- Real estate investors spent a record $240 billion on apartment buildings in 2021.
- The push is based on investors’ expectations that rents will rise amid inflation and rising wages.
- The country’s Sun Belt was at the center of activity with more than $50 billion in transactions in 2021.
When real estate investment firm Bridge Investment Group snapped up The Vinings at Hunter’s Green, a 204-apartment building with a resort-style pool and palm-lined patio with pergolas in Tampa, Florida, the summer last he had to pay.
The deal closed for $57.5 million in September, 2 1/2 times the price of the building’s last sale in 2015, property records show.
“We’re seeing strong growth in the Tampa metro area,” said Colin Apple, co-chief investment officer at Salt Lake City-based Bridge, which manages a $32 billion portfolio of real estate investment funds. “There’s been a lot of demand and population movement in areas like New York and Chicago. We like the overall demographic trends.”
Apple said Bridge is planning about $5 million in improvements to the property, including a dog park and a new playground. The company will seek to increase rents by around 7% over the next year, from around $1,235 per month for a one-bedroom apartment to $1,325 – an increase that roughly tracks the rate of current inflation, which just hit a 40 year high.
The deal is a microcosm of the record interest in apartment building investment that swept the country in 2021 and is expected to continue this year. Encouraged by high inflation, strong job and wage growth, investors have poured hundreds of billions of dollars into multi-family transactions on the expectation that apartment rents and asset prices will continue to rise. to augment.
A record $240 billion in apartment buildings sold in 2021
More than $240 billion worth of apartment buildings have been sold from 2021 through November, a record 63% higher than the dollar volume of deals completed in all of 2020, according to data from Real Capital Analytics.
Buyers have ranged from big Wall Street companies and institutional players such as Blackstone to new entrants like Adam Neumann, the ousted founder of coworking company WeWork, who recently revealed he joined former WeWork colleagues to buy approximately $1 billion worth of apartment buildings in the southern United States.
“There’s no hotter property type than multifamily right now from a volume perspective,” said Aaron Jodka, research director at Colliers International, who estimated that total deal activity in 2021 could exceed $270 billion, 40% more than the previous record year, 2019.
The Southwest and Southeast have attracted an outsized share of investment activity as the pandemic has detached millions of Americans, freeing many to migrate to sunnier, more affordable places.
Dallas, Atlanta, Phoenix, Houston and Los Angeles were the top five investment markets, in that order, in 2021, according to RCA, together accounting for more than $50 billion in deals.
Apartments held up well in a rocky real estate market
The growing interest in apartment buildings has been easy to overlook as other types of properties have grabbed the headlines in a real estate market that has been reconfigured by the pandemic.
Once modest warehouses, for example, have exploded as demand for storage and logistics space has increased in an increasingly e-commerce driven economy. Meanwhile, single-family rental homes, which had for decades been primarily the purview of retail investors, have become a favorite target for institutional owners, including large Wall Street investment firms and pension funds, as more Americans sought the suburbs and additional space to shelter in place and work from home.
The apartment construction market is, however, much larger than these segments, allowing investors to invest more billions of dollars in the sector, and it is also underpinned by positive underlying economic trends.
Many investors believe that interest rates will rise in 2022, which will make mortgages more expensive and encourage future owners to become tenants. The consumer price index, meanwhile, showed inflation hit 7% in December, its highest rate since 1982.
As money poured into apartment building transactions, the prices of these assets rose, leading investors to take increasingly aggressive bets.
Apartment buildings expected to outperform inflation
David Bitner, head of capital markets research at Cushman & Wakefield, said apartment building transactions averaged $174,000 per unit in 2021, citing RCA data, but fell sharply. increased over the year to nearly $240,000 per unit in November.
Many, Bitner said, expect inflation to compensate.
“For a 1% increase in inflation, we see more than a 1% increase in rental yields,” Bitner said. “So the commercial real estate tagline is not just hedging, it’s got inflation performance. And multifamily investing is very much included in that.”
Earlier in the year, Jon Gray, chairman of Blackstone, said the investment firm would focus on apartment buildings as an investment to “prepare for what we believe will be a higher inflationary environment. “.
Over the summer, a Blackstone private real estate investment fund, known as BREIT, acquired a $5.1 billion portfolio of rental apartments from insurance company American International Group, one of the main transactions of the year.
Rents have already gone up. National average monthly rental rates were $1,985 in November, a 21% year-over-year increase, according to residential brokerage Redfin. Established cities and emerging regions across the country recorded strong gains.
Miami, Fort Lauderdale and West Palm Beach in Florida saw the highest year-over-year rent increases of any metro area in the country, according to Redfin, with increases of 35%. New York City, which has been battered by the pandemic, has rebounded, Redfin found. The city, along with nearby Newark and New Brunswick in New Jersey and Nassau County in Long Island, saw rental gains of 34%.
Austin, TX; Jacksonville, Florida; and Tampa were also in the top 10 most popular rents.
New York City received less investment interest than major Sun Belt locations. RCA tracked about $2.7 billion in deals in the city, second only to traditionally strong apartment markets in Chicago, Boston and Washington, DC. Still, some investors saw reason to be optimistic, such as the city’s solid rental growth.
Blackstone, for example, acquired the Lower Manhattan rental apartment tower 8 Spruce Street at the end of the year for more than $900 million.
“We believe that people will always want to live in cities like New York that are centers of innovation and talent and that unique assets like 8 Spruce will continue to benefit from strong fundamentals, making this transaction a great choice for our investors. BREIT,” Qahir said. Madhany, managing director of Blackstone Real Estate, said.
Jodka, research director of Colliers International, noted widespread expectations that the prodigious buying of apartments will continue nationwide in 2022.
“We expect this volume in 2022, barring unforeseen events, to be strong, even stronger than last year,” he said.