An increased number of apartment dwellers remains as one of the mega themes in speeches this year. Since the burst of the housing bubble and recession, several economic and regulatory factors are funneling a greater number of people into apartments. Just a decade ago, many would have been homeowners, but today, are renters. And they may well remain renters for a decade or more. More stringent mortgage loan underwriting, the impetus for larger down payments under the new qualified mortgage rules, and personal balance sheets marred by college loans have seen the U.S. homeownership rate drop from almost 70 percent in 2004, to 65 percent today.
These in turn have fueled greater demand, higher rents, and yes, more construction in the rental segment.
So how have apartments performed for investors? Since 2000, the average annual return (both cash flow and property value changes) has been 8.78 percent. For the 12-months ending December 2013 it was 10.03 percent.
The data for this analysis comes from the National Council of Real Estate Investment Fiduciaries (NCREIF), which is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. NCREIF reports accurate, unbiased return metrics, with a framework in place that assures consistency over time and across investors. To read more about NCREIF click http://www.ncreif.org/index.aspx
NCREIF’s return assumptions include:
- Properties are acquired through all-cash transaction (no loans)
- Since the returns are within tax-free investments, no taxes are paid (except property taxes). There are no long-term gains taxed at the time of sale, and the investors do not depreciate the property.
- Returns are calculated quarterly and include both the net-cash flow from the property and the change in the property value. Specifically, total return is the net operating income from the property, less property management fees, plus the change in value.
For details and related questions click http://www.ncreif.org/faqsproperty.aspx
Within the NCREIF space, more than 7,000 commercial properties are tracked with a combined market value of $353.9 billion. This data series is recognized as a top proxy for U.S. commercial real estate returns and performance.
The annualized trailing 12-month apartment returns are included in the following table since 2000, and in the graph commencing 2002.
So where are returns trending in apartments? Given strong recent multifamily construction, I believe returns will generally track lower. In Washington, D.C., for example, in the 12 months ending February 2014, 1,000 jobs were added. In the same period, however, the District of Columbia issued 4,113 total permits for dwelling units (single and multifamily). As with all real estate, local interaction of supply and demand are key to performance.
The following graph shows the number of dwelling permits issued annually for five or more units since 1980.
To see building permit activity for every state and metropolitan statistical area in the country, click http://recenter.tamu.edu/data/bp/ The Real Estate Center at Texas A&M University has perhaps the easiest site to obtain building permit data in the country.
Coming up in the next blog – industrial property returns.
If any questions arise, just email back.
Ted