates that the car certainly is not dead, but there are major differences across markets, in terms of both prevailing commuting patterns and whether or not a shift towards other modes of commuting is occurring. At the same time, transportation disruptors bear watching in all locations, even those where the car is still king today; although not expected to occur in the near term, the eventual rise of autonomous vehicles promises to upend transportation and parking as we know it.

Check out CBRE Research’s U.S. & Canadian 2018 Mobility report for additional analysis of parking and transportation data and trends.

Market Momentum

The two most precious commodities in commercial real estate are large assets with high yield (coveted by investors) and deep pools of talent centered around colleges and universities (highly desired by today’s occupiers). No less important — but perhaps less appreciated — is market momentum, which often is the key driver of the biggest market success stories in the past several years.

Momentum can be measured in several ways relevant to commercial real estate. One is rent growth. The higher the rent growth, the more tenant demand that exists in a market relative to supply. Job growth, particularly for office-using jobs, is an equally important measure of market momentum for the same reason. An even more meaningful measurement of market momentum is high-tech job growth, which is both office-using and, because of its relatively high pay compared to other jobs, creates a multiplier effect or virtuous cycle of broader job growth in the local economy.

Placing increased importance on these momentum factors will lead investors and occupiers to markets other than the large gateway cities and even markets with the strongest university bases. While asset-rich gateway cities, like New York and San Francisco, have strong pools of homegrown university talent and will always attract large occupiers, these attributes alone are no longer enough for either investors or occupiers.

Secondary markets like Cambridge, Massachusetts, and San Jose, California, are well-known momentum markets with some of the strongest talent bases and rent growth in the U.S. Less well-known are markets like Tempe, Arizona; Ann Arbor, Michigan; Salt Lake City, Indianapolis, Pittsburgh and Montreal, all of which are gaining tech occupiers and investors because of their deep pools of talent and potential for higher investment yields. Interestingly, while the Raleigh-Durham area of North Carolina scores highly in CBRE’s 2017 Tech-30 Report, the city of Charlotte, North Carolina, scores higher due to its accessibility and critical mass even though the major university concentration is much higher in Raleigh-Durham. This brings home the point that momentum can top even one of the most university-rich markets.

Markets that are showing the greatest momentum (rent growth) are Orange County, California, (23 percent), Nashville (21 percent) and Atlanta (18 percent). Certain city submarkets average a rent premium of 16 percent relative to their broader markets and some are well more than this, including Cambridge, Massachusetts, (120 percent), Santa Monica, California, (92 percent) and Palo Alto, California, (71 percent). Part of the reason for this rapid rent growth is low vacancy and significant barriers to entry for new supply. The Mount Pleasant/False Creek submarket of Vancouver fits this bill, with vacancy at less than 4 percent. And most of these submarkets are extremely tight relative to their overall markets.

Markets that show the best combination of job growth and rent growth, plus the added benefit of lower costs than in gateway cities, include Dallas, Denver, Minneapolis and Toronto; these mid-sized to larger cities possess the trifecta of deep talent pools, high yields relative to their gateway competitors and faster rent and job growth than the average, the critical momentum factor.

While cost pales in comparison to talent and investment yield, it is a consideration for many occupiers (even in tech, as not all tech jobs require the same level of skill or education). Deep pools of highly qualified labor abound in many of these smaller and mid-sized markets.

Cities should never lead with cost as a differentiator from their competitors. It is a race to the bottom, since there will always be cities willing to offer more incentives to lower costs. Those that offer the complete package of talent, investment yield and momentum (high rent growth and job growth) are better positioned to attract investors and occupiers.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor

This article first appeared on the NAIOP blog.

Secondary Shift

In search for yield, product availability, better market performance and/or other factors, capital is moving to smaller markets.

Last year’s dollar acquisitions volume held up better in the secondary and tertiary markets than primary markets. Total investment for assets in the nine Tier I metros (the six “gateway” markets plus Seattle, San Diego and Miami/South Florida) fell 17% year-over-year.

The Tier II metros collectively experienced a much smaller drop of -5.2%. Also, Tier II’s investment market share almost caught up to that of Tier I metros. For Tier III metros, investment rose 3.7% in 2017. Tier III’s market share also reflected a gain over last year.

The movement of capital to Tier II and Tier III markets will likely continue in 2018 (but one should also recognize that many Tier II markets are still very large markets). The gateway and other Tier I markets will remain very attractive for investment with Los Angeles and Seattle likely heading this list.

Investment by Metro Tier Groupings

 

Yet for a large share of investors, the potential for higher returns outside Tier I markets will remain enticing, and we expect Tier II an Tier III market shares to rise again in 2018.

New York, Los Angeles, and DFW top metros

New York metropolitan area led the U.S. in total 2017 multifamily acquisitions with $12.2 billion or $8.1% of the total. While impressive, New York’s share has fallen from previous years (12% in 2016).

Southern California (Los Angeles, Orange County, Inland Empire) and Dallas/Ft. Worth ranked second and third (as they also did in 2016). Investment in Atlanta was also particularly active at $7.5 billion or 5% market share.

The top four metros combined represented more than one quarter of all U.S. multifamily acquisitions in 2017. Half of the volume was represented by only 11 metros.

U.S. Metros Ranked by Investment 2017

Philadelphia leads YoY change

Among the 20 metros with at least $2 billion of acquisitions, seven metros had increased volumes: Orlando (32.9%), San Antonio (31.8%), Baltimore (25.8%), Washington, D.C. (12.6%), Chicago (9.6%), Boston (4.5%) and Las Vegas (1.1%). Among all markets, Philadelphia had the largest gain with 2017 more than double its 2016 level.

Among the metros with $2+ billion total investment, New York had the largest y-o-y decline (-39%) followed by Miami/South Florida (-23.9%), San Francisco Bay Area (-23.4%) and Austin (-17.2%).

For all U.S. multifamily investment, 2017 was down 6.9% from the prior year. Without New York, the y-o-y change was only -2.3%.Note, that changes in buying volumes are not only governed by market performance and investor sentiment, but also by product availability and by large portfolio purchases which can skew y-o-y changes in both directions.

Dallas/Ft. Worth leads for unit count

Dallas/Ft. Worth led the nation for total units acquired in 2017 with 90,300 units (8.1% of U.S. total), followed by Atlanta with 70,300 units. Of the top 10 metros by unit count, six were Tier II metros, providing additional evidence of the importance of Tier II markets for multifamily investment.

Of all multifamily units bought, 21% were in Tier I metros compared to 23% in 2016. The market share for Tier II markets also fell, but is still largest among the three tier groupings at 36%. Market share grew in the “other” category which represents mostly smaller tertiary markets.

San Francisco has highest sales price

In 2017, seven markets had sales price per unit averages over $200,000: San Francisco ($332,700), Boston ($262,200), San Diego ($259,700), Seattle ($241,700), Los Angeles/So. Calif. ($240,800), New York ($231,800) and Denver ($212,900). Portland, Miami/South Florida and Washington, D.C. were also very close to $200,000.

Kansas City experienced the largest rise in average sales price in 2017 (37.5%), followed by Sacramento (36.0%), Orlando (24.4%), Philadelphia (23.8%), Detroit (23.8%), Tampa (22.5%) and Seattle (20.0%). All of the markets with gains over 20%, except Seattle, were Tier II or Tier III metros. (Note that the sales price changes reflect changes in asset mix of assets acquired as well as value changes).

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

 

Metropolitan Pull

Multifamily investment in the U.S. has never been just a gateway markets story. That is even more true this year with investment capital showing more interest in non-primary markets.

New York, Los Angeles, DFW and Atlanta Lead Multifamily Investment Year-to-Date

The New York metropolitan area led the U.S. in total multifamily investment over the first seven months of 2017 with $6.5 billion or close to 9% of the total. While impressive, New York’s share has fallen from previous years (for example it had a 12% share in 2016).

Southern California (Los Angeles, Orange County and Inland Empire) had the second highest multifamily acquisitions total followed by Dallas/Ft. Worth. Atlanta was also particularly appealing to investors with a $3.6 billion total or almost 5% market share.

New York, Southern California, Dallas/Ft. Worth and Atlanta combined represented more than one quarter of all U.S. multifamily acquisitions YTD hrough July. Half of the volume was represented by only 11 metros.

Orlando Experiences Best Year-Over-Year Change

For the U.S., the YTD 2017 investment volume is down 14.8% from last year, but the story varies greatly by metro.

Year-over-year, multifamily investment rose in four of the 21 more active metros with acquisitions totals of $1+ billion. The leader among these was Orlando with a very impressive gain of 41.5%. Orlando was followed by Austin (10.6%), Las Vegas (6.4%) and Dallas/Ft. Worth (1.1%). The other markets with large gains were mostly Tier III metros.

Miami/South Florida, Metro New York and the San Francisco Bay Area had some of the largest year-over-year declines in investment activity.

Note that changes in buying volumes are not only governed by market performance and investor sentiment, but also by product availability and large portfolio purchases which can skew year-over-year changes in both directions.

Capital Moving to Tier II and Tier III Metros

In search for yield, product availability, better market performance and other factors, capital is moving to smaller markets. The year-to-date acquisitions volumes have held up better in the secondary and tertiary markets than primary markets. (Note that in our tiering of markets, many Tier II or “secondary” markets are very large and dynamic markets, but are not given primary or Tier I status due to their lower pricing.)

Total investment for assets in the nine Tier I metros (the six gateway markets plus Seattle, San Diego and Miami/South Florida) fell 28% year-over-year.

The Tier II metros collectively experienced a much smaller drop at -5.9%. Tier II investment market share also caught up to that of Tier I metros; both represent 35% of all buying activity YTD2017.

For Tier III metros, the YTD 2017 investment total is almost on par with last year, the best year-over-year comparison among the market tiers. Tier III’s market share also reflected a gain over last year.

The movement of capital away from primary markets and to secondary and tertiary markets will likely continue through the balance of 2017. Primary markets will remain very attractive for investment (with Los Angeles and Seattle likely heading this list). But for a large share of investors, the higher return potential outside primary markets will remain very enticing.

Dallas/Ft. Worth Is Metro Leader by Total Units Acquired

Based on total units acquired, Dallas/Ft. Worth was the clear leader with 46,300 units purchased YTD (8.2% of the U.S.). Atlanta came in second with 35,400 units (6.3%), followed by Metro New York (32,700 units). Of the top 10 metros by unit count, seven were in Tier II metros, providing additional evidence of the importance of Tier II markets for multifamily investment.

From a market share standpoint by unit volumes, the shifts from last year were not as large as those for dollar investment. However, Tier I metros’ share fell slightly while Tier III metros’ share rose slightly.

San Francisco Has Highest Sales Price

The YTD 2017 average sales price per unit for the U.S. fell slightly from 2016 (-0.4%) to $129,500.

Four markets had averages over $200,000: San Francisco $284,200, Los Angeles/So. California $248,500, San Diego $242,800 and Seattle $203,000. All of these markets also experienced increases over last year: 3.8%, 9.8%, 4.4% and 8.3%, respectively.

Philadelphia experienced the largest rise in average sales price (35.5%), followed by Detroit (31.4%), Houston (27.5%), Sacramento (27.2%), Tampa (24.7%), Columbus (21.5%) and San Antonio (21%). All of the markets with average sales price gains over 10% were Tier II or Tier III metros, likely reflecting more sales activity of high-end product (rather than changes in values).

By Jeanette Rice, Americas head of Multifamily research, CBRE.

A report with all the markets ranked is available upon request from the author at Jeanette.rice@cbre.com.