Your October Newsletter from CALCAP!

CALCAP CONNECTIONS

October 2024

Principal's Corner

Q3 Apartment Market Overview

Market Fundamentals

The U.S. multifamily market demonstrated continued and exceptional demand in Q3 2024, with absorption reaching 192,649 units during the quarter, while 162,595 new units were delivered, according to CoStar. On an annual basis, the market absorbed 488,773 units against 557,842 units of new supply - a rate of delivery unseen since 1974! While robust demand still trails concurrent supply, the gap has narrowed to just above 69,000 units, the smallest margin in two years.

The national occupancy rate stood at 94.4% in Q3, down just 10 basis points from the year-ago figure. Monthly rent for market-rate apartments averaged $1,838 as of September 2024, with the national average annual asking rent growth easing to 1.1% compared to 1.2% at the end of July.

Record Absorption in Target Markets

Perhaps the most compelling story of Q3 was the record-breaking absorption in several key markets for CALCAP, including those where we own existing investments as well as target markets we are considering. Phoenix and Las Vegas, where we currently operate, along with target markets of Nashville and Salt Lake City, all posted all-time high apartment demand for the year-ending Q3 2024.

These markets have benefited from extraordinary demographic tailwinds, with population growth rates two to three times the national average since 2017. This momentum, coupled with strong job growth and below-average unemployment rates, has helped these markets digest significant new supply. Nashville grew inventory by 7%, Salt Lake City by 6.5%, and Phoenix by 5.6% over the past year. While this supply has created some near-term rent pressure, the record absorption levels suggest these markets are working through their supply pipelines more effectively than anticipated, supporting our long-term conviction in both our existing and target markets.

Construction Pipeline

The development pipeline is emptying rapidly. Of the nearly 762,000 apartments currently under construction in the U.S., about 550,000 units are expected to come online in the year-ending Q3 2025. However, new starts have slowed dramatically, with less than 40,000 units beginning construction in Q3 2024, translating to fewer than 210,000 units scheduled for delivery in 2027.

Looking Down The Road

Despite some of the current challenges, the multifamily sector is regaining investor confidence. According to Altus Group's Q3 2024 survey, 69% of respondents expect multifamily to outperform other sectors. While oversupply issues persist in some Sun Belt markets, the multifamily sector has shown greater resilience in the Northeast and Midwest, where construction has been more restrained.

Our strategy remains focused on markets with strong demographic fundamentals and long-term growth potential. While we acknowledge the near-term operational challenges and supply pressures in several of our markets, the record absorption in our target markets validates our investment thesis. The emerging BTR sector presents an intriguing opportunity to diversify our portfolio as we adapt to evolving renter preferences and market conditions. The significant pullback in new construction starts suggests improving supply-demand dynamics beyond the current delivery wave, though we remain cautious and disciplined in our approach to new investments in both traditional multifamily and the BTR sector.

Edward M. Aloe

President and CEO

626-229-9057

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Latest Headlines...

The Top Markets for Multifamily Investors

Affordability and population growth are important factors to consider.

According to the Arbor-Chandan 2024 Multifamily Opportunity Matrix, Nashville, Phoenix and Austin are proving to be the top markets for multifamily investment with high rankings in affordability, population growth and climate. Affordable Midwest markets also performed well in the 2024 ranking, while many of the country's largest cities finished lower.

Nashville's No. 1 rating is due to its competitive tax climate, ability to attract renters from other metro areas, vibrant culture and bustling economy. The Tennessee capital saw its population grow 1.5% in 2023, about three times faster than the national average. The market benefits from the healthcare, technology tourism sectors, and its labor market had the lowest unemployment rate of all the 50 largest metros through July at 2.5%.

Phoenix's dynamic labor market helped it climb to the second spot on the list. The city also decreased unemployment to 3.1% in July and has become a domestic semiconductor manufacturing hub, attracting skilled jobs that have reinforced local housing demand. Rent growth has slowed in the market amid increasing housing supply, but Arbor said rental vacancy rates across the metro have decreased over the past year by 3.4%.

View Article Here

Expert: Multifamily Remains Buyers' Market Amid 'Generationally High' Supply

Demand doesn't seem to be an issue.

Remillard believes that multifamily currently remains a buyer's market. He thinks generally that those who decided to make acquisitions over the past 12 months "are going to do phenomenally well."

He estimates that construction costs are cheap thanks to starts for new product dropping- making it an ideal time to develop. Sellers, meanwhile, are in a tough position now with the current state of the market.

"I think a lot of people are saying we're waiting until after the election, it's never a good time to sell in the winter, because that's when rents are the lowest, and concessions, for free rent is the highest," Remillard warned.

But what's encouraging for sellers is buyers are at least looking in the market. Remillard said that he sees around an average of 30 property tours, anywhere between 150 to 175 different investment firms sign confidentiality agreements to at least consider the terms, and there are up to 20 bids on each property. He calls this trend "exciting to see," because for much of last year, a "handful" of bidders for each property was all that was happening.

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Underwater Multifamily Borrowers See Chance For Off-Ramp With Fed Rate Cuts

While the office sector has been the main source of distress in commercial real estate, multifamily hasn't been far behind, with delinquencies and defaults piling up among investors who gobbled up buildings during the pandemic.

Roughly 11% of multifamily CMBS loans were delinquent in August, up from 3% at the start of the year, according to securitized debt tracking firm CRED iQ. And MSCI projected last month that nearly $57B in apartment loans taken out by borrowers who capitalized on rock-bottom interest rates during the Covid-19 pandemic are potentially trouble.

With a record number of new apartments coming online in the U.S. this year pushing rents down, coupled with skyrocketing operating costs, borrowers are turning to short-term lenders hoping that further rate cuts will allow them to get less expensive permanent financing next year.

The Fed's 50-basis-point rate cut last week has fueled a new wave of commercial real estate optimism throughout the industry.

View Article Here

On the lighter side...

About CALCAP Advisors

About CALCAP

California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare, and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California-based investment company founded in 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 14 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $650mm in Assets Under Management. To learn more visit www.calcap.com.

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which gives employees the opportunity to donate unused vacation and sick days for a very worthy cause.