Despite rapid growth in the US real estate market that peaked in 2007, in a recent study by JLL US Investment Outlook Q2 2015 report noted that investment sales in office and multifamily assets have now surpassed 2007 levels. They concluded that sales of office buildings have risen 46.20% representing $73.4 billion in sales followed by multifamily with a 45% increase accounting for $61.30 billion in sales. New York continues to lead the global markets as the preferred destination by foreign investors with investments exceeding $27 billion for the first half of 2015 followed by London coming in around $23 billion. Sales of multifamily assets peaked in 2007 at about $100 billion in the US is now expected to reach over $125 billion by year end.
Foreign investors that are primarily made up of institutions and sovereign wealth funds continue to increase their investments in US real estate. In that same report by JLL, they cite that that the largest investors in US real estate from 2014-2015 are as follows:
Canada – 28.70%
Singapore – 16.30%
Norway – 8.20%
Germany – 7.9%
China – 6.4%
Australia – 5.20%
South Korea – 3.10%
Others – 19.2%
Institutions continue to expand their asset allocation into US real estate. This has added more capital to the marketplace and now the market is flush with capital where there are too many buyers chasing assets coupled with a lack of supply has pushed up pricing of income producing assets. In a report entitled “In the Advancement of Real Estate as a Global Asset Class” published by JLL as part of its Global Foresight Series in 2013, they predict that institutional investors will account for $1 trillion in real estate investments by 2030 as compared to $450 billion in 2012. Colliers in a press release dated March 20, 2015 cites that allocations among institutions increased this year to 9.6% up from 9.4% the previous year representing a volume of $52.50 billion. Walter Boetcher, Director of Research and Forecasting for Colliers notes that with low interest rate environment offer higher yields in property investments compared to bonds and equities. This is exactly what is happening with institutional investors who are putting their capital in hard assets and less in a volatile stock market or bonds with low yields. Other reasons foreign investors are flocking to the US real estate market is their falling currency value compared to the USD. If you look at the Euro or plummeting of the Australian Dollar gives incentive for investors to parlay their capital into US real estate where they can earn more money just on the strength of the US dollar rather than letting their currency sit in their own market.
A few examples of institutions who increased their asset allocation to real estate include:
- The Canadian Pension Plan Investment Board (CPPIB) increased its real estate allocation from 4.3% in March 2007 to 10.6% by September 2012;
- The National Pension Service of Korea (NPS) expects alternative investments to account for more than 10% of its total portfolio in 2016, compared with 2.5% in 2007; and
- In March 2010, the Government Pension Fund of Norway allowed for a maximum 5% allocation to real estate; it had previously been zero. The manager of the fund, Norges Bank Investment Management, has already spent US$3 billion on real estate and is targeting US$33 billion by 2020;
- The California Public Employees’ Retirement System (CalPers) plans to invest $6.33B in funds and joint ventures with about one dozen real estate managers for the new fiscal year, according to its $301B annual investment plan. This will include retail, logistics and multifamily
According to JP Morgan Asset Management group in an article published by Investments & Pension Europe (IPE) dated June 1 2012, they noted that institutions will increase their asset allocation to alternative investments which include real estate, timber and infrastructure from 5%-10% to 25% in the coming decade.
With interest rates at an all-time low is an ideal environment for investors. According to a study from the Department of Treasury, the 10 year T-bill stood at 4.20% in January 2005 and decreased to 2.617% by January 2015. Most lenders determine interest rates based on the performance of the T-bill adding a percent over the index. Current fixed rate financing for a 10 year multifamily asset is about 4.3%. All of these attractive features are triggering more demand for income producing assets in the US.
Jamie Woodwell, VP of Commercial Real Estate Research at Mortgage Bankers Association, published in a corporate press release dated August 13, 2015 that “the delinquency rates (60-plus days) for commercial and multifamily mortgages held by life insurance companies, Fannie Mae and Freddie Mac are all at or below 0.06%, and the delinquency rate (90-plus days) for bank-held multifamily loans is at its lowest level since the series began in 1993. Lenders are competing hard to make loans in a low-rate, high-growth commercial real estate environment, but the evidence so far is that they are sticking close to their underwriting metrics. We expect cap rates to rise with interest rates, which could present a headwind for the market.”
Taking into consideration the ample debt and equity market, has driven up cap rates. In the CBRE Cap Rate Survey for H1 2015, it showed that class A office cap rates in New York city continues to compress to 3.75%-4.25% from 4.0%-4.5% the previous year thus making investments less palatable for investors. Multifamily cap rates for class A product in NYC also averaged 3.7%-4.50% in H1 2015 compared to 4.0-4.5% in H1 2014.
According to a report by CBRE entitled “Scoring Tech Talent” which covered 50 cities across the US, Manhattan continues to be the most expensive place to live in the US with an average monthly rent of $4,382 along with office rents souring at 67.05 per sq. foot and office vacancy of 7.5%. Moreover, the largest tech talent market in the US was Washington DC followed by New York each with a growth rate of 15.9% and 10.20% respectively. This robust employment growth puts upward pressure on the rental growth of all income producing assets ultimately increasing pricing.
According to Elliman Report, the multifamily market in Manhattan continues to rise with average rents increasing 6.6% from $3205 to $3248. “The Manhattan Rental Market Report” found that the average apartment rent in July, 2015 in Manhattan was $3963 while Brooklyn was $2,730. Harlem and Tribeca saw the largest rent growth of 17.9%. According to Buzzbuzzhome.com, New York City has 38,815 multifamily units under construction of which 36% are located in Midtown. The tallest project stands 844 feet located at One Bloor Street. In a recent report from “Curbed NY”, Brooklyn realized a 16.7% rent growth from July 2012 to July 2015 from $2400 to $2800 and in Manhattan from $3000 to $3700 for this same period.