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Tier II Multifamily Markets Draw Investors

Tier II markets experienced the largest increases in multifamily investment this year through July.

Tier II acquisitions totaled $37.4 billion, up 18.5% from the same period last year, with Houston and Raleigh the investment growth leaders

Investment in Tier III markets rose 5.9% year-over-year, with Tier I investment climbing 2.4%

New York led the U.S. for multifamily acquisitions with $7.9 billion or 8.4% of the U.S. total. While impressive, New York’s volume fell 13.1% year-over-year. Southern California (Los Angeles, Orange County, Inland Empire) had the second highest total of $5.9 billion. This total also represented a decline (-14.5%) from the same period in 2018.

Actual or anticipated changes in rent control regulations have impacted investor sentiment. The uncertainly surrounding the regulations are further contributing to keeping some investors on the sidelines. However, investment in San Francisco rose year-over-year, so other forces are also at play, including product availability.

Dallas/Ft. Worth stayed in third place with $5.2 billion, up slightly from the prior year. Following close behind were Washington, D.C., Phoenix and Atlanta all with double-digit increases. The top six metros combined represented over one-third of all acquisitions year-to-date 2019. Half of the volume was represented by only 10 metros.

Among Tier I markets, Boston led for investment growth (65.4%). However, Boston’s total was moderate at $1.9 billion. Seattle had the second highest year-over-year gain (45.4%) followed by the San Francisco Bay Area (33.8%).

For Tier II markets, Baltimore experienced the largest increase (128.8%) followed by Tampa (45.1%) and Austin (42.5%). Las Vegas had the highest total among Tier III markets$1.9 billionand a sizeable 52.3% gain.

Tier II Metros Achieve Highest Gains

Multifamily investment climbed the most in Tier II markets, rising 18.5% over the prior year. Investment in the Tier III markets rose by 5.9%, double that of the investment gain in Tier I markets.

Most of the 16 Tier II markets have been experiencing very strong demand growth and sustained favorable market performance even with robust construction pipelines. While capital is not shying away from Tier I markets (largely the gateway markets plus Seattle, Miami and San Diego), it is showing a preference for these larger dynamic non-gateway metros.

Nearly 25% of Units Acquired in Only Four Markets

Nearly one-quarter of all units acquired year-to-date were located in four Tier II metros: Dallas/Ft. Worth, Atlanta, Houston and Phoenix.

Tier II metros collectively captured the largest market share of units acquired41%. Furthermore, more than half of the top 20 metros by unit count were Tier II markets, providing additional evidence of the attractiveness and importance of Tier II markets.

Investment Patterns to Stay on Current Course

Through the balance of 2019 and into 2020, Tier II metros should continue to attract a disproportionate share of capital. Most Tier II markets are sizeable, are experiencing high levels of market demand and have good product availability. Capital which had once gravitated primarily to Tier I markets will continue to explore Tier II opportunities.

Tier III investment should also continue to rise. While there is less product availability in many of these markets, most have favorable market performance and offer some yield premium thereby making them attractive including many that had not formerly considered smaller markets.

Investment activity in Tier I markets will also remain a centerpiece of the investment story through the balance of 2019 and into 2020, even if year-over-year increases are muted. Tier I markets benefit from having larger assets (important for buyers needing scale) and from improvement in market performance in their urban cores.

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

Multifamily Business

The New York metropolitan area led the county in total multifamily acquisitions over the first four months of 2017 with $3.4 billion or close to 10% of the total. While impressive, New York’s share has come down from previous years (12% in 2016).

Southern California (Los Angeles, Orange County, Inland Empire) and Dallas/Ft. Worth had the second and third highest volumes (as they also did in 2016).

New York, Southern California and Dallas/Ft. Worth represented nearly one quarter of all U.S. multifamily acquisitions year-to-date. Half of the volume was represented by only 12 metros.

Based on units acquired rather than dollar volume, Dallas/Ft. Worth was the leader with a total of 19,500 units purchased year-to-date (7.8% of the U.S. total). Atlanta came in second with 13,400 units (5.4% of total), followed by Southern California (12,300 units, 4.9%) and Metro New York (11,800 units, 4.7%).

Combined, these four metros represented 23% of the 251,000 units acquired year-to-date.

Year-Over-Year Change by Metro

For the U.S. as a whole, the total year-to-date investment volume dropped 26%. For individual metros, the experience varied greatly. Among the more active metros (acquisitions of at least $500 million), Baltimore and Orlando had the largest gains both at 59%, followed by Jacksonville (58.7%).

Miami/South Florida area experienced the largest year-over-year decline (-76.8%). Other larger markets with notably reduced investment activity included Houston, New York and Denver.

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

Analysis of Investment by Metro Tiers

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

Year-to-date investment acquisitions (as measured by dollar volume) were holding 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 43% year-over-year.

The Tier II metros – Atlanta, Austin, Baltimore, Dallas/Ft. Worth, Denver, Houston, Minneapolis, Orlando, Philadelphia, Phoenix, Portland, Sacramento and Tampa – collectively experienced a smaller drop than Tier I metros (about the same as the U.S. market overall.

Similarly, total investment in the Tier III metros fell just slighty less than the U.S. market overall.

Investment outside the major metros rose, indicating that capital is reaching out to additional tertiary markets and even some smaller markets.

The other key statistic in the tier summary statistics is that investment activity for the 13 Tier II metros appears to be closing in on Tier I metros in terms of market share. Tier I metros still have the largest market share at 34% but Tier II’s is close at 29%.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE

*Figure 1 – Source: CBRE Research, Real Capital Analytics, Q2 2017 (thru April)