q3 2015 newsletter - 29sc - final
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1. Letter from Stan2. US Housing Market Trends3. Multifamily Trends4. Acquire Properties - YTD5. Deals Under Contract6. Sold Properties7. Recent Hires & Promotions8. Contact Information
Lake Merritt, Oakland, CA
3rd Quarter 2015Newsletter
Letter From Stan
Dear Investors and Colleagues:
Last quarter, Q3 was a strong period for 29th Street Capital in terms of both realized executions and new acquisitions. In September alone, we closed on three unique properties in three separate markets, Des Plaines, IL (Chicago MSA), Arvada, CO (Denver MSA), and Pasadena, TX (Houston MSA). These achievements provide distinct examples of our companys breadth, depth and ability to run a national platform while executing nimbly at the local level. This period also marks a major milestone for our firm in that we closed on our 40th multifamily acquisition. We also sold two assets that were held between 3 and 4 years that produced noteworthy returns (IRRs) between 36% and 55% and equity multiples between 2.3x and 3.0x (see Pages 9 and 10). We not only were able to return all invested capital to our investors in these projects, but we also created over $31MM of value that was distributed among our equity partners.
While we continue to implement our proven boots on the ground strategy, we believe that we will continue to outperform our competitors by strengthening our team with new, experienced talent. Our local acquisition and asset managers continue to source off-market deals, engage less expensive and more efficient contractors, and continue to recognize issues in their markets earlier than those who are not local. Despite this success, we understand that we will have to work harder in todays market to deliver on our commitment to provide opportunities for our investors to achieve their financial goals. The way we differentiate ourselves in the marketplace will become even more critical as we approach the second half of the current market cycle and the rising interest rate environment. Short-term interest rates have been held near zero since December 2008 in an effort to stimulate the economy. Now, all signs point to a December interest rate hike by the Federal Reserve. Officials are more confident in a healthy economy, and with the threat of inflation looming, they believe now is the time to start raising interest rates at a gradual pace. Based on todays yield curve and the expectations of future interest rates, the consensus view is that the 1yr, 5yr and 10yr treasury rates will remain under 3.0%. The direction and pace of interest rate movements administered by the Federal Reserve are not something we can control, buttheir impact on markets and our corporate strategy are something we consistently monitor and discuss.
Despite the growing debate over the duration and levels of multifamily performance returns for institutional and non-institutional asset classes, 29SC believes that demand for moderately priced apartments will outpace supply over the next several years. There are numerous factors that support this viewpoint, but none more influential to multifamily housing demand than the overall demographics, tastes and preferences of the Millennial cohort. This cohort is now experiencing job, wage and household growth momentum that is releasing pent-up demand for multifamily housing options in cities providing jobs that match their skills and with wages that support their budgets. Apartment rentals offer affordability, flexibility, location and a lifestyle choice that Millennials prefer.
As we close out 2015, we are pleased to have grown our portfolio by ten (10) properties and by over $92MM in additional assets under management. We expect to have a strong start to 2016 with two (2), two-property portfolios under contract in League City, TX (314 units) and in Hayward, CA (69 units). Once we close on these four assets, we will add $40MM to total assets under management ($470MM) and add 383 units to our growing 6,000+ unit portfolio. As we enter the new year we are eager to close on the deals that we have under contract and are excited to see more fantastic executions through strategic asset dispositions. I would like to congratulate our team for their hard work and thank our investors for their trust and commitment to our vision of transforming communities throughout the country.
Please contact me or Cody Harper if you have any questions or investment interest:
Stan Beraznik, Founder & CEOCody Harper, Vice President of Corporate Development
Market Outlook U.S. Housing Fundamentals
US Housing Market Trends
US Home prices, including single-family homes as well as apartments, continued their rise across the country over the last 12 months, but at a slower pace. The S&P/Case-Shiller Home Price Indices for August showed YoY gains of 4.7% and 5.1%, respectively as measured by the 10 and 20-City Composites. Home prices continue to rise and outpace both inflation and wage gains. The index has seen 34 consecutive months with positive YoY gains led by San Francisco, Denver and Portland with price increases of 10.7%, 10.7%, and 9.4%, respectively. All 20 cities have shown YoY gains every month since the end of 2012. While nationally, prices are recovering, new construction of single-family homes remains very low at 1/3 its long-term average despite low vacancy rates among both renter and owner-occupied homes. Many housing developers have been focused on building multifamily over single-family to absorb significant pent-up demand within the Millennial cohort.
The highest home prices seen in eight years is producing many single-family homeowners to sell. According to RealtyTrac, homeowners who sold during Q3 2015 realized an average price gain of $40,658 (17%) from the purchase price of their property, the highest average price gain for home sellers since the Q3 2007. On average, these sellers owned their home for 6.72 years. The average sale price of single-family homes and condos nationwide during Q3 2015 was $263,976, up 0.2% from the prior quarter and up 2.4% from Q3 2014, the slowest YoY price appreciation in any quarter since home prices bottomed out in Q1 2012. RealtyTrac reports that homes are not affordable for average wage earners in 65% of zip codes with good schools. Workforce housing located in good school districts is at the heart of 29SCs multifamily acquisition strategy. Fear of affordability, rising interest rates and flat home price appreciation in many high growth markets by existing homeowners has created the incentive to cash out home equity to become a renter by choice.
Using data provided by Zillow, the Economist has compared prices against two affordability metrics: income and rents. On this basis, affordability looks stretched in areas like San Francisco with prices at 9x household income and nearly 20x annual rents. Areas like Denver are also exhibiting a growing concern for housing affordability with prices at nearly 5x household income and 13x annual rents. These data compare to a long-run city average of 6x income and a national average of 3.3x income and 11x for rents. Over time, prices should adjust (or equivalently incomes and rents will rise) to return affordability ratios to their long-run averages. But gauges of affordability are affected by interest rates, which are at an all-time low, making housing artificially cheap to buy. As and when interest rates do normalize, prices will face pressure to return towards their long-run relationship with income and rents.
Market Outlook Multifamily Apartment Trends
The strengthening economy continues to produce positive job growth and other favorable demographic factors, which are driving housing fundamentals to improved levels. Even as we enter the fourth quarter of 2015, the demand for investment-grade rental housing remains steady. Data through October show that the multifamily rental market continues to tighten despite increasing new supply, as the multifamily rental vacancy rate fell to 4.9% as of October, 2015 compared to 5.0% one year earlier. Estimated effective rents increased again, at 0.6% since the fourth quarter of 2014, marking 21 consecutive quarterly increases according to Axiometrics.
Based on this trend, it is estimated that institutional multifamily rent growth in the U.S. for 2015 will be 4.2%, a 39-month high. Though apartment market performance is still solid, the typical seasonal trend of decelerating fourth-quarter rent growth took hold in October. As the chart above shows, rent growth is forecast to remain relatively steady over the next several years, though 2016 will likely see further moderation as the impact of new supply takes hold and job growth decelerates to a predicted 1.7%.
Oakland, CA remains at the top of the list at No. 2 for annual effective rent growth, with a rate of 12.3%, well above the national average. 29SC will acquire two properties (see Page 8) in the City of Hayward in Q1 2016, which will be its 9th and 10th
acquisition in the East Bay near Oakland. Effect rent growth continues to outpace the national average of 4.9% in many other cities where 29SC is local: Denver, CO, Phoenix, AZ, Nashville, TN, Las Vegas, NV and Atlanta, GA.
With new supply rising, but still modest by historical standards, and demand surging forward, rent growth has accelerated over the past two years, to the fastest pace since 2008. Net absorption for the first half of the year rose more than 77,000 units. While the number of completions has been slowing over the past few months, an anticipated 332,000 new units are expected to come online this year alone, a rate well above an anticipated absorption rate of 155,000 units, based on year-to-date project