Rents in the United States have been rising faster than incomes for several years, demanding a larger share of household budgets. In fact, nearly one-third of American renter households contribute 50 percent or more of income towards rent.
Are Small Asset Rentals Less ‘Severe’ on Renter Budgets?
Following the definition used by the Harvard Joint Center for Housing Studies (JCHS) in their recently released 2016 annual report, “State of the Nation’s Housing”, we examine two categories of cost burdened renters — Moderately Burdened and Severely Burdened households.
Moderately Burdened households are those paying between 30 percent and 50 percent of their household income towards rents, while Severely Burdened households pay 50 percent and up.
About 25 percent of households in small properties (5 to 49 units) fall in the Moderately Burdened category, slightly higher than the 24 percent share in large properties (50+ units).
Measuring renters that are severely burdened, the share is slightly higher for households in large properties (30 percent) than small properties (28 percent). Overall, the share of households that are Moderately or Severely Burdened is only slightly higher for large property renters.
As shown by comparing the two charts below, the affordability issue in small properties is experienced to a greater degree by lower income households. Severely Burdened households are mostly concentrated in the lowest income groups in both asset types.
Which Markets have the Biggest Affordability Problem?
High cost burdens for households living in small properties is characteristic of many metro areas. In some cases — like New York for example — incomes are high but rents are relatively higher. In other cases, such as Baltimore, rents may be low but incomes are even lower on a relative basis.
As shown in the chart below, the share of Severely Burdened households living in small assets was higher than the national average for Seattle (29 percent), New York (31 percent), Baltimore (34 percent), Los Angeles (35 percent) and Atlanta (38 percent).
The picture changes significantly in the large property market, where the share of households in New York that are severely burdened drops below the national average. Larger assets come with luxury finishes and comprehensive amenity packages in many instances, so rents are high — but incomes are relatively higher. Similarly, in San Francisco, high rents are offset by high incomes at large properties.
From the landlord’s perspective, cost burdens for households in small properties are likely a constraining factor in raising rents further. Notably, the analysis above does not consider property quality.
In some markets where burdens are low, the low quality of the small property rental stock will constrain rent growth as well. In order to raise rents at a low quality asset, investors should look consider value-add repositioning strategies.
Learn more on Alex Chatter.
As we enter the fall buying season, it’s useful to look at pricing in major multifamily markets through the first half of the year. Not only in the priciest markets, but also in markets that may represent higher yield opportunities.
Using transaction data compiled by Real Capital Analytics, we calculated the average sale price in the top 50 markets in the U.S. — specifically, the weighted average price per unit paid for apartment sales transactions over $2.5 million recorded during the 12 months ending in June 2016. The average price for the U.S. overall during that time was $134,000/unit.
Most Expensive Markets
San Francisco ($492,500/unit) was the highest priced multifamily investment market over the last 12 months. Its local economy has been boosted by the expansion of the technology sector, while opposition to new development has limited new supply. Given those attributes, San Francisco should remain among the more favored markets in the long term.
Manhattan ($485,800/unit) was second on the list, weighted heavily by the purchase of Stuyvesant Town and Peter Cooper Village for $5.3 billion at the end of last year. New York City remains the favorite destination for international investment capital. However, investors of all types have begun to approach this market with caution as the luxury condominium market has slowed recently. The area also now has the highest level of new development in the pipeline of any multifamily market in the country.
The third highest priced multifamily investment markets was also in the Bay Area: San Jose ($334,800/unit). Boosted by a strong local economy built around Silicon Valley’s entrepreneurial spirit, San Jose’s long-term forecast remains bright.
Washington, D.C. ($284,500/unit) and Boston ($257,200/unit), two additional traditional international gateway investment markets, rounded out the top five highest priced markets.
Least Expensive Markets
It’s also useful to look at recent sales transactions in the lowest priced multifamily markets, to see where high-yield opportunities may lie.
“The secondary and tertiary markets of the U.S. have apartment assets that price at a lower rate per unit and also at higher cap rates,” said Jim Costello, Senior Vice President at Real Capital Analytics. “In the six major metros, cap rates came in at 4.8% in during Q2 2016 versus a 6.4% rate in the secondary and tertiary markets. Given that GSE debt is priced about the same across markets in terms of mortgage rates, it implies more positive leverage opportunities in the secondary and tertiary markets.”
The lowest priced market over the last 12 months was Memphis ($54,600/unit). Memphis is expected to maintain strong economic growth as a major transportation hub with a healthy job market, low business costs, and an attractive downtown area.
Indianapolis ($57,600/unit) was another strong market that finished at the bottom of the list. The local economy is expected to continue its recent expansion, which has been driven by low business costs and favorable demographics, along with gains in employment in the high-tech and life sciences sectors.
Three Ohio markets, Cleveland ($59,600/unit), Columbus ($63,100/unit), and Cincinnati ($77,300/unit) were among the lower priced markets. Data from Real Capital Analytics shows that the average apartment cap rate in Ohio came in at 7.6% in during Q2 2016. The local economy in these markets should continue to pick up steam in the near term, based on strong growth of healthcare and professional services sectors.
Houston ($73,700/unit), where the local economy has been hurt by falling energy prices, rounded out the top five lowest priced markets.
Learn more on Alex Chatter.
Arbor LoanExpress Attains New Efficiency And Client Service Milestones For Multifamily Borrowers And Brokers
Uniondale, NY According to Arbor Realty Trust, Inc., a real estate investment trust and national direct lender specializing in loan origination and servicing for multifamily, seniors housing, healthcare and other diverse commercial real estate assets, its Arbor LoanExpress (ALEX) online agency loan origination and processing platform has reached three new efficiency and service milestones upon its one-year anniversary mark. In only one-year’s time, ALEX helped rapidly close 426 loans and process $2.3 billion in loan volume while ultimately saving nearly 24 hours per loan in processing time.
As a Top 10 Fannie Mae DUS Multifamily Lender for the past decade and Freddie Mac’s Top Multifamily Small Balance Loan provider, efficiency and customer service are at the crux of Arbor’s business and success.
“Leveraging technology advances to deliver a faster and more efficient origination and processing experience is a primary focus and a core part of our business strategy, “ said Ivan Kaufman, Arbor’s president, chairman and CEO. “In 12 short months, ALEX has delivered an easy, efficient and transparent financing environment for borrowers and brokers alike. We have only scratched the surface of what we intend to deliver to our clients in the near future.”
Within its first year of service to Arbor clients, ALEX has also provided the company with new avenues to business generation across the growing online real estate investment market. As part of this new level of reach within the multifamily market, ALEX’s news blog, ALEX Chatter, has provided multifamily investors exclusive insight and research into the small balance investment market through its partnership with Chandan Economics.
While ease, efficiency, 24/7 loan document management, mobile access and e-signature execution were some of the hallmarks of ALEX’s first year in business, the platform is now working on several additional initiatives. These include integrating ALEX with several significant broker client systems; incorporating a seniors housing financing component; and delivering continual process and experience enhancements that will increase loan processing time savings and ease of use.
This post was originally published on New York Real Estate Journal