LOS ANGELES-Cap rates for multifamily assets keep getting lower, and the push to purchase these properties in prime cities is increasing. A Jones Lang LaSalle/RealShare Apartments Outlook 2012 Survey at the recent Apartments 2011 conference found that the demand for multifamily is increasing. Click here for a recap of the entire event.
“We’re seeing a focus on coastal, gateway cities like Seattle, Portland, San Francisco and Washington, DC.—cities that have a strong focus on technology, biotech, life sciences and government as that’s where the job growth is right now,” said Seth Heikkila, vice president, Jones Lang LaSalle. “But to move out that risk continuum, investors are requiring higher cap rates.”
Cap rates right now in top markets are around 4%. Most people surveyed (34%) think that the market is a bit over exuberant. At the same time, though, 22% claim we have't hit a bubble.
“There’s so much capital chasing too few deals—we call it “homeless capital,” said Bill Montgomery, President, Acquisitions & Investment, Sares-Regis. “REITs have been buying all the core properties and pension funds have had a hard time competing. We’re seeing money flowing into value add and development projects.”
While development isn't coming back in a lot of real estate sectors, it is happening in multifamily, Montgomery contends. But that comes with increased costs. About 63% of respondents say construction costs increased by 5% over the last year.
However, that bet might be worth it, according to Tom Toomey, President and CEO of UDR, Inc. “We expect to see six million new renters over the next three or four year period," he said. "So why wouldn’t you want to invest more, build more, redevelop more—just seems like a great time and the numbers are stacked up in our favor.”
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