2019 Multifamily Rental Market Outlook · Source: Berkadia Research; Axiometrics. Despite elevating effective rent, several factors are drawing steady demand for apartments, including

Apartment Association of Michigan2019 Multifamily Rental Market Outlook

Presented by Kevin Dillion

Multifamily Review

Client Logo 3Source: Berkadia Research; Real Capital Analytics; Freddie Mac

Multifamily Outlook I Freddie Mac Mid-2019 Outlook

The tight labor market is driving wage growth nationally, fueling household formation.

New supply is scheduled to remain elevated over the coming years. Due to the imbalance of the housing market, this increase in construction isn't necessarily an oversupply concern.

Apartment fundamentals are slated to remain healthy through 2019 and into 2020. While moderation is probable in this stage of the cycle, the upward swing of the economy does not foreshadow any imminent headwinds that would cause major disturbance to the apartment market.

Lower interest rates could entice more households into homeownership. However, this should not cause any significant headwinds in the rental market due to the overall shortage in the national single-family housing inventory.

Client Logo 4Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive; Nestpick

Factors investors should consider:

Homeownership continues to elude many households, especially debt-ridden young adults who are priced out of purchasing a home.

In a highly competitive market, more investors are putting their capital into property sub-types like affordable housing as well as secondary and tertiary markets.

Active adult communities are not as cyclical as other residential asset types as residents in these properties stay between 6 to10 years, compared to 1 year for student housing and 1.5 years for conventional multifamily housing.

Millennials will surpass Baby Boomers as the nation’s largest generation by the end of this year, while Generation Z is forecast to surpass Millennials by 2034. Generation Z and Millennials will combine to create a “Youth Boom” that will drive housing demand, especially in the rental market.

Multifamily Market I Investment Trends Through the first three quarters of 2019, roughly $96.6 billion worth of transactions were made, compared to $96.9

billion from the same time last year. Despite the slight dip, the average price per unit in the third quarter of 2019 reached $174,529, appreciating a robust 9.3% year-over-year.

Canada and Bahrain combined to account for roughly $4.6 billion worth of transaction volume year-to-date.

Client Logo 5Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive; Nestpick

Multifamily Market I Major Transactions

Providence at Harbour ClubBelleville, MI | 1,112 Units

Sale Price: $79,000,000Sale Price/Per Unit: $71,043

Valley RanchAnn Arbor, MI | 480 Units


Signature ClubAnn Arbor, MI | 324 Units


Alden TowersDetroit, MI | 389 Units


Cap Rate Analysis

Client Logo 7

1

101

201

301

401

501

0.0%

2.0%

4.0%

6.0%

8.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Spread (B

PS

)R

ate

Spread (bps) 10 Treasury Rate National Cap Rate Avg. 10 Treasury Avg. Cap Rate

3Q12 Spread: 471 BPS

3Q19 Spread:349 BPS

Avg. 10-Yr Treasury 2004 -2018: 3.12%

Avg. National Cap Rate 2004 - 2018: 6.14%

Source: Berkadia Research; Real Capital Analytics; Federal Reserve of St. Louis

The yield on the 10 Year Treasury fell in the third quarter as global growth fears emerged, trade tensions ratcheted up between the U.S. and China, and expectations the Fed will be more accommodative with regards to policy.

Investment Indicators I 10-Year Treasury vs. National Cap Rate

Client Logo 8

5%

6%

7%

8%

9%

10%

Office Hedonic Cap Rate Apartment Hedonic Cap Rate Industrial Hedonic Cap Rate Retail Hedonic Cap Rate

Source: Berkadia Research; Real Capital Analytics

* Based on independent reports of properties and portfolios $2.5 million and greater.

CRE – Cap Rates

C A P I T A L T R E N D S

Cap Rates 3Q19Office: 6.7%Multifamily: 5.4%Industrial: 6.1%Retail Mall: 6.9%

The hedonic cap rate for multifamily properties was the lowest among the commercial real estate asset types, holding steady at 5.4% through the year

ending in September 2019.

Client Logo 9Source: Berkadia Research; Real Capital Analytics; Morgan Stanley; Multifamily Executive

Historical Cap Rate Trends

Cap rates fluctuate over time due to economic and capital market conditions. The commercial real estate market experienced declining cap rates and elevated propertyvalues three times over the past four decades: 1982-1990, 2002-2007, and present day. Key factors that drive cap rate swings are:

Taxes

Capital Requirements

Interest Rates

Law reform

Cap Rate Influencers

Key factors currently affecting cap rates swings:

Market driven by interest rates

With a current cap rate spread below the 10-year average, an interest rate hike by the Fed won’t have a significant effect on cap rates, remaining steady due to solid market fundamentals

Current Cycle – Interest Rates

Key factors that drove cap rate swings:

Pension funds, foreign investors, and other institutions investing in CRE

Led to aggressive lending practices and ensuing period of significant overbuilding

Changes to the tax code enhanced depreciation allowances and tax shelters for CRE

Deregulation of the saving and loan (S&L) industry allowed institutions the ability to invest in commercial mortgages for the first time, opening a new source of capital

1980’s – Major Tax Legislation

Key factors that drove cap rate swings:

Significant increases in debt and equity availability

CMBS driven

Reduction in capital requirements on investment banks

Heightened investor demand

Mid 2000’s – Investment Bank Fueled

Multifamily Capital Market Trends

Multifamily Market Capital Trends

Client Logo 11Source: Berkadia Research; Real Capital Analytics


Multifamily Buyer Composition -National


2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019 YTD

Cross-Border Institutional REIT/Listed Private User/Other

Private Capital is and has been the main driver of the multifamily apartment market, making up roughly 66% of all multifamily deal volume through the first

three quarters of 2019.


*Based on independent reports of properties and portfolios $2.5 million and greater.

($13)

$10

$33

$55

$78

$100

2015 2016 2017 2018 YTD 2019

Bill

ions

Private

Acquistion Disposition Net

($12)

($6)

$0

$6

$12

$18

2015 2016 2017 2018 YTD 2019

Billio

ns

REIT / Listed


($11)

$0

$11

$21

$32

$42

2015 2016 2017 2018 YTD 2019

Billio

ns

Institutional


($4)

$0

$4

$8

$12

2015 2016 2017 2018 YTD 2019

Billio

ns

Cross-Border


Multifamily Capital Flows

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**Identified units as of 3Q19; 100+ unit developments

Source: Berkadia Research; YardiMatrix

National Multifamily Quarterly Snapshot

M U L T I F A M I L Y

3Q 2019Average

Effective RentAverage

Occupancy

Market Average $1,411 95.8%

Class A $1,553 95.0%

Class B $1,202 96.7%

Class C $1,139 96.7%

YearAnnual

OccupancyAnnual

Absorption

2018 95.4% 329,132

2017 95.0% 304,175

2016 94.9% 233,365

2015 95.2% 263,966

2014 95.1% 315,747

2013 94.5% 188,974

2012 94.4% 215,086

2011 94.0% 106,691

2010 93.7% 370,639

2009 92.0% (6,829)

Total UnitsTotal Units

Under Construction

10,243,989** 607,845**

Barriers to homeownership have pushed numerous residents into the rental market, increasing rent nationwide. Since 2009, the average effective rent rate for

apartment units increased 43.7% through 3Q19, reaching $1,411 per month.


Multifamily Assets*


$16.

5

$31.

6

$51.

8 $69.

2

$92.

9

$100

.0

$133

.6

$138

.5

$122

.9 $141

.9

$96.

6

Ten-Year Average: $89.9 billion

$0

$40

$80

$120

$160

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

($)

Bill

ions

Annual Sales Volume 10-Year Average Annual Sales Volume

Through the third quarter of 2019, approximately $96.6 billion worth of transactions were made nationwide, down slightly from the same time period last year. Despite the dip, year-to-date

volume is the third-largest figure recorded since 2009.

Annual Transaction Volume I National



Lender Composition - National

2019

2018

2017

2016

2015

Year

CMBS Financial Private/Other Government Agency Insurance International Bank National Bank Regional/Local Bank

Garden

Mid/Highrise

Student Housing

Seniors Housing & Care

Property Type

CMBS Financial Private/Other Government Agency Insurance International Bank National Bank Regional/Local Bank

Metro Detroit Multifamily Market Trends



Private Capital is the dominant source of buyer composition in the Detroit metro. From 2009 to 2018, an average of 87% of multifamily transactions

metrowide has been made with private capital.

Multifamily Buyer Composition – Detroit, MI MSA


2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019 YTD

Cross-Border Institutional REIT/Listed Private User/Other

Client Logo 18

*August 2019

**Includes properties w/ 100+ conventional units

Source: Berkadia Research; CoStar; YardiMatrix

3Q 2019Average

Effective RentAverage

Occupancy

Market Average $959 97.0%

Class A $1,391 93.5%

Class B $1,081 97.7%

Class C $865 97.7%

YearAnnual

OccupancyAnnual

Absorption

2018 96.6% 2,058

2017 96.1% 2,130

2016 95.7% 1,122

2015 95.9% 6,216

2014 93.7% (35)

2013 93.9% 545

2012 93.9% 2,565

2011 93.1% 3,564

2010 91.8% 8,979

2009 91.0% (3,312)

Total UnitsTotal Units

Under Construction

155,185** 2,582**

Multifamily Quarterly Snapshot –Detroit, MI MSA

M U L T I F A M I L Y Despite a minute slowdown, rent growth in this apartment market is well above the historical average. Year over year, effective rent increased 3.5% through the third

quarter of 2019, reaching $959 per month.

Client Logo 19

1,06

1

109

347

503

477 55

6 633

1,80

0

1,52

3

761 83

2

90%

92%

94%

96%

98%

0

500

1,000

1,500

2,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

Completions Occupancy

Source: Berkadia Research; CoStar; Axiometrics

Dan Gilbert and his team at Bedrock are developing two of the newest additions to the Central Business District, Monroe Blocks and Hudson’s Site. Both high-rises will bring over 800 units to

Downtown Detroit and change the city skyline for the first time in a generation.

Completions vs. Occupancy I Detroit, MI MSA

Client Logo 20

1,06

1

109

347

503

477

556

633 1,

800

1,52

3

761

832

(3,3

12)

8,97

9

3,56

4

2,56

5

545

(35)

6,21

6

1,12

2

2,13

0

2,05

8

1,76

0

(6,000)

(3,000)

0

3,000

6,000

9,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

Completions Absorption

Source: Berkadia Research; Axiometrics

Despite elevating effective rent, several factors are drawing steady demand for apartments, including employment opportunities and revitalization.

Completions vs. Absorption I Detroit, MI MSA

Client Logo 21

1,52

3

761 99

5

2,91

9

1,59

3

1,37

6

1,39

9

2,13

0

2,05

8

(611

)

320

831

1,03

7

1,61

3

(1,000)

0

1,000

2,000

3,000

4,000

2017 2018 2019 2020 2021 2022 2023

New Supply Demand

Downtown Detroit’s revival has been a source of optimism for local apartment developers. Over the next four quarters, approximately 46% of the apartment deliveries in this region will be focused in the Downtown / Midtown / Rivertown submarket, where nearly 1,000 new units are forecast to open by September 2020.


Projected Supply vs. Demand I Detroit, MI MSA

FORECAST

Client Logo 22

Rank Submarket3Q19 Effective

RentY-o-Y Rent

Change

3Q19 Occupancy

Rate

Y-o-Y Occ. Change (BPS)

1 Troy/Rochester Hills $1,159 6.7% 97.0% 100

2 Clinton Township/St. Clair County $866 5.3% 96.4% 0

3 Westland/Canton/Livonia $959 4.7% 97.1% (50)

4 Farmington Hills/West Bloomfield $1,262 4.5% 97.0% 20

5 Southfield $1,079 3.8% 96.8% 20

6 Pontiac/Waterford/Auburn Hills $925 3.2% 97.5% 30

7 Warren/Roseville $807 3.1% 96.1% 70

8 Downtown/Midtown/Rivertown $1,183 2.9% 96.7% (50)

9 Detroit City $760 2.8% 97.2% 90

10 South Wayne County $843 2.8% 97.1% 20

11 Novi/Livingston County $1,061 2.6% 98.2% 0

12 Royal Oak/Oak Park $968 2.6% 97.2% 20

13 Sterling Heights/Shelby Township $999 2.3% 97.7% (30)

14 Dearborn/Dearborn Heights $978 -2.2% 94.2% 130

Detroit Market Average $959 3.5% 97.0% 20


Quarterly Trends – Rent Growth in Submarkets

M U L T I F A M I L Y T R E N D S

Client Logo 23

$57.

1

$93.

6

$118

.3

$294

.2 $369

.3

$346

.5

$811

.0

$369

.8

$555

.8

$279

.4

$301

.3

Ten-Year Average Annual Sales Volume: $329.5 million

$0

$180

$360

$540

$720

$900

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

($)

Mill

ions

Annual Sales Volume Ten-Year Average Annual Sales Volume



Annual Transaction Volume I Detroit, MI MSAMultifamily Assets*

Many recent trades have been for value-add properties. As a result, most trades have been for Class C properties for prices roughly in line with or lower than recent years.

Client Logo 24

Average Annual Price Per Unit I National vs. Detroit, MI MSA

$84.

1

$85.

4

$93.

3

$101

.3

$108

.3

$113

.6 $130

.0

$140

.4

$145

.4 $157

.9 $174

.5

$29.

4

$36.

8

$37.

4

$34.

4

$39.

3

$40.

5 $58.

3

$61.

7

$85.

6

$85.

8

$66.

3

Metro Detroit Ten-Year Average: $50,909

U.S. Ten-Year Average: $115,981

$0

$40

$80

$120

$160

$200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

($)

Thou

sand

s

USA Metro Detroit U.S. Ten-Year Average Metro Detroit Ten-Year Average



Multifamily Assets*

As of 3Q19, the average price per unit in Metro Detroit was down from one-year prior, but still outpaced the 10-year historical average of $50,909.

Client Logo 25

67.2

%

66.5

%

65.9

%

65.3

%

65.1

%

63.9

%

63.7

%

63.4

%

63.9

%

64.4

%

64.8

%

73.9

%

73.7

%

73.5

%

73.5

%

71.7

%

71.3

% 74.0

%

71.6

%

70.2

%

70.9

%

71.1

%

45%

55%

65%

75%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3Q19

USA Detroit, MI MSA Linear (Detroit, MI MSA)

Source: Berkadia Research; U. S. Census Bureau

According to the U.S. Census Bureau, the average homeownership rate in the Detroit, MI

MSA was 71.1% in the third quarter of 2019, down 310 basis points year over year.

Homeownership Rate

Client Logo 26

$63,007

$60,845

$61,001

$57,995

$62,096

$57,975

$54,564

$75,058

$59,633

$67,660

$59,496

18.4%

18.7%

18.9%

18.9%

19.1%

19.9%

20.5%

21.6%

23.6%

25.5%

28.5%

$11,591

$11,404

$11,547

$10,981

$11,881

$11,514

$11,182

$16,205

$14,058

$17,250

$16,932

Kansas City, MO

St. Louis, MO

Cincinnati, OH

Indianapolis, IN

Columbus, OH

Detroit, MI

Cleveland, OH

Minneapolis, MN

Milwaukee, WI

Chicago, IL

United States

2019 Median Household Income Rent as % of Income 3Q19 Annualized Effective Rent*

Source: Berkadia Research; Tetrad; Axiometrics

Median Household Income vs. Annualized Effective Rent

Housing Affordability I Midwest Metro Areas

Metro Detroit Economic Trends

Client Logo 28Source: U.S. Census; Bureau of Labor Statistics; Moody’s Analytics

0%

5%

10%

15%

20%

Detroit-Warren-Dearborn, MI Michigan USA

September 2019 | Seasonally Adjusted

Monthly Job Growth

Monthly Unemployment Rate

USA: 3.5%

Michigan: 4.2%

Detroit, MI MSA: 4.6%

Client Logo 29Source: Berkadia Research; Moody’s Analytics

Construction, 4%

Education & Health Services, 15%

Financial Activities, 6%

Government, 9%

Information, 1%

Leisure & Hospitality, 10%

Manufacturing, 13%

Natural Resources & Mining, 0%

Other Services, 4%

Professional & Business Services, 20%

Trade, Transportation & Utilities, 19%Metro Employment

Sectors – September 2019

E C O N O M I C T R E N D S Major employers that have moved to the region include Google, Microsoft, and LinkedIn. Google is building a 53,000-square-foot development center

in Novi for its self-driving car project.

Client Logo 30Source: Berkadia Research; Moody’s Analytics

Metro Employment Sectors – September 2019

E C O N O M I C T R E N D S

Rank SectorSeptember 2019

Employees% of Total Employment

1 Professional & Business Services 396,083 19.5%

2 Trade, Transportation & Utilities 378,115 18.6%

3 Education & Health Services 312,451 15.4%

4 Manufacturing 256,137 12.6%

5 Leisure & Hospitality 205,391 10.1%

6 Government 188,597 9.3%

7 Financial Activities 115,576 5.7%

8 Construction 75,619 3.7%

9 Other Services 74,845 3.7%

10 Information 26,571 1.3%

11 Natural Resources & Mining 1,067 0.1%

Grand Total 2,030,4453 100.0%

September 2019 | Seasonally Adjusted

Documents

2019 Multifamily Rental Market Outlook · Source: Berkadia Research; Axiometrics. Despite elevating effective rent, several factors are drawing steady demand for apartments, including