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Winter 2012
Winter 2012
Multi-family has been a favored real estate sector in the past couple of years, with apartments experiencing cap rate compression, reflecting significant demand for income producing properties. Further, underlying fundamentals driven by demographic trends and a small development pipeline are pointing towards increasing rents. These expectations have manifested in increases in prices above and beyond the majority of other institutionally held commercial properties. Nationally, apartment prices are within 12.2% of peak pricing, compared to 25.2% for core commercial property. 1 Writing for National Real Estate Investor, Mark Scott noted that high-quality multifamily has traded as low as 4%.2 However surprising these low cap rates are, they do fit into the context of an overall low interest rate environment with expectations reinforced by the Federal Reserves September proclamation that it would keep interest rates near-zero into 2015. It is therefore not as shocking that the average apartment cap rate was 5.4% in the third quarter of 2012 (figure likely includes some Class B buildings).3 RREEF, part of Deutsche Bank, places the cap Source: Moodys/RCA. rate even lower at 5.2%.4 It is becoming increasingly evident that homeownership rates have been artificially elevated, a result of a speculative impulse in each category from home buyer, to originators and mortgage holders. Naturally, we should see regression towards the mean in homeownership, requiring a significant backtrack towards renting. This cycle is expected to boost demand for rental product in both multifamily and single family, which is becoming a new institutional asset class. We see multifamily as demographically distinct from the single family space with users more commonly single or those that have recently been cohabitating with relatives or friends. Others are young couples who do not require the living space offered by single family homes. Further, we find that many households are opting for the convenience of urban rental space. Each of these features indicate a level of consistent demand for high-density developments. In the Las Vegas Valley, we have been observing trends similar to the national scene when it comes to Class A multifamily. While Class A trades infrequently in Las Vegas, there have been some noteworthy sales. Reflections at the Lakes, a well located older project built in 1989, sold in August for $30 Million, nearly $100,000 per door with approximately $6,000 per door in deferred maintenance that the new owner would resolve. We do not have a sense of the acquisition cap rate on this project. Additionally, we have observed a large acquisition by WTI, Inc, which purchased the older Renaissance Villas Complex for nearly $75 million. Built in 1988, this equates to just under $90,000 per door. The Willows at Town Center traded in November 2012 for $22 Million or nearly $117,000 per door. The complex was built in 2005. For buildings sold with reportable cap rates, Colonial Properties Trust purchased the newer Palm Vista complex in North Las Vegas for $40.9 Million in the spring of 2011. At 341 units, Colonial Properties paid nearly $120,000 per unit. Built in 2007, the project had a cap rate of 5.2% as reported in SEC 10-K filings. Colonial Properties CEO Thomas Lowder told REIT magazine that Colonial believes Las Vegas is at the bottom for rents and that their acquisition is an opportunity to acquire newer product in an area with good growth potential (REIT July/August 2011).
1. 2. 3. 4.
Moodys/RCA Commercial MBS report November 13, 2012. http://blog.nreionline.com/nrei-writes/category/multifamily/ http://urbanland.uli.org/Articles/2012/Nov/BlankMonday1113 U.S Real Estate Strategic Outlook: Mid-Year Review 2012.
Winter 2012
Since reportable cap rates are rare, we extend the discussion to The Croix Townhomes, a Henderson area sale that took place in December 2010. This was a period where we were beginning to see cap rate compression, but even so, the reported cap rate on this project was 5.8%. Purchased by Istar Financial, the project was bought at nearly $143,000 per door (larger than typical unit size) and was built in 2005. We should note that we tend to only trust reported cap rates on projects that are bought by public REITs (audited financial statements) or those for which we have seen P&L statements ourselves. We find that broker advertised cap rates often exceed what can actually be obtained by owners. Paul Curbo, portfolio manager at Investco has data that suggests cap rates are around 5% in the major markets and as low as 4% in some west coast transactions. 4 In addition to the few buildings we have noted that traded with high occupancies, we have also observed a rather expensive value-add sale. Investors have purchased Echelon Point in the Northwest Valley for $6.5 million or $105,000 per door. This project had just 62 units and was 100% vacant at the time of sale. We understand that it requires substantial capex of up to $125,000 per door. Originally developed as a luxury condominium, the project is considered to be distinct from the typical Class A building meant for entry-level occupants.
REIT
CG at Palm Vista
2007
341
$40,900,000
$117
5.2%
Mar-11
Private
1989
326
$30,000,000
$108
N/A
Aug-12
REIT
2008
137
$19,600,000
$89
5.8%
Dec-10
Private
2005
188
$22,000,000
$66
N/A
Nov-12
Private
1988
840
$74,750,000
$106
N/A
Oct-12
REIT
2007
41
$5,000,000
$82
7.0%
Sep-12
Private
1999
320
$28,000,000
$86
N/A
Jun-12
LISTINGS Owner Type Property Year Built Units List Price $/Sq.ft Cap Rate Advertised
Private
Hacienda Heights
2008
216
$22,660,000
$116
5.5%
Private
Inspirado
2011
252
$31,500,000
$123
N/A
Private
Crescent Ridge
344
$39,980,000
$112
N/A
National Comparison*
*Source: RREEF. **Townhome Product that is much larger than traditional multifamily with an average of 1,613 sq.ft for The Croix and 1,480 for Spinnaker Village.
5.20%
Sources for Las Vegas Area Info: Clark County Assessor, Costar, Colonial Properties SEC form 10-K CLP 10-K 12/31/2012,CLP 8-K 10/27/2011,Loopnet,Coldwell Banker Premier Realty.
4. http://www.reit.com/Videos/CRE-Cap-Rates-Lower-than-Estimated.aspx
Renaissance Villas
Winter 2012
AUTHOR
Phone: 702-938-1375 Email: info@cbprds.com Web. www.cbvegas.com 8290 W. Sahara Ave, Suite 200 Las Vegas, NV 89117
The information and opinions in this report are believed to be reliable and has been obtained from sources believed to be reliable. Coldwell Banker Premier Realty makes no representation as to the accuracy or completeness of such information. The opinions expressed in the report constitute the judgment of the authors only and may not reflect the opinion of Coldwell Banker Premier Realty. This report is provided for informational purposes only and does not constitute investment advice. This report may not be circulated or copied without our prior written consent.