Views
3 months ago

RCG 17 Guide to Markets FINAL[1]

SECTION 1 | MARKET

SECTION 1 | MARKET PERFORAMANCE Executive Summary 2017 RED 49 GROUP PERFORMANCE • Average occupancy among the 49 large metro markets we model econometrically (the “RED 49”) was 95.56% at year-end, based on Reis data, down -10 basis points from 2Q17, and -24bps from 4Q16. • In March 2017, RED Capital Research’s (“RCR”) forecasting model projected a -58bps year-on-year decline. The variance was almost entirely attributable to lower than expected supply. • Peer group effective rent increased at a 3.9% year-on-year unit-weighted average rate in 4Q17, down from 4.5% in 4Q16. Last March, RCR’s model projected an inventory-weighted average gain for the year of 4.0%. • Adjusted for inflation, rents increased 2.1% Y-o-Y in 4Q17, representing the 22nd consecutive quarter of real rent growth. • The peer group average investment sale B/B+ cap rate proxy ended 2017 on 5.17%, down about -3 basis points from 4Q16, but up slightly from the mid-year cycle low. • Peer group NOI increased about 4.5% and derived property values appreciated 5.5% in 2017, producing estimated oneyear look-back total returns in the 10% to 11% range; excellent investment returns for assets with the risk characteristics of multifamily properties. FORECASTED NEAR TERM RED 49 PERFORMANCE • RCR econometric models forecast robust demand for vacant multifamily space in 2018. Under our base macroeconomic forecast we project that RED 49 households will absorb about 185,000 units in 2018, 29% more than 2017. • Nevertheless, occupancy is likely to decline about -35bps by YE18 to 95.2%, assuming the Reis supply projection of 230,000 units is reliable. • In light of robust second half rent trends and our expectation of faster nominal GDP and personal income growth in the U.S. we now project 2018 rent growth to fall in the 3.6% to 3.9% range, up from a low-3% forecast published in our Mid-year 2017 GTM. • RCR models now project that RED 49 effective rents will rise at a compound annual rate of 3.4% over the five-year forecast interval, up from 3.0% at MY2017, boding well for further 7%+ annual unlevered investment returns. MACROECONOMIC OUTLOOK • GDP growth gained traction in the second half, rising at a 2.9% seasonally-adjusted annual rate, up from 2.1% in 1H17. RCR’s unbiased GDP forecasting model projects 1H18 SAAR growth to approximate 2.5%, followed by an average 2.2% gain in the second half of the year. • Intermediate-term performance is likely to be weaker. The benefits from corporate tax reform will fuel solid progress in 2018, but economic headwinds are likely to rematerialize next year. • Our unbiased mathematical models forecast that inflation and interest rate obstacles are likely to push GDP growth back to “new normal” levels in 2019-2020. The probability of recession is low but may rise should inflation and interest rates spike. • Our payroll job creation forecast for the U.S. is now more robust for 2018, and constructive afterward. We expect the nation to add 2.35 million payroll jobs in 2018, up from 2.15 million last year. • In the last installment, RCR opined that inflation was likely to remain stubbornly low. Events proved this forecast to be myopic. Inflation may rise more than we imagined a few months ago. • Fed policy will change accordingly. Prior to the advent of unanticipated inflation in January and February our fed funds model projected a 100bps increase to 2.2% in 2018, with the funds rate peaking at about 2.8% next year. It now seems that this may prove to be optimistic. OVERALL RED 49 EXPECTED TOTAL RETURNS • The weighted average five-year expected total return of the RED 49 currently is 7.0%. • The estimate is -10 basis points below our MY2017 GTM forecast and the observed 3Q17 metric. • Adjusting for the replacement of the model we use to project U.S. home price appreciation with one that forecasts moderating prices increases rather than decreases, ETR actually declined about -50bps since our last installment, despite upward revisions of expected GDP, job and income growth over the five-year forecast interval. The decline in expected returns is primarily attributable to higher forecasted terminal cap rates and the negative impact on demand and rents from stronger than expected home price appreciation. 4

SECTION 1 | MARKET PERFORAMANCE Executive Summary (continued) RED 49 METRO PERFORMANCE • Fourth quarter rent trends surprised on the high side in many “growth markets.” Effective rents increased in Atlanta, Austin, Charlotte, Dallas, Denver, Orlando and Phoenix by an inventory weighted average of 5.9% Y-o-Y. Their respective rent equations (“in-sample forecasts”) projected a 5.6% increase. • Rent growth in the primary markets averaged 3.1%, below the RED 49 average and the 3.3% in-sample forecast. Miami, Palm Beach and Seattle were positive outliers, posting fast and above forecast growth. Fort Lauderdale, the Inland Empire, New York and the Washington suburbs recorded soft and below forecasted results. • Texas and Southeast markets continued to shine. Our five covered Texas markets notched 5.4% average rent growth, topping the in-sample forecast by 40bps. Southeast markets averaged 5.0% gains versus a 4.9% in-sample bogie. • The Pacific Northwest and Intermountain states also reported strong results. Rents increased by an average of 5.2%, topping the group’s 4.6% in-sample forecast. • Northeast and Mid-Atlantic Region metros underperformed. Rents advanced at a 1.9% average rate, missing the in-sample forecast by 50bps. Only the District of Columbia (2.4%) topped its in-sample forecast. RED 49 METRO LEVEL EXPECTED TOTAL RETURN OUTLOOK • The pop in Y-o-Y rent growth observed in 4Q17, and some upward revisions by Reis of earlier rent observations caused our rent models to raise forecasted rent growth rates in a host of metro areas. The biggest beneficiaries were Cincinnati, Denver, Los Angeles/Orange County and San Jose. • Conversely, in situations where rents and absorption are adversely affected by rising home prices, expected rent growth and total returns declined. Prominent among these are Dallas, Fort Worth, Portland, Sacramento and the District of Columbia. • Among the seven metros with highest ETRs, five are institutional investor favorites: Charlotte, Los Angeles, Nashville, Salt Lake and San Francisco. • As a group, the primary markets remain attractive. Prominent exceptions include parts of Southern California, South Florida and Washington, DC/Suburban Virginia. • Texas, the Southeast and the Intermountain states continue to offer compelling opportunities. • Most of the Midwest remains attractive for income oriented and risk-averse investors. • California markets also lagged, rising 3.1% (in sample = 3.4%), held back by soft Bay Area, Orange County and Inland Empire results. • Midwest market rent performance was credible, advancing 3.8% and topping the 3.6% in-sample bogie. Surprising strength in Chicago, Detroit and Milwaukee was largely responsible. 5

2014-8-6-RCG-Margin-Tax-Rpt-FINAL-1
NYCOSH Protecting Worker 1-17-14 FINAL
spring 04 / 17:1 - Grand Canyon River Guides
appg-booklet-final-17-mar-14-asbestos-in-schools--2-1-
Global-Priority-Market-Analysis-FINAL-VERSION-1
bqr 12-1 Final - Grand Canyon River Guides
1|17
201311_cfpb_navigating-the-market-final
January 2008 - RCG Economics