RENTAL HOUSING IN THE ROARING 20S ULI Fall Meeting / CDC Blue - - PowerPoint PPT Presentation

RENTAL HOUSING IN THE ‘ROARING ‘20S’

ULI Fall Meeting / CDC Blue October 25, 2017 Taylor Mammen, Managing Director

MACROECONOMIC & CAPITAL MARKETS OVERVIEW

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 3

EMPLOYMENT SENDS MIXED SIGNALS

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20%

• 2,500
• 2,000
• 1,500
• 1,000
• 500

500 1,000 (in 000's)

U.S. Employment Growth vs. Quarterly Wage Growth 2006-Q2 2017

Employment Growth (000s) Wage Growth

Job growth is positive but wages continue uneven recovery

Source: Moody’s Economy.com; St. Louis Federal Reserve; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 4

HOUSEHOLD FORMATION IS STRONG

• 200
• 100

100 200 300 400 500 (in 000's)

U.S. Household Formation 2000-Q2 2017

The liberation from parents’ basements continues

Source: Moody’s Economy.com; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 5

PER CAPITA SPENDING GROWING STEADILY

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Quarterly Personal Consumption Expenditures per Capita 1990-2017

Real PCE per Capita* Nominal PCE per Capita

Real per capital spending is now 9% above 2007 peak

*Chained 2009 Dollars Source: St. Louis Federal Reserve; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 6

REAL ESTATE EQUITY IS ABUNDANT

50 100 150 200 250 300 $ in billions

Dry Powder by Region*

Europe Rest of World North America

Plentiful “dry powder,” but fundraising may be moderating

*Private equity cash reserves held to fund future obligations Source: Preqin; RCLCO Quarterly Chartbook 20 40 60 80 100 120 50 100 150 200 250 $ in billions

• No. of Funds

United States RE Fundraising

• No. of Funds

Capital Raised ($bn) 10 20 30 40 50 50 100 150 200 $ in billions

• No. of Funds

International (Non-U.S.) RE Fundraising

• No. of Funds

Capital Raised ($bn)

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 7

STILL PLENTY OF OFFSHORE CAPITAL

• 500

1,000 1,500 2,000 2,500 3,000 3,500 $0 $20 $40 $60 $80 $100 $120 Properties Offshore Capital

Offshore Capital in United States ($ in Billions)

Volume ($ in Billions) Properties

2017 foreign capital transactions close to 2016 pace

Source: RCA; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 8

REAL ESTATE DEBT SEEMS ABUNDANT, ALSO

($300) ($200) ($100) $0 $100 $200 $300 $400 $ in billions

U.S. Commercial RE Debt Markets - Net Capital Flows - Annually 1985 - 2016

Overall, debt markets are active thanks to commercial banks & GSEs

Note: Federal Reserve Data releases lag by one quarter. As of Q2 2017, the most recent data is as of Q1 2017. Source: U.S. Federal Reserve; National Association of Real Estate Investment Trusts (NAREIT); RCLCO Quarterly Chartbook ($80) ($60) ($40) ($20) $0 $20 $40 $60 $80 $100 $ in billions

U.S. Commercial RE Debt Markets - Net Capital Flows - Quarterly

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 9

BUT STANDARDS MAY BE TIGHTENING

(40%) (20%) 0% 20% 40% 60% 80% 100%

Net % of Banks Tightening Lending Standards

Continued post-recession challenge to finance anything with risk

Note: As of Q4 2013, the U.S. Federal Reserve separated this data into three categories (construction/development, nonfarm nonresidential, and multifamily residential), depending on the type of structure for which the loan is intended. For these time periods, the data shown on the graph represents the average of these three categories. Source: U.S. Federal Reserve; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 10

RESULT: STRONG TRANSACTION VOLUME

• 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 $0 $100 $200 $300 $400 $500 $600 $700 Properties Transaction Volume

Total Transaction Volume ($ in Billions)

Volume ($ in Billions) Properties

2017 real estate transactions very close to 2016 pace

Note: Only includes transactions valued at $2.5 million or greater Source: Real Capital Analytics (RCA); RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 11

CAP RATES INCREASE

0% 2% 4% 6% 8% 10% 12% Recession 10 Year Treasury Yield Going-In Cap Rate (%) BBB Corporate Bond Yield

Most consistent cap rate expansion since the recession

Source: U.S. Federal Reserve; Real Estate Research Corporation (RERC); RCA; Federal Reserve Bank of St. Louis; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 12

NCREIF RETURNS CONTINUE TO MODERATE

(30%) (20%) (10%) 0% 10% 20% 30% 40%

NCREIF Total Returns

Hotel Apartment Retail Industrial Office

Industrial leads total returns, while others lag more sharply

Source: National Council of Real Estate Investment Fiduciaries (NCREIF); RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 13

VACANCY CONTINUES TO INCREASE

(4.0%) (2.0%) 0.0% 2.0% 4.0% 6.0% 8.0% (150,000) (100,000) (50,000) 50,000 100,000 150,000 200,000 250,000 300,000 Units

U.S. Apartment Absorption, Vacancy, Rent Growth

Completions Net Absorption Vacancy % Rent Growth %

Rent growth remains strong, but is slowing

Note: Apartment criteria filtered as follows: multifamily property (secondary type is apartment), 50+ units, and a 3-star or greater CoStar rating Source: CoStar; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 14

NEW HOUSEHOLDS OUTPACE SF STARTS

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

Single-Family Housing Starts and Household Growth

Single-Family Housing Starts Increase in Households

Multifamily filling the gap; pent-up demand is likely growing

Note: Single-Family Housing Starts include single-family detached and single-family attached (townhomes) Source: Moody’s Analytics; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 15

NEW HOME SUPPLY ABOVE MEDIAN

2 4 6 8 10 12 14 Months Supply

New and Existing Home Months Supply of Housing (1999 - June 2017)

Existing Home Months Supply New Home Months Supply Existing Supply Historic Median New Home Months Supply Historic Median

Existing housing supply still below median level of inventory

Note: Home supply includes single-family detached, condo, and townhomes Source: National Association of Realtors (NAR); RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 16

STEADY INCREASE IN HOME SALES

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 New Home Sales Existing Home Sales

National Home Sales

Existing Home Sales (L) New Home Sales (R)

New home sales still significantly lag historical levels

Note: Monthly data are seasonally adjusted annual rates Source: U.S. Census Bureau; NAR; RCLCO Quarterly Chartbook

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 17

PRICING CONTINUES TO INCREASE

50 100 150 200 250 300 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000

Median Home Price and Case-Shiller 20-City Price Index (2000 – Q2 2017)

Median New Home Price Median Existing Home Prices Case-Shilller 20-City Index

New homes prices may be moderating as builders reach for the entry level

Source: U.S. Census; NAR; Standard & Poor’s; Federal Reserve Bank of St. Louis; RCLCO Quarterly Chartbook

LOW-DENSITY RENTAL HOUSING

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 19

SMALLER HOUSEHOLDS ON THE RISE

Smaller households in every age group

Source: U.S. Census Bureau 0.5 1 1.5 2 2.5 3 3.5 4 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 People per Household U.S. Households (in thousands)

U.S. Households by Size

1-2 person 3+ person People per household

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 20

“DELAYED ADULTHOOD”

23% 24% 25% 26% 27% 28% 29% 30% 31% 32%

% of Age Group Living with Parents

Ages 18-34

Drives delayed household formation

Source: U.S. Census Bureau 20 21 22 23 24 25 26 27 28 29 30 Age

Average Age of First Marriage

Men Women

Silent Generation starts getting married Baby Boomers start getting married Generation X starts getting married Millennials start getting married

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 21

DELAYED WEALTH-CREATION, ALSO

0.000 0.500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4 13:Q3 14:Q2 15:Q1 15:Q4 16:Q3 17:Q2

U.S. Non-Mortgage Household Debt (in trillions)

HE Revolving Auto Loan Credit Card Student Loan Other

“Can’t afford the downpayment” the leading reason to rent for all income groups

Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax; Demand Institute 0% 10% 20% 30% 40% 50% 60% Curently looking to buy Simply prefer to rent Plan on moving soon More convenient to rent Cheaper to rent than own Can't qualify for a mortgage Can't afford the downpayment

Reasons For Renting (By Income Tier)

<$40,000 $40,000-$100,000 $100,000+

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 22

HOUSING OWNERSHIP IS RELATIVELY EXPENSIVE

0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Home Price-to-Rent Ratio

Home Price to Rent Ratios

CoreLogic National HPI FHFA HPI (Purchase Only)

Even given very strong multifamily rent growth

Source: U.S. Census Bureau

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 23

HOMEOWNERSHIP RATE MAY HAVE STABILIZED

58.0 60.0 62.0 64.0 66.0 68.0 70.0

U.S. Homeownership Rate

But younger age groups may continue to lag other generations in becoming owners

Source: U.S. Census Bureau 39.1% 65.5% 75.2% 79.5% 78.7% 43.1% 69.7% 76.7% 80.6% 80.6% 34.7% 59.3% 70.1% 75.2% 79.3% 25 to 34 35 to 44 45 to 54 55 to 64 65+

Homeownership Rate by Age Cohort

4Q95 4Q05 4Q15

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 24

RENTERS COMPRISE ALL NET NEW GROWTH

Vast majority of household formation is among high income earners

Source: U.S. Census Bureau

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Households by Tenure (thou.)

Renter Owner 1,000 2,000 3,000 4,000 5,000 6,000 Renter Occupied (Total) Less than $50,000 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 $150,000 or more

Change in Number of Renter Households 2009-2015

79% 13% 6% 17% 32% 53%

• 3,000
• 2,000
• 1,000

1,000 2,000 3,000 Owner Occupied (Total) Less than $50,000 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 $150,000 or more

Change in Number of Owner Households 2009-2015

26%

• 1%
• 7%
• 8%
• 4%

7%

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 25

ACCELERATING TOWARD MIDDLE ADULTHOOD…

• 1.5%
• 1.0%
• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% Annual Change

Annual Growth Rate by Age Group

25-34 35-44 Forecast

2018 is the first year in which ages 35-44 growth exceeds ages 25-34 growth

Source: U.S. Census Bureau

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 26

RENTAL HOUSING “TAXONOMY”

Low-density products likely better serve 30+-something households

Source: RCLCO COMMUNITY TYPE DESCRIPTION DENSITY (DU/ACRE) BUILDING TYPES TYPICAL NEW COMMUNITY SIZE SETTING Large Apartment Community Apartment communities with 50+ units that

• ffer a variety of amenities including: a

swimming pool, fitness center, 24-hour maintenance, controlled access, etc. 50-300 High-rise, Mid-rise, Wrap, Mixed-Use Podium 200+ Units Urban / Suburban Mid-sized Apartment Community Apartment community ranging from 5-49

• units. Generally offer fewer amenities than

their larger counterparts 20-50 Wrap, Mixed-Use Podium, Garden Varies Urban / Suburban Small Multifamily Community Consists of multifamily buildings with two, three, or four attached units. Typically, units in a duplex and triplex are constructed side-by- side while those in a quadraplex are constructed back-to-back or two over two 20-30 Duplexes, Triplexes, Quadplexes Varies Urban / Suburban Single-Family Attached Community Consists of single-family residences built side- by-side in a row with at least one shared wall. Each home technically sits on a different plot

• f land

10-20 Townhomes 50 homes Urban / Suburban Single-Family Detached Community Consists of free-standing single-family residences 1-10 Single-Family Detached Homes 50 homes Suburban

Low-Density Multifamily

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 27

MOST RENTALS ARE LOW-DENSITY

SFD 12,467,134 30% SFA & 2-4 APT 10,555,852 25% 5-49 APT 13,463,526 32% 50+ APT 5,395,203 13%

Current Renter-Occupied Units by Product Type

More than half of the current rental housing stock is single-family or townhome

Source: American Community Survey 2014 1-Year Estimates

SFD, SFA & 2-4 APT 4,933,247 47% 5-49 APT 4,258,004 40% 50+ APT 1,316,768 13%

Renter-Occupied Units Built 1980 to 1999

SFD, SFA & 2-4 APT 2,795,194 47% 5-49 APT 2,079,323 35% 50+ APT 1,086,147 18%

Renter-Occupied Units Built 2000 or Later

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 28

DEMAND FOR RENTAL HOUSING BY AGE

• 40

40 80 120 160 25-34 35-44 45-54 55-64 65+

Average Annual Low-Density Rental Housing Demand Segmented by Age (000s, Through 2030)

Among renters, younger households significantly more likely to demand low-density

Source: RCLCO

• 40

40 80 120 160 25-34 35-44 45-54 55-64 65+

Average Annual Multifamily Demand Segmented by Age (000s, Through 2030)

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 29

DEMAND FOR LOW-DENSITY MODERATES

85% 88% 90% 93% 95% 98% 100% (200,000) (100,000)

• 100,000

200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

Historical and Projected Net Low-Density Rental Housing Demand, Supply, and Occupancy

Annual Net Demand Supply Additions Occupancy Rate

But supply goes negative

Source: RCLCO

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 30

GROWING PENT-UP DEMAND

(600,000) (400,000) (200,000)

• 200,000

400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (p) 2018 (p) 2019 (p)

Historical and Projected Low-Density Rental Housing Pent-Up Demand

Potential 1,000,000+ shortage by 2019

Source: RCLCO

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 31

INVESTORS HAVE STEPPED IN TO FILL THE GAP

Acquisitions are slowing, though, as home prices increase

Source: Amherst Capital $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000 $220,000 1,250 1,350 1,450 1,550 1,650 1,750 1,850 1,950

2016 Median Sale Price to Size (SF) Ratio Institutional Investors

Invitation Homes Colony Starwood Homes American Homes 4 Rent Progress Residential Tricon American Homes Main Street Renewal Gorelick Brothers Capital Alitsource Residential Conorex-Lucinda Cerberus Capital Management

High Yield High Rent Growth / Capital Appreciation Middle market

• 10,000

20,000 30,000 40,000 50,000 60,000 70,000 80,000 2011 2012 2013 2014 2015 2016

Institutional Acquisitions (units)

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 32

ADDITIONAL OPPORTUNITIES FOR INNOVATION

Purpose-built low-density rentals, wholesale purchasing from homebuilders, etc.

Source: NexMetro

WRAP-UP

Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 34

IMPLICATIONS AND QUESTIONS

► Tremendous housing demand in the next decade ► Housing demand is dynamic (always the case, but

more so, and more opportunity and sophistication to deliver according to it)

► Rental products should be drivers, not afterthoughts

» Do the economics work? » How should they be integrated into the rest of the community? » What’s the right capital structure?

► Lots of opportunities in the suburbs, but cookie-

cutter approach won’t work

» Need to respond (or create) specific suburban character » Opportunity to deliver to diverse audience » Can you find the right land?

AUSTIN LA ORLANDO DC

221 W 6th St Suite 2030 Austin, TX 78701 11601 Wilshire Blvd Suite 1650 Los Angeles, CA 90025 964 Lake Baldwin Ln Suite 100 Orlando, FL 32814 7200 Wisconsin Ave Suite 1110 Bethesda, MD 20814

Taylor Mammen Managing Director / Director of Institutional Advisory P: (310) 282-0437 E: TMAMMEN@RCLCO.COM W: RCLCO.COM