Brokers See Listings as Big Challenge in 2018 Apt. Market

Pictured: Brian McAuliffe, president of institutional properties at CBRE, and head of its multifamily sales platform.

The big national apartment brokerages think 2018 will be a year in which their biggest sales job will be convincing owners to sell.

“In a lot of cases it’s not a no-brainer to sell,” says Josh Goldfarb, the co-head of Cushman & Wakefield’s multifamily investment sales platform. Valuations of most apartment properties soared during the early years of the economic recovery, driving apartment pricing – and sales – to historic highs. The pace of rent growth and the resulting increases in property values pushed some owners to shorten their hold times on assets to cash in on the great pricing. Buyers of an apartment property in 2010 found themselves unexpected, – but, happy – sellers in 2012, or 2013.

Now, though, valuations are slowing or staying flat. “You have to come up with a really thoughtful reason for doing this (selling) if the valuations aren’t there,” says Goldfarb.

“If you bought in 2010, or 2011, or 2012, you hit your pro forma in two or three years,” says Blake Okland, head of Newmark’s Apartment Realty Advisors arm. “The next guy is going to take five-to-seven years. So we really need to be able to entice these guys to sell.”

Okland predicts the market will see an increase in off-market deals, as buyers approach sellers on their own, with their own pitch. Look, too, for entity-level deals, where investors buy apartment shops outright as a way to achieve scale and deploy pent-up capital in one big chunk. For brokers, touting one’s ability to mass-market a new property listing will be less important than offering owners full-service advisory services: portfolio assessment, broker-opinions of value, and market forecasting.

Capital, say brokers, isn’t a problem. Investors – foreign, domestic, institutional and private – continue to pour into the apartment sector. U.S. real estate continues to be seen as one of the world’s surest bets – and multifamily tops the list of preferred asset classes.

Amazon and other online retailers looking to build out a home-delivery distribution network have upped the industrial sector’s appeal as they hunt for warehouses around the country. But even that demand is unlikely to push industrial properties to compete with multifamily in the coming years.

“If I want to be in real estate, logistics and the industrial sector is the darling right now, but it’s a fraction of the size of multifamily,” says Brian McAuliffe, head of CBRE’s institutional apartment sales platform. “When we look at the amount of capital – foreign, domestic, private – who want apartments, it’s as robust as ever.”

The end of one year and the start of another is usually the time brokerages are flooded with requests for BOV’s – broker opinion of values. Those requests from owners are seen as the first step to bringing a property to market for sale. Brokers say the pace of requests this year have been on par with years past.

The difference is where the potential listings are.

Core, downtown properties have been the favorite in recent years, but suburban value-added deals have been gaining ground. In 2018, brokers expect that trend to expand.

“Suburban, Class B isn’t a super-aggressive play, but it’s the safest harbor for multifamily money,” says Okland, of ARA.

In the face of flattening value appreciation, the higher returns in those older, suburban properties will drive sales.

“The big trend we saw in the second half of 2017, was the drive for current yield,’ says CBRE’s McAuliffe. “Investors can’t bet that the market will bail them out with lower cap rates and appreciation.”

The big turn to the suburbs and secondary markets could quickly change the dynamics in those areas. As investors boost rents after renovations to the older properties, those rents could approach the level where new development makes sense since the start of the economic developers could justify new apartment development in the best, downtown locations. But given the going rent levels elsewhere, new product was almost always seen as a losing proposition.

Goldfarb, of Cushman, says he’s seeing new suburban apartment development already – especially in certain southeast markets. In many places, the supply of 20-year-old apartment properties ripe for a renovation is drying up.

“In the last few years, you’ve been able to find an early-2000’s vintage property, throw some new stainless steel stoves in, and the sky’s the limit,” says Goldfarb. “Now, that’s getting played out. And the rising rents are justifying new development.”

Source: Brokers See Listings as Big Challenge in 2018 Apt. Market