Marcus and Millichap 2014 National Apartment Report

66 Pages·2014·4.06 MB·English

2014 National Apartment Report
To Our Valued Clients:
The U.S. economy demonstrated exceptional perseverance in 2013, beating expectations and adding nearly 2.5
million new jobs. Numerous challenges restrained the economy last year, including austerity measures that resulted in
sequestration, higher taxes and the relentless cloud of uncertainty that polarized fiscal negotiations. Political gridlock
sparked a partial government shutdown and interest rates flared as the Fed considered tapering its quantitative easing.
Despite the hurdles, solid economic growth is now raising pressure on interest rates. Not only have broader eco-
nomic conditions proven sustainably healthy, but a surge in equity prices and home prices has restored net household
wealth to a new record high of $77 trillion. The coalescence of these positive factors suggests that a start date is im-
minent for tapering the Fed’s purchase of long-term Treasurys and securities.
The return to a normal credit environment does suggest incremental increases in financing rates going forward,
but the good news for investors is that NOI growth, real estate cap rate spreads and lender spreads provide a healthy
buffer against future bond yield increases. More importantly, further increases in interest rates will likely reflect
strengthened job creation and economic momentum rather than Fed policy speculation. In addition, a low-inflation
environment with greater political certainty and less fiscal tightening will prevail in 2014. Domestic and cross-border
investors will fuel capital allocations to U.S. real estate assets compelled by the need for safety, a strong income return,
and yield compared with alternative investments, and this competition will exert downward pressure on cap rates.
The apartment sector matured and “leveled off” as the national vacancy rate approached equilibrium. However,
the new construction cycle and nascent rise in renter household formations heralds a new phase of expansion for
apartments. The big story in 2013 focused on the stellar performance of Class B/C product, and the threat of new
supply and price fatigue in Class A assets, but the brisk lease-up of newly delivered Class A units has eased concerns.
The conversation for 2014 may well focus on positive demographics, immigration, pent-up demand, and the role
Echo Boomers will play in establishing new households. The single-family sector has staged a durable and beneficial
recovery and will compete with apartments, but housing demand appears more than sufficient for both. We hope the
following report offers useful insights on a variety of trends, markets and investment strategies.
On behalf of our team nationally, we look forward to being a part of your success in 2014 and beyond.
Sincerely,
John J. Kerin Hessam Nadji
President and Senior Vice President,
Chief Executive Officer Chief Strategy Officer
BLACK TEXT VERSION
WHITE TEXT VERSION
2014 National Apartment Report
NATIONAL PERSPECTIVE
Executive Summary........................................................................................................................................... 3
National Apartment Index.............................................................................................................................. 4-5
Specialty Indexes.................................................................. ........................................................................ 6-7
National Economy.................................................................. ........................................................................... 8
National Apartment Overview ........................................................................................................................... 9
Capital Markets ................................................................................................................................................10
Apartment Investment Outlook ....................................................................................................................... 11
MARKET OVERVIEWS
Atlanta ............................................................................................................................................................. 12
Austin .............................................................................................................................................................. 13
Baltimore ......................................................................................................................................................... 14
Boston ............................................................................................................................................................. 15
Charlotte .......................................................................................................................................................... 16
Chicago ........................................................................................................................................................... 17
Cincinnati......................................................................................................................................................... 18
Cleveland ......................................................................................................................................................... 19
Columbus ........................................................................................................................................................ 20
Dallas/Fort Worth............................................................................................................................................. 21
Denver ............................................................................................................................................................. 22
Detroit .............................................................................................................................................................. 23
Fort Lauderdale ............................................................................................................................................... 24
Houston ........................................................................................................................................................... 25
Indianapolis ..................................................................................................................................................... 26
Jacksonville ..................................................................................................................................................... 27
Kansas City ..................................................................................................................................................... 28
Las Vegas ........................................................................................................................................................ 29
Los Angeles ..................................................................................................................................................... 30
Louisville .......................................................................................................................................................... 31
Statistical Summary ................................................................................................................................... 32-33
Miami ............................................................................................................................................................... 34
Milwaukee ....................................................................................................................................................... 35
Minneapolis-St. Paul ....................................................................................................................................... 36
Nashville .......................................................................................................................................................... 37
New Haven ...................................................................................................................................................... 38
New York City .................................................................................................................................................. 39
Northern New Jersey....................................................................................................................................... 40
Oakland ........................................................................................................................................................... 41
Orange County ................................................................................................................................................ 42
Orlando ............................................................................................................................................................ 43
Philadelphia ..................................................................................................................................................... 44
Phoenix............................................................................................................................................................ 45
Pittsburgh ........................................................................................................................................................ 46
Portland ........................................................................................................................................................... 47
Riverside-San Bernardino ............................................................................................................................... 48
Sacramento ..................................................................................................................................................... 49
Salt Lake City .................................................................................................................................................. 50
San Antonio ..................................................................................................................................................... 51
San Diego ........................................................................................................................................................ 52
San Francisco.................................................................................................................................................. 53
San Jose .......................................................................................................................................................... 54
Seattle ............................................................................................................................................................. 55
St. Louis .......................................................................................................................................................... 56
Tampa .............................................................................................................................................................. 57
Washington, D.C. ............................................................................................................................................ 58
West Palm Beach ............................................................................................................................................ 59
CLIENT SERVICES
Contacts, Sources and Definitions .................................................................................................................. 60
Research Services ........................................................................................................................................... 61
Office Locations ........................................................................................................................................ 62-63
Written by John Chang, First Vice President, Research Services, and edited by Hessam Nadji, Senior Vice President, Chief Strategy Officer. The Capital Markets section
was co-authored by William E. Hughes, Senior Vice President, Marcus & Millichap Capital Corporation. Additional contributions were made by Marcus & Millichap
market analysts and investment brokerage professionals nationwide.
2014 Annual Report
Executive Summary
National Apartment Index (NAI)
• Ties to technology, energy and trade characterize the top ranked markets. Expensive housing and tight vacancy rank New
York (#1), San Francisco (#2) and San Jose (#8) highly, despite price fatigue from residents. Tight vacancy in Oakland-East
Bay (#9) and Miami (#13) and robust job growth in Denver (#3) created a strong run-up, displacing Orange County (#11)
and Los Angeles (#15).
• Construction risk caused slides in Austin (#18), Phoenix (#22) and Washington, D.C. (#27), but Dallas/Fort Worth (#14)
and Houston (#12) rankings held steady. Low supply, mid-ranked markets such as Philadelphia (#20), Pittsburgh (#32) and
Baltimore (#24) offer stabile operational forecasts.
• Southeastern markets Atlanta (#31), Tampa-St. Petersburg (#23) and Palm Beach (#38) made advances and Jacksonville
(#44) held steady, but Fort Lauderdale (#29) and Orlando (#36) declined. With the exception of Minneapolis (#4) and
Chicago (#17), low momentum resulted in declines for most Midwestern markets.
National Economy
• GDP estimates reflected surprising strength as of third quarter 2013, posting 4.1 percent annualized growth. Additionally,
U.S. employment recorded gains across all sectors, climbing 1.7 percent, and has now recovered 88 percent of the total jobs
lost in the recession.
• International trade flows will expand as global austerity eases. Consumer spending and robust recovery in housing will
reinvigorate business investment, fueling employment and wage growth. GDP is forecast at 3.0 percent in 2014 and the
economy should generate an estimated 2.7 million new jobs.
• The timing and pace of the Federal Reserve’s unwinding of its quantitative easing (QE) programs remains undetermined,
but less Fed intervention will mark a return to a “normal” credit environment.
National Apartment Overview
• New supply thus far has been well-matched by rising renter demand, but does add risk to space fundamentals balanced at
4.9 percent vacant. Household formations surged to approximately one million in 2012, nearly double the annual average
of the previous five years.
• The number of new units delivered in 2013 increased 84 percent over the prior year to 168,000. Another 215,000 units in
2014 will surpass demand for 176,000 units, increasing vacancy by 20 basis points to 5.1 percent.
• Late recovery secondary markets and mid- to lower-tier assets led revenue gains and effective rents grew 4.2 percent in 2013.
Despite a rapid lease-up in new units, Class A assets will bear the brunt of competition from new supply, paring effective
rent growth overall to 2.6 percent.
Capital Markets
• The spread in yields can buffer incremental increases in interest rates. Additionally, investor demand, economic growth and
performance gains will exert downward pressure on cap rates.
• Capital will flow to most market segments and product tiers. Equity funds and institutional and cross-border investors
create steady demand for core product in primary markets, while CMBS conduits will support investors seeking yield in
secondary markets or through value-add strategies.
Investment Outlook
• Spreads narrow between market tiers and asset classes. Investor risk profile will determine acquisition strategies. Abundant
capital exists for construction as newly delivered units have leased quickly. Facing no new competition, stronger rent growth
by Class B/C assets will catalyze the number of renovations.
• Value-add strategies offer stronger returns and the recent dip in the average cap rate signals a recovery in non-premium as-
sets. Sellers have been slow to bring properties to market, however, thereby limiting the number of opportunities.
2014 Annual Report BLACK TEXT VERSION page 3
WHITE TEXT VERSION
National Apartment Index
MaMrkaertkse wtsit hw itthhe t Hheig Hhiegshtest MaMrkaertkse wtsit hw itthhe t Hheig Hhiegshtest
ExpEexcpteecdt e20d1 240 E14m Epmlopymloeymnte Gnrto Gwrtohwth ExpEexcpteecdt e20d1 240 C14o mCopmletpiolentisons
AustiAnustin 20 20
HoustHoonuston ds) ds)
DenveDrenver an an15 15
s s
DaSllaalDst /aLLFSolaOtlaua.k rlWsieltsa / LLvoFCnoairOtdilut.tkl rhoeyWielsa voCnirdilttlhoey Units (thou Units (thou150 150
Palm PBaelmac hBeach 0 0
ForUtn LiFtaoeuPrUddto n SeLrirtttaledaauPdtandeo ldSeesr0rttlda%ataneldes0% 2% 2% 4% 4% 6% 6% 8% 8% Dallas/FDoarllt aWsWa/osFrhtoirhnt gWtWaoosnr,ht ihDn.gCt.on, DA.uCs.tinAHuostuisntonHouDsteonnverDNeenwv SeeYroartNtkleew- STeYaoacrttoklem-aTacoAtlmaantLaosA tlAanngtLeaolse sAngOrellaensdoOrlando
NonfaNromn fEamrmp lEomympelonytm (Ye-nOt- (YY -COh-aYn Cghe)ange)
MaMrkaertkse wtsit hw itthhe t Lhoe wLeoswtest 2014 NationMala MrAkapertaksre wttmsit hwe itnthhet t IHhneigd Hheiegxshtest
ExpEexcpteecdt e20d1 240 E14m Epmlopymloeymnte Gnrto Gwrtohwth ExpEexcpteecdt e20d1 240 A14b sAobrspotiropntion
Coastal and Low-Vacancy Markets Capture Top Positions
CleveClalenvdeland 20 20
St. LoSuti.s Louis Nds)ewds) York (#1) retains its pinnacle status, with strong employment
New HNaevwe nHaven and anthe an1lo5we1s5t vacancy rate in the Index. Vacancy will hover at 4.0
s s
PKhailnasdPBaDKehsoeali pstlnCarthsoiodBtiaDinayetsoel pstCrthoiotiinayt ppfhaelotariuccgseeuUnits (thoue,n ehta o nwloUnits (thou1ddir50s l l S laea1mnsn50sd o Jidlonoes wreba to(ve#ta h8cea )ff,nS eacwcnyht ilivFicferht ae rndselc niSipstapc noeg d rDo( #swiie2xtg)h,o, .b w(uA#ht5 in)ch heiogw nhe ed s ugrsapeptdapico leya hofarefno admdre nroletannesertt
ChicaCghoicago
WasUhnWiMnitageislUtdwho nSinaMnitt,u geaiDkltdtw.oeeC Snesa0.t,u. a0Dkt%.eeCes0..0% 0.5%0.5% 1.0%1.0% 1.5%1.5% 2.0%2.0% ynsppeoeaaasrcir,teb isboy,u nDOarltsle a,srs d/0aFpsoeDrneatel sWlcacgapWssoo/0terhitFiithno nvretCg Wtde aoWslsoon r,hy tiiouh.mDn. gnCnt.Doiltnl,yH yaeoD .ur nsC(t .t#voocnHeh1 oruta1s htAr)(ouae ns#tcai 3ntnne)Adiu rDnseti ainsLennvte-oridrcDNsu ees nM,wnAv eYrgmonriN kaegosmwe umYAltorliera gkesn(tn ea#( At#t1lubCa1h3inymStce5a) aat g) tOloC bmehb-iSoaTceyaaaaktctgr thololskeam e-aenTsvatocPdesohan o-medrEa neiaixaPdsnhsp otdele nai iBxficgeahvdyet
NonfaNromn fEamrmp lEomympelonytm (Ye-nOt- (YY -COh-aYn Cghe)ange) (#9). Denver’s forecast to capture the highest rent growth and third-
highest proportional job growth moved it into the top tier along with
MaMrkaertkse wtsit hw itthhe t Lhoe wLeoswtest Miami, lifted by strong global influences and the third-lowest vacancy
6% E6%xpEexcpteecdt e20d1 240 V1a4c Vaanccayn Rcya tReastes rate. Supply constraints and expensive housing options relative to local
incomes will shrink Oakland-East Bay’s vacancy rate to the second-
Rate5%Rate5% lowest in the Index. The only Midwest representative, Minneapolis (#4)
Vacancy 34%%Vacancy 34%% ehJedirrgsienedyg u(g#pa6 itn)h sra enaedn s dpP aoscuretbsla -on4n.d0 l o(p#we1 rv0ca)ec natwtn covy a pcaaonnsdict syioo nlliidsft. ejPodob rb gtolraotnhwd tN hm.o Portvrhoeednr onwu inNtcheeiwnd
2%New Y2or%kNeOwa kYloarnkdOaklMiaanMidminneMaipaoMlimiinsnePoarptlolainsdSPaonr tlDaiengdSoaSna nD iJeogsoeSaCnh iJNc.o asNgeeoCw hiJNce. rasNgeeoPyiwt tJsebrusUrengiPyithtetds bSutUrantgitehesd States tgohrnoreew est prhou.t nTh agnse do m fD oSaseltal atdtsyl/eFn-oaTmratc iWoc mmoarat rh(k# e(7#t)s1, i4wn) h trhieceth aI insnldeipedpx i,et dHs rtoawunoskt iosnpngo .(t #s 1o2n) gsuapinpeldy
Construction Surge Poses Localized Risk in Several Markets
MaMrkaertkse wtsit hw itthhe t Hheig Hhiegshtest An outsized ramp up in supply caused Austin (#18) and San Antonio
10% 1E0%xpEexcpteecdt e20d1 240 V1a4c Vaanccayn Rcya tReastes (#26) to slide in the ranking. Cooler employment and rising vacancy
Vacancy Rate468%%%Vacancy Rate468%%% tat(rr#nei2gdn2g dBe) ,reo emwsdth potiwnlloe oy ( nm#o1efe w6tnh) t pe ra eelnaatrdrkga snce isienntw g Ien sm1du0epp xpla odlnyyed mcc laseiuennvsetees nd,a wdapv iostaihsnxi -tcWrieoudann ssgSh, a idnrlteeg scLtploiaennkce,te iD fvoCe.rlCi ytP.y. h, B ((o##eel22no17iwx))
by one. Stable space fundamentals characterized new entrant Baltimore
In2d%ianapIon2lid%isaSnt.a pLooliuisLsSat.s LVoeugiaLssas AVtleagnatsaAHtoluasnttJoaancHkosuosntJvoialnlceksPohnovielSlniaexn PAhnoteoSnniaixno AntTaonmiPopalam TBaeUmaPnpcailathem d BSetUaantcitehesd States (ga#dro2vw4an)t,hc ea rdna disR ehdive elCdrsh iPidcheai-glSaoad n(e# lp1Bh7ei)ra nt h(a#rred2ei0n r)ou s nt(eg#as1d, 9yw )h inial net dhst ea Tbraaimlnizkpiinang-gS .ft u.H nPdeeaatlmethresynb utjoarlbgs
(#23) four spots and Milwaukee (#25) one. Inventory growth together
with vacancy that exceeds the U.S. average cost Fort Lauderdale (#29)
and Charlotte (#30) each one position.
page 4 BLACK TEXT VERSION2014 Annual Report
WHITE TEXT VERSION
Markets with the Highest Markets with the Highest
Expected 2014 Employment Growth Expected 2014 Completions
20
Austin
s)
Houston d
n 15
Denver a
s
Salt Lake City u
Dallas/FOt. rWlaonrdtho s (tho 10
Louisville Unit 5
Palm Beach 0
ForUtn LitaeuPddo Sertrtladataneldes0% 2% 4% 6% 8% Dallas/Fort WWaosrhtihngton, D.C. Austin Houston DenverNew SeYoarttkle-Tacoma AtlantLaos Angeles Orlando National Apartment Index
Nonfarm Employment (Y-O-Y Change)
Markets with the Lowest Markets with the Highest Rank Rank 13-14
MSA 2014 20131 Change
Expected 2014 Employment Growth Expected 2014 Absorption
New York City 1 1 n 0
Cleveland 20
St. Louis ds) San Francisco 2 3 s 1
New Haven an 15 Denver 3 11 s 8
s
BDoestrtooint hou 10 Minneapolis 4 7 s 3
Philadelphia s (t San Diego 5 6 s 1
Kansas City Unit 5 Northern New Jersey 6 8 s 2
Chicago
0 Seattle-Tacoma 7 5 t 2
WasUhniMnitgeiltdwo Snat,u aDkt.eeCes0..0% 0.5% 1.0% 1.5% 2.0% Dallas/Fort WaWsorhtihngton, D.C.Houston Austin DenverNew York Atlanta ChiSceaatgtloe-Tacoma Phoenix SOPoaarnkt llJaaonnsdde- East Bay 1890 11282 tss 692
Nonfarm Employment (Y-O-Y Change)
Orange County 11 4 t 7
Late Recovery and Low Momentum Markets Offer Modest Houston 12 13 s 1
Markets with the Lowest
Performance Outlook Miami 13 21 s 8
Expected 2014 Vacancy Rates
6%
Dallas/Fort Worth 14 14 n 0
e Atlanta (#31) and Sacramento (#33) accelerated four and five spots,
at5% Los Angeles 15 10 t 5
R respectively. The fourth-highest vacancy rate tempered the strength of
ncy 4% Atlanta’s recovering jobs and rent growth. Conversely, modest job gains Boston 16 9 t 7
Vaca3% and weak rent growth cloud Sacramento’s more robust vacancy outlook. Chicago 17 20 s 3
New entrants Pittsburgh (#32) and Nashville (#34) both offer a healthy Austin 18 15 t 3
2%New YorkOakland MiaMiminneapolisPortlandSan DiegoSan JoseChiNc. aNgeow JersePyittsbuUrngithed States evhcaeocldann orcmayn yko iunantgldso ostsket aaibdsl yet figoahpr taLerrat.ms FVeunergtt ahfsue (rn# d4rea1dm)u eacnnttidoa lnJsa , cinakls tohhniogvuhigl lhev a(Pc#ai4tnt4cs)by. uPrraaglthme’ss RPShaivlietla rLdsaiedklpee-h CSiaiat yn Bernardino 122901 212329 sts 411
Beach (#38) advanced two places, but Orlando (#36) receded by five,
Phoenix 22 16 t 6
as new supply will drive vacancy higher. Low levels of employment
Tampa 23 27 s 4
Markets with the Highest growth diminished the rankings of New Haven-Fairfield County (#40),
10% Expected 2014 Vacancy Rates Detroit (#39), Cincinnati (#42), Cleveland (#43), and St. Louis (#46) Baltimore 24 New n NA
e by magnitudes varying from 10 to four places. Indianapolis (#45) and Milwaukee 25 26 s 1
at8%
R Columbus (#35) fared better, both slipping two spots, while Kansas San Antonio 26 24 t 2
y
nc6% City (#37) edged down one. Washington, D.C. 27 17 t 10
a
c
Va4% Index Methodology Louisville 28 25 t 3
Fort Lauderdale 29 28 t 1
2%
IndianapolisSt. LouiLsas Vegas AtlantaHoustJoancksonvillePhoeSniaxn Antonio TamPpalam BeUancithed States 12-mThonet hN, AfoIr rwaanrkds- l4o6o kminagjo erc aopnaormtmice annt dm saurpkpeltys abnadse dde umpaonnd a v aseriraiebsl eosf. CAhtlaarnltoat te 3301 2395 ts 14
Markets are ranked based on their cumulative weighted-average scores
Pittsburgh 32 New n NA
for various indicators, including forecast employment growth, vacancy,
Sacramento 33 38 s 5
construction, housing affordability and rents. Weighing both the
Nashville 34 New n NA
forecasts and incremental change over the next year, the index is designed
Columbus 35 33 t 2
to indicate relative supply and demand conditions at the market level.
Orlando 36 31 t 5
Users of the index are cautioned to keep several important points Kansas City 37 36 t 1
in mind. First, the NAI is not designed to predict the performance of Palm Beach 38 40 s 2
individual investments. A carefully chosen property in a bottom-ranked Detroit 39 32 t 7
market could easily outperform a poor choice in a top-ranked market. New Haven 40 30 t 10
Second, the NAI is a snapshot of a one-year time horizon. A market facing Las Vegas 41 41 n 0
difficulties in the near term may provide excellent long-term prospects, Cincinnati 42 34 t 8
and vice versa. Third, a market’s ranking may fall from one year to the Cleveland 43 37 t 6
next even if its fundamentals are improving. The NAI is an ordinal index,
Jacksonville 44 44 n 0
and differences in rankings should be carefully interpreted. A top-ranked
Indianapolis 45 43 t 2
market is not necessarily twice as good as the second-ranked market, nor
St. Louis 46 42 t 4
is it 10 times better than the 10th-ranked market.
1 See National Apartment Index Note on page 60.
2014 Annual Report BLACK TEXT VERSION page 5
WHITE TEXT VERSION
Specialty Indexes

Yield Index Premium Yield Markets Bolster Returns
MSA Rank
Investors have increasingly targeted secondary and tertiary markets
Detroit 1
in pursuit of higher yields. While these markets often carry addition-
Cleveland 2
al risk, the superior yields can warrant the risk, particularly when the
Cincinnati 3
economy is building momentum and performance gains have not yet
Pittsburgh 4
been baked into pricing. Although this Index highlights markets with
Jacksonville 5
higher than average cap rates, premier submarkets within these metros
Indianapolis 6 often may carry premium pricing. Exit strategies from high yield mar-
Columbus 7 kets can be a risk factor, as market performance does not always align
Louisville 8 with investment horizons. Though a five year hold period will often
Dallas/Ft. Worth 9 perform well, these markets align better with long-term hold strategies.
Atlanta 10
The top yield market is Detroit, where apartment performance
has been notably robust even though the local economy has faced sig-
High Yield Markets Pricing Discount From Peak
nificant challenges in recent years. With the auto industry still building
Decline From Median Price Per Unit
Detroit momentum, DetrPoriiotr Poeffakers investors a unique operating environment at
Cleveland a modest e$n10t0ry point. Cleveland, a market also6 0a%ssociated with the re-
D
PCiitntscbinunragthi saunrdg eintst anPer Unituetigo$7h i5bnodruisntgry ,O ahlsioo omffearrsk seut,p Ceriinocr iynineladtsi,.5 0Ih%na ecline Fvfaec tb, obtoht hm Cailnevtaeliannedd
JInadcikasnoanpvoilllies relativelyPrice sta$5b0le performance over the last 10 y4e0a%rsrom P despite market tur-
CLooluuimsvbiulles bteunlteinocne .o Median Tno $a 2 t5hnea tieoansta lo bf aOsihs iaos, oPpitetrsabtuiorgnhs ahnads 3gr0ea%nrnrior Peataelr eidn csoigmnei figceannetr aatte-
Dallas/Ft. Worth strong return$0s for most asset classes across the 2m0%etkro. As the economy
Atlanta6% 7%Five-Year 8A%verage Cap 9R%ate 10% rianencgdo ivnreevrnests,a tmIoln drigaasnrn aoopLyolwapi ss lpSVtoaehocFgnroa arrstg ptmLeu-aonhutntdoeeeKiraltdndnailsetea issp a CPitrlitt.ooyt s pThbpuCreligerchvetekl iaCefi nouldsfu ptmihbn Nup as strthoohvillppiesD e eytrmriotietiaelrdsk wemti tawhrk isletl teb aieds ylJi asotccekcdsu,o pnoaffvnielcrlye-
Five-Year Vacancy Range which has a modest inventory and could face development risks in com-

1 2% RSantgaebilityC Iunrrednet x ing years as it did in 2009, but it has diversified its economy since the
MSA Rank recession and offers investors assets with consistent cash-flows.
9% High Yield Markets PriNcienwg HDoisucsoeuhnotl dFsro Pme rP eak
e Philadelphia 1
Vacancy RatDaLKCCPMSPM06l3lJPoIa%%aioail%nhaiitineslPlndulcCtrCn/CawLtiivFkcdsitotalnoi nesettslllsenLAu.biscuaDpavo enaaWbiLthivmeFilneasnluuopnuaaaalsntvvoinuaborrkiinlriikrKdnpaong sulllvalttallgiCveitehdhaeessient dioletl6sh ieeia% Cl- ts i yYsCCiiit t neyycian Cnlraeti vVelaPa7int%dtcsbFaMuirilvngSwehaa-clutY kLyeeaea krRe 8AC%iavtPyeornrtMlaiagngnnedee aCpaolips 9R%1a23567894t0e 10%tpipthttsneaehtroaenni eevnramictdtedreiiiSTh o aadoynsrtrnt tn eaokialpem ob New Households Per Unitoteleo r nwiSntStvailfsoc t01234i geia ptFttaMedian Price Per Unitni rnro-yhnaIcrboatttAen t al$edge lniLtidadmpw$$$1laapiern tniuk$2570r umaenatwtd05050 ipaaieyurLvnrorHtnlarihf d iirasrs ka oInogaloteiSlVcneeallrue cg hAceF uDPgaPmhtdrcuoa ea rarsetsesstueitdenLs ieoc mmacoL antixelrpooduaidnknn irhndLutP sawafffo edow uvcgeeislreno nl DKorlaiFee nreaaAad enlkartclvrrnn iaUnols saowgng myeeesmae ctl/sipinsl gr eF hynnet ssC .gPai idictdtetvttogtaytWahlnhun soe fierCbbbtne ser tcSusMhCtrDttialoiy ,soeghelnrneoGe l n hv i eaFdvbPendtirrgl kenissrayarsCOau uhsn tneeo nb dlcId itraietu assfnPo1sl irtcptmnfarP ntobeud o0ieosN dchuRdragathsme eclvrsee da yexhisPanttlmyvfHi ceid pelehcot lce gearueB.aha eytdrDseUsrtnee ricitossnnarrnkancilc.io iteoe ,alteydi aThrsnnstUw . a,23456h nS tv,t.00000ulhi i ol%%%%%oecnbgpyfli nucvhue sgDecline From Prior Peakorthgewttdieows. hv t titrh ena hoLyPa tiager onhusnegsys ueep m.drr o sdaio sP esflas wvvtp sraoieomoian temlngl hpltumeac ra eef ereritar akaa niitvasivlrteienposkeeetedorrsss---
12% Range Current proved durable despite a moderate supply influx. Kansas City apart-
ments maintained values better than most metros despite post-recession
9% New Households Per
e pricing volatility. The market has faced greater vacancy movement,
ncy Rat 6% however, plac4ing thHiso muasriknegt tUhniridt oCno tnhset Srutacbtielidty Index. Rounding out
Vaca 3% tthhee itro opv fiervaUnitel la 3rrea nCkiinncgi,n bnuatt i satnrodn Cg lpevrieclianngd .p Verafcoarnmcayn cchea lhleenlpgeeds immapinacttaeind
their statuPer re among markets that retain value during downturns. Fol-
0P%hiladelpLhioauiKsavinllseas CCiitnycinCnlaetivelaPintdtsbMuirlgSwhaalut kLeaeke CitPyortMliannndeapolis ldroeugwriaionbngl e ftovharew Households csave12na lOcuyeh -tiahodr dom ueogtphrpo tsoh,r etP urinetticstebiseussi.ro gnThh ’sw ociulolg nhks eiseMtpe inlbwtulyay uehkrsieg esh c moyuiaeriilnndtgsa ianthneidds
e
price stabiNlity, its fluctuation in vacancy keeps it from passing its higher-
ranking neighboring Midwest markets.
0
page 6 FortA tlLaantuaderdaleAustLionuiLsovisl DlaAellnagsel/eFts. WortShDaen nFvrearncBisLcPoAortClaKnHd oTuEstXonT VU.ES.RSION2014 Annual Report
WHITE TEXT VERSION
Specialty Indexes
Major Discounts From Past Peak Offer Compelling Options Opportunity Index
MSA Rank
The economic recovery and apartment performance gains have not fa-
Indianapolis 1
vored all markets equally, and some have yet to fully recover value losses in-
Las Vegas 2
curred during the recession. The highlighted opportunity markets offer the
Sacramento 3
widest pricing discount from their pre-recession peak, yet have forecast em-
Fort Lauderdale 4
ployment gains that exceed the national average in 2014. These markets have
Kansas City 5
the potential for appreciation as sales activity accelerates. Markets ranking
high in the Opportunity Index blend Midwest metros and former housing Pittsburgh 6
boom markets that have yet to fully recover. Although risks can run high, Cleveland 7
particularly on the supply side, these metros could offer outsized returns if Columbus 8
they follow the pricing trends that have already occurred in many markets Nashville 9
across the country. Detroit 10
Indianapolis leads this Index with median price per unit standing 48 per-
High Yield Markets Pricing Discount From Peak
cent below their previous peak and job growth of 2.4 percent anticipated in
Decline From Median Price Per Unit
2014. Investors must be wDeatrroyit of supply-side risks that could manifest on short Prior Peak
notice, but the current Cdleevveelalnodpment pipeline of 3,900 units remains digestible. $100 60% D
Lunasi t Vise g4a7s pfoerllcoewnts bIneldoiPwCaiitnn tscpabinrpuneroagvthliiios uisn p tehaiks pinrdiceexs . aLs atsh Ve ecguasr,r eSnatc rmamedeinatno parnidce F poerrt Per Unit $75 50% ecline F
Lauderdale face deficJiIntadsc ikaisnnoan ptvohillliees 40 percent range. In Las Vegas and Sacramento, Price $50 40% rom P
einmgp dlooywmne nvat caanndc yh oevuesneCLhoo luauoimssl vdbniul lgesewro wsuthp pwlyil lc goemneersa oten slitnroen. gH roewnteavle dr,e mina Fnodr,t p Luashu-- Median $25 30% rior Pea
Dallas/Ft. Worth k
derdale, although job growth remains strong at 3.1 percent, the expansion of $0 20%
animpoatprertwomvoeernst,ht m yu monriaetrs ok buetyts- o2inf.-8cml uApatdelraerknc teKaet6n a%itnn svtahessi tsCo yritse7y aw% ra iFnlwilvd ebi -lPYol eiolatistrk st8Ae b%vbleuyurra yggpeehur C. s cahApo s9mRu %atphtpe eev tlaiotcicaoannl1 c0,e y%cp.o uOnshothminegyr IndianapLolaiss SVaecFgroaarst mLeanutdoeKradnalseas CPiittytsbuCrlgehvelaCnoldumbNuasshvilleDetroit
Five-YeHairg hV aYciaenldc My Raraknegtes Pricing Discount From Peak
up values and providing greater opportunities for property owners to execute
transactions. 12% Detroit Range Current HouDPsreiocinlri nPgee aF kEromquilibMrediuianm Pr iIcne Pdeer Uxnit
Cleveland MS$1A00 Ran6k0%
HhThkhidanneioat otsdutirs ohuo a shhAneeucsoha cstgciv.ue onh otelsIleh mg dinltrneah a i grItntefmpgh eo gveedrer alaebsm yylkcedue ae a raaemsolabtrsasim f siVacancy RateoaDa wnooartnnanrlkhciltJ dbIla,neiela069es3 ce PdacCPtC %%%/hlh%LhiidaFkssniiioltalonttk,saooallnAu .s cdu lod tsaWebiutSueiytmnlshnlt puhapl,vvos nsbLoyh rneiuiiraieaorgemulllatt llin ute hhaeesshi cepiKs6apgaaoxsvo%inpll unoclns ldeadeeptoyst eess i pCCriisngvtnmtn talyercuutyi tolainA neeoaCnwrla leipoktpti cvtto7evemfslyha%oa.te Pci na strreArdttlF p hsetnhsitblvmp,taMtutiae iirlgh nr-lthgSYwslehh eogaa towelcutatau ankuiLenlrieaagr lletr8sAktteleh% ie iev dnsMvoceC .iuma tirgPuyapiolc orngtttMuaaldiepea mntn ldnemnCaetdecvi ca aefysepopeaito llnn9 sRimrorh%stoa etp otinumcemmluiygmtas a iediieennnnmesygt,sv peao1sfmlna0ltuoo%ovdptaycop rmmkrmkaa ceaeebaetnndrlsde--tt. New Households Per UnitAFALLDDSPMedian Price Per Unit1234Ioooaotunaedlirusnsraln$$$altnt$257 it anva Als0505FipLaLsnetolvarinaans/sr a iHgFSl u VdlnaeeoecFodg rocaNar lrsetue imtLsere ssanWdcutw idonaoeKor aldg Hnearls tea oUhs Cu Pinittytsistbeu CrlChgehvoeolaClnnodldussmtb NruPasushecvilrlte eDetdroit123456789 23450000%%%% Decline From Prior Peak
Five-Year Vacancy Range
tcdtiioeocnminpssaatA rntwutedliscal tl3na ian.ot1acnd cp ,we weliearnicrlscla e ltrsnueeltod s tncy Ratetweihrnma igs1itp n 269oyb%%%l eovoeayatmrmch aa eenssr nigcentyemg gltfperoro-lo Ro w7maay.nnt1mgh d et pe thhmneerit scu r eeylexntCeciptafeu.aarrs r,mnsFe ibndootiulsrny tt,b, vLyfbaea cu3lulat. dn1 sehh cprioodeeursart sclw eeeoh infllio ltk r.lt eediHcsw ikdfoio-seuuernsm pait nintaaog--l H0Fo4ortuA tlLasantutadoerndHal eoANuustLiesonuwiiLsnovisl D lgaHAelln agoUsel/eFutsn. sWioter tSChhDaen nooFvrelanrdncsiss tcP oroPrutleacnHrdto uestdo1n0U.S.
5an.2d pDeraclleanst w aisl lh foauces irnVacaagp idd3e% vheoluopsemhoenldt fmoromdeasttiolyn os uatsp eaxcceesp dtieomnaaln jdo.b B gortohw Athu slitfitns Unit 3
er
trAahotu beasiutr i ssnltloo, fcwwaaceli itrenh cpg oD atnchaoeel ml atlhsai eraagsnd.e dsStti0ht nPi%pehliglle a, dTr telhchepeLhoixeoanuua iKtmsssavai nillsgnmoeaesgs aCCt iiit rcnnyackoicpnenCnrlataeetssirvat,etlr smaPubeintdt cuesitbnntMuii rlo tgiiSw hnntaaul ut vnktLieeonaeikntoe sbt C iotooPoyorrftfftMyl hiaa.enn nnrdLmesay opa osluimrtsrkisoaevjntioslgl rew m hwioleliu tlrlrse oemmh aooanvilndde w Households P 12
e
growth relative to development. With its growing biotechnology hub spurring N
household formation, Louisville’s modest 1,000 apartment units scheduled for 0
cpaodromdsiptpieloecnttisso ,t nshu itsph ypiseo aryrte iaansrg iw tas i 4lhl. o3fua plsli ensrhgc eoinnrttv eovnaf ctdoaenrmyc yrae nrmadta.e i.Ln os ss tAabnlgee rleelsa tailvseo tooff heorsu ssetrhoonldg FortA tlLaantuaderdaleAustLionuiLsovisl DlaAellnagsel/eFts. WortShDaen nFvrearnciscPoortlanHdouston U.S.
2014 Annual Report BLACK TEXT VERSION page 7
WHITE TEXT VERSION
National Economy
Economic Recovery Reaches Self-Sustaining
Momentum Despite Numerous Setbacks
Employment vs. Unemployment
T
Employment Change he U.S. economy absorbed the effects of sequestration, higher taxes,
s) Unemployment Rate and a 16-day partial government shutdown but still recorded prog-
b
of jo 6 10% ress across most metrics. While the turmoil on Capitol Hill produced
ns U fiscal measures that clearly curbed growth, conditions have improved
o3 8%n
nge (milli0 6%employm bprerrcooladadiumlcyte.i dvF ientyde eagrraalyil n 7ssp. 7ea ntmtdeiislntl igot onr e jtmohbea si,rn eoss ria l8i ed8nr pcayegr cooefnn tteh,x eop fea tcnhoseino ponom sbiytu.i toTh nbsre ol oaUsdt.- Sibn.a hstheades
a e
ment Ch-3 4%nt Rate ltarestn rde acevsesriaogne. oAf n2d.3, apletrhcoeungt ha ninnfluaatlilyo nsi-nadceju tshtee do ffiGcDiaPl ehnads ogfr othwen r eact eas ssiuobn-,
y excluding the government sector and measured by gains in the private
o-6 2%
mpl 90 92 94 96 98 00 02 04 06 08 10 12 14* sector alone, GDP averaged a healthier annualized 3.3 percent gain, much
E
closer to longer run trends.
U.S. GDP
P
GD 10% Uncertainty about U.S. fiscal and monetary policy will persist into
n
e i 2014, likely producing sporadic volatility in the capital markets. Consen-
g
n 5% sus on a long-term, comprehensive fiscal plan remains a low probability
a
h
C among such a deeply divided Congress, therefore, a series of short-term
y
erl 0% solutions and renegotiated deadlines will prevail. Also, the timing and
uart pace of the Federal Reserve’s unwinding of its quantitative easing (QE)
Q
d -5% programs remains a wildcard. Solid economic growth is pressuring interest
e
aliz rates, but the Fed has stated implicitly that tapering monthly purchases of
u
n-10% long-term Treasurys and securities will begin only after the economic data
n
A 90 95 00 05 10 12 14* justifies it and broader economic conditions prove sustainably healthy.
Single-Family Home Sales
2014 National Economic Outlook
Median Home Price
ds) $250 Home Sales 7H
san om u Consumer Spending, Housing and Trade Propel Growth. Third quar-
Price (thou$$220205 56e Sales (m tfarenord mG d DoinuPvb elpneo-tdostriegydi t r 4egb.a1uin iplsd ebirncyge n,t htb eua nrte nsaiuldsaeolni ztbeidoal o gsstreeocdwto tbrh y,f owcro ittnhhse u amfi gfeterhn escprooenunssde iclniufg-t
me illio tive quarter. Forward-looking manufacturing surveys suggest the trade
n Ho $175 4ns, S sector will be more prominent this year, aided by easing global austerity
a A and stronger demand. GDP growth is forecast for the 3.0 percent range
Medi $150 3AR) and the U.S. should add an estimated 2.7 million jobs in 2014.
03 04 05 06 07 08 09 10 11 12 13**
u Rising Immigration, Employment and Income Growth Drive House-
Home Construction vs.
hold Formations and Apartment Demand. Household growth acceler-
Household Growth
ated sharply to over one million in 2012, still below long-run trends,
Construction
ns)2.0 Household Growth 2.0H but higher than the average created between 2007 and 2011. The releas-
pletions (millio11..05 11..05ousehold Grow iunbnrnegixdg theo rstflee ivpnee e.er nsattli- myuepaa trdess,e maavsa eUnrad.gS ia.n npgd rbo ersetpwneecewtesne f d1o .ru2 ep tmsow p1iln.o4gy mminiel nliimot nam naidng nrwautaaigolleny gftrororew nthdthes
m th
Unit Co0.5 0.5 (millions u T“Napoerrminagl” thCer eFdeidt ’sE nQvuiraonntmitaetnivt.e TEraeasisnugry Proaltiecsy reMmaarikns vae rRy ectulorsne ttoo
0.0 0.0 )
90 92 94 96 98 00 02 04 06 08 10 1214* their 50-year low, and stand at less than half of the long-term average.
Without Fed intervention, interest rates will fluctuate naturally in re-
sponse to economic and capital market drivers and, though it will raise
some headwinds for investors in the near term, the positive economic
* Forecast ** Through October trends will boost commercial real estate performance.
page 8 BLACK TEXT VERSION2014 Annual Report
Retail Sales and Unemployment
Unemployment Rate
12% WHRITetEa iTl ESaXleTs V, EExRcSluIdOinNg Auto & Gas 10% Yea
r-o
v
nemployment Rate 369%%% -055%%% er-Year Change in R
U eta
il S
0% -10% ale
00 01 02 03 04 05 06 07 08 0910**** s
National Apartment Overview
Strong Demand Tempers Supply Surge as
Construction Cycle Begins; Localized Imbalances a Risk
Completions vs. Vacancy
T
he apartment sector consistently exhibits the most stable space fun-
Units Completed
damentals of all commercial property types. Fiscal headwinds and s)240 Vacancy Rate 8%
higher taxes weighed on productivity and consumer confidence late nd
a
in 2012, contributing to a slackening of apartment demand and rent us180 6%
gecroownothm tihc acto pnedristiisotends thharvoeu gbho otshtee dfo jlolobw ainndg Mincaorcmhe. Sgirnocwe tthh,e inn,j eimctpinrog vreed- eted (tho120 4% Vacancy
newed vigor into rental demand and net absorption. Single-family home mpl Ra
o 60 2% te
sales reflected similar volatility during the same time period, caused in C
s
part by an increase in mortgage rates, but higher sales volumes and price nit
U 0 0%
increases have proven durable and the sector’s recovery remains intact.
94 96 98 00 02 04 06 08 10 12 13*14**
Household formations exceeded one million in 2012, surpassing the aver-
age of the preceding five years, and pent-up demand appears to be generat-
ing sufficient demand for both rental and for-sale housing for now.
Monthly Rent Vs. Mortgage
Mortgage Payment
The estimated number of new apartment units delivered in the past $1,800 Effective Monthly Rent $1800
12 months rose over 80 percent to 168,000. Nonetheless, a second and
third quarter surge in demand pushed net absorption to 188,000 units; nt $1,450 $1450
e
consequently, the vacancy rate fell 20 basis points to 4.9 percent compared m
y
with one year ago. Nationally, effective rents increased 4.2 percent to an Pa$1,100 $1100
y
average monthly rent of $1,128, besting the prior year’s performance of nthl
o $750 $750
3.0 percent. Late recovery secondary markets and mid- to lower-tier assets M
recorded the strongest gains, although new properties thus far report rapid
$400 $400
lease-up as well. Looking forward, apartment space fundamentals appear
93 95 97 99 01 03 05 07 09 11 13*
balanced, but not without risk. The number of new developments break-
ing ground and coming to market will increase in the next year and likely
surpass the rate at which units can be absorbed, particularly in metros with
Rents Outpace Income Growth
a high concentration of new expensive, infill product.
Rent Growth
$1,200 Renter Household Income $40
2014 National Apartment Outlook nt An
Re$1,100 $35nu
u New Supply Cycle and Rising Renter Households Signals New ctive al Me
Gynoirfiuocnwagnt htald.y u Ltloots wfi a vgieme dym e1ai8rgs-r 3ao4tfi osyunepa lrpesrv eoesllsdse, dlai vnhidno uga s weshihtoahlr dpp agrrrieosnew ttsihn, . c toThhneti rsni bsuuumgtegbdees rst isog a-f onthly Effe$1$,900000 $$2350Idian ncom
M e
cumulative level of pent-up demand for 3.0 to 3.5 million new house-
$800 $20
holds. Stronger job and wage growth and confidence in the durability of 00 02 04 06 08 10 12 13*14**
the economy have begun to de-bundle these households and stimulate
immigration, both of which will propel rental demand.
18-34 Year Old Population Living
u National Vacancy Rate to Edge Higher as Pockets of Supply Imbal-
With Parents
ance Emerge. A forecast increase in the vacancy rate to 5.1 percent by 24
year-end 2014 may also pare rent growth to approximately 2.6 per-
cent. Completions are forecast to increase 28 percent to nearly 215,000 ons)22
units, exceeding forecast demand of approximately 177,000 units. A milli
brief supply imbalance will emerge as an abundance of Class A units on (20
open in urban infill markets. ulati
p
o18
P
u Vacancy Tightens in Mid-Tier Properties, Pressures Rents. Existing
Class A assets will bear the brunt of competition from new supply. Va- 16
83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
cancy in mid- to lower-tier apartments will tighten to 4.4 to 5.0 percent
and generate stronger rents, catalyzing a greater number of renovations.
* Estimate **Forecast
2014 Annual Report BLACK TEXT VERSION page 9
WHITE TEXT VERSION