Matthews™ Fall/Winter 2019 Publication

T R E N D S & I N S I G H TS 5

63

Top 10 Trends In Commercial Real Estate

120

Multifamily Rent Growth

Healthcare Sale Leasebacks

Where are Rents Rising the Most in the U.S.?

Benefits to Unlocking Equity in Your Property

126

104

Redefining Culinary Expectations

The Expansion & Health of the Industrial Sector

How the Fast-Casual Sector is Dominating the Restaurant Industry

I N D U ST RY N E WS 58 Maintaining Liquidity The Evolution of the Capital Stack

40 Multifamily Construction Challenges What Constraints are Looming in the Market?

20 The Affordability Crisis How Rent Control is Making Waves in Multifamily

Matthews Real Estate Investment Services™ Disclaimer 2019 This information has been produced by Matthews™ solely for information purposes and the information contained has been obtained from public sources believed to be reliable, but we have not verified such information. No endorsement, guarantee, warranty or representation, expressed or implied, is made as to the accuracy or completeness of any information contained and Matthews™ shall not be liable to any reader or third party in any way. This information is not intended to be a complete description of the markets or developments to which it refers. All rights to the material are reserved and cannot be reproduced without prior written consent of Matthews™.

KYLE MATTHEWS Chairman & CEO RADDIE ZLATKOV

DUERK BREWER

Chief Financial & Strategy Officer

Chief Operating Officer

DAVID HARRINGTON

CHAD KURZ

EVP & Managing Director

SVP & National Director, STNL

ARON CLINE

CALVIN SHORT

SVP & Senior Director, STNL

SVP & Senior Director, STNL

BEN SNYDER

GARY CHOU

SVP & Senior Director, Shopping Centers

SVP & Senior Director, STNL

MICHAEL PAKRAVAN

DANIEL WITHERS

SVP & National Director, Retail Leasing

SVP & Senior Director Multifamily

JOSH BISHOP

BRADEN CROCKETT

VP & Director, STNL

VP & Director, STNL

ROB ZAHARIA

MICHAEL FLEMING

Vice President, Multifamily

Vice President, Retail Leasing

Alexander Harrold

Danny McQuaid

Andrew Fagundo

Elle Ebizadeh

Michael Chislock Michael Moreno

Andrew Gross

Eric Chen

Mitchell Glasson

Andrew Ivankovich

Hunter Hovland

Nabil Awada

Austin Graham

J. A. Charles Wright

Nick Dell

Austin Walsh

Jack Chang

Peter Kikis

Avery Barry

Jeffery Miller

Peter Smelko

Brianna Burgess

Jim Brandon

Rahul Chhajed

Caleb Barker

Joseph Nelson

Robert Goldberg

Christopher Laskero

Johnny Blue Craig

Robert Vasiliavitchious

Chuck Evans

Josue Posada

Ross Urbahns

Clay Smith

Karter Stone

Simon Assaf

Cody L. Schooley

Keegan Mulcahy

Taylor Avakian Tom Aragone

Connor Kerns

Kyle Mirrafati

Conrad Sarreal

Kyler Bean

Tyler Groth

Cortland Lioi

Luc Whitlock

Wesley Connolly

Craig Irvin

Michael Astorian

Woods Cook

Michael Bouras

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THE AFFORDABILTY CRISIS HOW RENT CONTROL IS MAKING WAVES IN MULTIFAMILY

BY TAYLOR AVA KIA N Formerly known as the War Emergency Tenant Protection Act, rent control was proposed during the World War II era to protect tenants from war-related housing shortages. These policies were first enacted in New York and Washington, D.C., as they experienced the most significant shortages. Fast forward to today, rent regulation has spread to California, Maryland, New Jersey, and most recently, Oregon.

THREE YEARS POST WWII, 2.5 MILLION NEW HOMES WERE BULIT ACROSS THE COUNTRY. Although there are no housing shortages today as severe as during World War II, the rent regulation policies have evolved with the intention to create more affordable housing options and simultaneously protect tenants who live on a fixed or low-income, such as the elderly. Rent control is a law implemented by the government in which they control and regulate the amount a landlord can charge a tenant for rental housing.

This policy prevents landlords from overcharging rent and protects tenants from eviction without just cause, such as late payments.

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W W W. M AT T H E W S . C O M

Over the past few years, we have seen news headlines declaring retail is dead, the impeding recession is affecting consumer spending, the e-commerce boom will make retail obsolete, and most recently, impending tariffs are obliterating retail sales and profits. It comes as no surprise that the retail industry is changing, especially with big-name brands, such as Sears, Macy’s and J.C. Penney, declaring bankruptcy, shuttering locations, and announcing closures. Despite this shift, consumer confidence and spending are elevated, and the overall retail property fundamentals remain healthy with continued improvement.

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As numerous big-box locations that were once the main traffic-generators to shopping centers remain empty, well-funded investors with a sharp eye for opportunity are taking advantage to reinvent the space. Several big-name businesses and investors are changing the retail game, for the better.

The following article will dive into what big-box tenants are transforming the shopping center space and how they are taking advantage of the opportunities currently available in the market.

RETAIL OUTLOOK

WHAT’S IN THE CARDS FOR SHOPPING CENTERS?

THE FUTURE OF THE SHOPPING CENTER INDUSTRY Sour ce: ICSC, Envision 2020

UNIFICATION

of brick-and-mortar & online retail UNPRECEDENTED INTIMACY

with the consumer

CONVERSION

of shopping centers into communities Mall environments that ENGAGE millennials

Rising wages, low unemployment, and increased consumer spending are all positively affecting the retail industry. The total disposable personal income of retail consumers in today’s market reached an all-time high revenue of $16.5 billion in June 2019. The National Retail Federation (NRF) also reported that U.S. retail sales are expected to rise between 3.8 percent and 4.4 percent to more than $3.8 trillion in 2019.

2019 holds many positive dynamics for the retail industry, particularly for those who are willing to adapt. For retailers and shopping malls that aren’t changing, it is assured that they will face headwinds. However, many investors are standing in the curtains, ready to sweep up the surrendered retail space for unique opportunities.

Based on those numbers, investors see an increase in retail investment opportunity. Investors are continuously finding ways to keep the sector alive, with new concepts and tenants filling out vacant space to include co-working space, boutique fitness studios, and even food halls.

Price trends, strong fundamentals, and lower interest rates all point to a brighter future, for some regions more than others. For example, Southern California is an especially prime market, where supply is constrained, and there is a lack of large-scale, new retail property development taking place due to heightened construction costs and prolonged entitlement processes.

AS OF AUGUST 2019, THE NATIONAL SHOPPING CENTER RETAIL MARKET’S VACANCY RATE

Along with the limited construction, space demand remains robust, and rents have reclaimed their pre-recession levels, thus inspiring investors to show increased interest in the opportunities these assets offer for current yield and appreciation.

stands at 7.2 percent with over 171 million square feet absorbed year-to-date

rental rates are $21.11 per square foot, according to CoStar data

The increased rental rate reflects the growth in demand for retail space, with heightened demand for grocery-anchored neighborhood community and strip centers. These tight market conditions increase the likelihood that fundamentals for existing shopping center inventory will continue to improve over the long-term.

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BIG-BOX IN THE NEWS As consumers start looking for experience, convenience, and a sense of community, there is a transformation in the retail sector well underway to include a blend of entertainment and one-ofa-kind services. Big-box tenants are utilizing new strategies to differentiate themselves in the retail transformation.

OMNI-CHANNEL RETAIL HAS COME TO FRUITION

In August 2019, Target’s stock spiked to a record 19%, with same-store sales rising 3.4% and online sales jumping 34%.

The Home Depot sales increase by 5.7% in Q1 2019, due to faster online delivery. The retailer also a B2B platform where professionals can manage their inventory online.

Walmart has contributed $1.2 billion to its e-commerce program and has rolled out grocery pick-up services to 140 stores.

Retailers no longer only have physical locations or online stores; they have a strategized physical retail location and a refined online presence that delivers a seamless shopping experience. These services include ordering online and pick-up in-store the same day and buying online with same-day shipping.

Once just a buzzword, omni-channel retail has become the number one way for retailers to stay relevant in the consumer marketplace.

Target and Walmart are two tenants that are firing on all cylinders and continue to defy conventional retail thinking to capitalize on the whole consumer experience. Target just cited a surge in sameday fulfillment as the main driving force behind sales growth, and Walmart has made numerous technical improvements to focus on the omnichannel shopper. These improvements include introducing cashier-less checkouts, automated store systems, and have recently equipped employees with an in-store app that allows customers to order and pay for items online in the physical store. Walmart is also seeing more customers place their grocery orders online during the day and then utilize the drive-thru pick-up for their items on the way home from work.

TOP RETAILERS RANKED BY OMNICHANNEL EXPERIENCE Source: Internet Retailer Research, 2019 Omnichannel Repor t

Walmart

159

Target

158.5

The Home Depot

155

Best Buy

143

Macy’s

140.5

Dick’s Sporting Goods

137 129.5

Kohl’s Nordstrom

123.5

Lowe’s

120

JC Penney

118

* Based on a 200 point ranking

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A NEW RETAIL MIX Although Nordstrom revenue slipped 5% in Q2 2019 to $3.87 billion, the profit for the quarter represented a positive yearover-year change of 13% to $141 million.

Kohl’s is underperforming on comparable store sales expectations, which is down 2.9% in Q2 2019. Net income for the quarter totaled more than 17% to $241 million.

It is a tough time for department stores, with age-old retailers like Macy’s and JCPenney closing locations, and upscale retailers trying to compete with discounters. Although Nordstrom sales have slowed, especially in their renowned shoe department and men’s suits, they have added to their retail mix. After closing some full-line stores in recent years, the retailer now operates more stores than in 2018, including 118 full-line stores, 250 Nordstrom Rack locations, six Trunk Club clubhouses, three Jeffrey boutiques, and three Nordstrom Local concepts. The new additions have been small, but they have provided a unique shopping and service experience.

NORDSTROM LOCAL STORES SERVICES

The retailer is also building its online strategy around a plan to locate available inventory that is closest to the customer and ships the item from that location.

Department discount store, Kohl’s is also cutting back its in-store merchandising, and real estate footprint to team up with grocers, gyms, and Amazon. Discount grocer, Aldi will be Kohl’s first partner to sublease space in its downsized stores.

This partnership will not only allow customers to buy milk and eggs and a pair of jeans, but will also allow the retailer to effectively use space and penetrate specific markets that they aren’t currently located in.

Announced earlier this year, Kohl’s will be leasing space next to its department stores to Planet Fitness in order to generate more traffic.

Additionally, Kohl’s has partnered with Amazon to sell Amazon products and accept Amazon returns to its stores. Kohl’s is making themselves more relevant by partnering with companies to provide a more suitable way for people to shop. These partnerships are pivotal indicators for Kohl’s stock.

KOHL’S NET SALES DOLLARS AND COMPARABLE SALES ($MILLIONS) Sour ce: Kohl’s Cor poration

$19,167 $19,036

Personalized Shopping Experience

Dry-Cleaning Services

1.7%

1.5%

$18,636

Pick-Up Items Ordered Online

Personal Stylist 2018

Barber Shop

Custom Alternations

2017

2016

(2.4%) 53 rd Week ($170 Million)

Net Sales ($Millions)

Change in Comparable Sales

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RETAILERS RIGHTSIZING & DOWNSIZING LOCATIONS Retailers are looking to right-size their operations to deal with the changing consumer shopping patterns. Walgreens, CVS, Target, and Walmart are prime examples of tenants who are building and introducing smaller stores or decreasing their portfolio size.

With more than 9,000 stores around the country, Walgreens announced that it was shuttering a couple hundred of them.

CVS Health has about 9,900 stores but will be curtailing plans to open new stores. The drugstore is also evaluating over 500 lease renewals.

Both CVS and Walgreens are closing less than three percent of their stores in an effort to seek new ways to drive shoppers to their stores. These include offering more health services, improved products, and even experiences. Walgreens recently stated that they anticipate minimal disruption to customers and patients and hope to save $1.5 billion in annual expenses in 2022.

Walgreens’ goal is to invest in partnerships and services for the future, focusing on more profitable stores that will provide long-term growth.

In the second quarter of 2019, CVS Pharmacy’s earnings beat Wall Street’s expectations, and the company raised its earnings forecast for the rest of the year. This growth was primarily fueled by its acquisition of health insurer Aetna. In the coming years, CVS Pharmacy is slowing their store expansions to remodel well-performing stores and focus on its HealthHUB Concept, a concierge service that offers expanded MinuteClinic services, pharmacy support, and more health and wellness products.

OTHER BIG-BOX TENANTS INCLUDE

Ikea, Barnes & Noble, and Nike are DOWNSIZING...

...while Walmart and Target are RIGHTSIZING.

Walmart is testing a small-format store concept by building a 3,000 square feet convenience store with fuel pumps in parking lots with 180,000 square feet or more. Target is building smaller and more streamlined urban-format stores to service those who do not live near their larger traditional Target stores.

REASONS TO DOWNSIZE

Increased cost of land

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Suitable, sizable land being more challenging to find

RETHINKING EXISTING PROPERTIES Unibail-Rodamco recently became the largest owner of shopping centers in the world, purchasing Westfield for $16 billion.

This is the largest property acquisition since 2013, bringing up the sale of investment malls by 155% year-over-year.

The breakup strategy is on the rise.

Investors are breaking up their $40 million to $200 million properties into smaller NNN boxes, pads, or anchor retail strips to receive high property prices.

The retail landscape is being rearranged as thousands of locations remain empty from stores downsizing, and bankruptcies from Toys “R” Us and Sears. Despite these closings, malls are welcoming these spaces as opportunities to replace anchor stores that weren’t attracting customers with more profitable tenants. By investing in higher growth retail as well as mixed-use projects, malls that already have high favorable demographics and high-quality locations are reactivating the underutilized space and parking lots. There is a new future for these malls and shopping centers, but achieving it requires investment and patience.

For those investors who are willing to wait to secure new tenants, we have seen a rise in demand for retail investment due to the limited supply.

AS IN VE STOR S RE THINK THE RE TAIL SPACE , WE HAVE SEE N THE RISE OF

T WO DIFFERE NT SE L L ING STR ATE GIE S :

1

There is a “battle royale” occurring between bigbox retailers who are coming up with new concepts to stay relevant and grow in a changing landscape.

With the increased growth in personalization and localization, each new strategic goal is to compete in a market that is primarily dominated by Amazon.

The bar is continuously raised around delivery windows, options, and customer experience.

Many investors have been raising concerns about investing in retail centers due to the everchanging world with retail continually being surrounded by “bad news,” especially in the mall space. However, we are seeing Class A malls, high-quality open-air centers, and outlet centers increasing in productivity. There is profitable retail in every market, and active tenants will always be attracted to the best centers in the market, particularly properties with continued fundamental improvements. Well located groceryanchored and shadow-anchored centers are also performing well and are highly desirable by investors. So long as investors continue to focus on shopping centers situated in dense and attractive locations, these will continue to be assets with the ability to scale and adapt if the center should lose existing tenants. Brick-and-mortar is here to stay; if it weren’t, Amazon wouldn’t have purchased the big-box retailer, Whole Foods.

For more information regarding the big-box trends in the market or if you are interested in finding out more about shopping center buying and selling strategies, please reach out to a Matthews™ specialist.

Breaking up of larger assets that have strong anchors or vacant boxes with tenants in tow into smaller individual properties.

By selling off parts of large centers into either NNN boxes or two to three tenant properties, cap rates are lower and will often yield a higher overall sale price.

2

Increase in retail sale leasebacks, for example, Sansome Pacific recently purchased 11 of Bass Pro Shops and Cabela’s stores.

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00111100101010100010111001101 01010010001010101000101001111 00101010100010111001101010100 10001010101000101001111001010 10100010111001101010100100010 10101000101001111001010101000 10111001101010100100010101010 00101001111001010101000101110 01101010100100010101010001010 01111001010101000101110011010 10100100010101010001010011101 THE EVOLUTION OF THE 00111100101010100010111001101 CAPITAL STACK 01010010001010101000101001111

BY KEVIN PUDER & BRIAN KREBS 00101010100010111001101010100 10001010101000101001111001010 10100010111001101010100100010 10101000101001111001010101000 10111001101010100100010101010 00101001111001010101000101110 01101010100100010101010001010 01111001010101000101110011010 10100100010101010001010011101

MAINTAINING

LIQUIDITY

What do lower interest rates mean for your investments?

For commercial real estate, a funds rate cut could mean additional market opportunities – and some risks. In July 2019, the Fed lowered the interest rate to 2.25 percent, just seven months after the rate increase to 2.5 percent.

Now, interest rates sit at a range of 1.75 to 2.0 percent.

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WHO IS THE FEDERAL RESERVE?

THE UNCERTAIN FUTURE

The Federal Reserve is the U.S. government’s central bank, and its funds rate is an overnight lending interest rate used as a benchmark to set rates for a variety of loans, including commercial real estate and business loans, and adjustablerate mortgages. Historically, the prime rate for commercial loans is three percentage points higher than the Fed funds interest rate.

While the Fed is guided by macro-goals of steady growth and low unemployment, developments in the U.S. and global economy are pointing toward potential cuts in the coming 12 months. The overall U.S. economy is slowing, with manufacturing, housing, and business investment down. U.S. manufacturing decreased 39.4 percent yearover-year as of July 2019, now at a three-year low. These downward figures were major factors in the Fed’s projection of 2.1 growth for the year after a 3.1 percent rate in Q1.

The decision to cut or raise the funds interest rate is based on the Fed’s mandate to maintain healthy economic growth, with a target of two to three percent gross domestic product (GDP) growth rate and a natural rate of unemployment of 4.7 to 5.8 percent. Its other policy mandate is to manage inflation as a way to stabilize pricing.

The Fed’s target core inflation rate is two percent.

IN JULY, FED OFFICIALS FORECASTED THAT 2019’S ANNUAL GROWTH RATE

WOULD AVERAGE 2.1 PERCENT

Global growth is slowing as well, with the World Bank projecting a forecast of 2.6 percent for 2019 and a modest 1/10 of a percent increase in 2020.

Economists point to declining rates of investment, which they attribute to uncertainties brought on by the Trump Administration’s high-tariff trade policies, Great Britain’s looming exit from the European Union, and structural misallocation problems in second- and third-world countries.

Investor skepticism is reflected in an inversion of yields in 3-month and 10-year U.S. Treasuries.

001111001010101000101110011010 001000101010100010100111100101 100010111001101010100100010101 001010011110010101010001011100 THE RATE CUT 101010010001010101000101001111 010101000101110011010101001000 010100010100111100101010100010 001101010100100010101010001010 110010101010001011100110101010 001010101000101001110101010100 100111100101010100010111001101 Looking to 2020, they predict an annual growth at 2.0 percent, an uptick from their 1.9 percent forecast in March 2019. The economy generally has been strong, growing at about a three percent pace both last year and in the first quarter, and unemployment rates are at a 50-year low.

The July cut from 2.5 percent to 2.25 percent was the first funds rate cut since December 2008, followed by another cut in September 2019 to a range of 1.75 to 2.0 percent, and the most recent cut occurred in October to a range of 1.75 to 1.5 percent. The Fed cut interest rates repeatedly from 2007 to 2008 to help the U.S. economy recover from the Great Recession. Starting in December 2015. the Fed gradually raised the rate to its December 2018 level of 2.5 percent, and the July cut represented an initial unwinding of those increases.

The Fed issued a statement after its July interest rate cut that acknowledged uncertainties remain.

Fed Chairman, Jerome Powell, described the cut as an insurance move. “We’re thinking of it as essentially in the nature of a mid-cycle adjustment to policy. It’s not the beginning of a long series of cuts,” Powell said. However, the Fed’s second meeting in September resulted in another rate cut. Powell further hinted at the idea of small cuts in the future, but only in response to a weakening economy to help prevent a recession.

“ALTHOUGH THE LABOR MARKET REMAINS STRONG, WITH HEALTHY JOB GROWTH AND THE UNEMPLOYMENT RATE NEAR LONG-TERM LOWS, THE FED’S CONCERNS ABOUT OUR ECONOMIC OUTLOOK AND THE LONG LAG TIME BETWEEN LOWERING RATES AND SEEING EFFECTS IN THE REAL ECONOMY WERE KEY DRIVERS OF THE DECISION.” – Danielle Hale, Realtor.com Chief Economist SOURCE: INMAN

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0011110010101010 0010111001101010 OPTIMISM IN THE MARKET CONCERNS 1001000101010100 0101001111001010 101000101110011 0101010010001010 101000101001101 0011110010101010 0110100100010111 0010111001101010 010100010100110 1001000101010100 1010010001010101 0101001111001010 101000101110011 0101010010001010 101000101001101 0110100100010111 010100010100110 1010010001010101 HISTORY OF FED FUND RATES A lower Fed funds rate translates into cheaper borrowing costs and lower cap rates which allow for more purchasing. And, dealmakers are finding there is plenty of capital available for property developments in attractive markets.

Lower Fed funds rates may also have a positive impact on international investment. Lower rates reduce upward pressure on cap rates and reduce the costs to foreign investors who hedge against U.S. dollar-based assets.

A Fed interest rate change of 25 or 50 basis points does not translate into dramatic savings; in fact, it translates to $2.50 per thousand dollars. As such, economists are not predicting a significant impact on the commercial real estate sector.

The reduction in rates does not easily translate into investor demand, and investor demand is what governs real estate values. International investments will likely be concentrated in specific U.S. market areas and property types.

Commercial real estate is, above all, a market, and cheaper borrowing costs might translate into price inflation. Already, U.S. commercial real estate prices are at record levels, up 111 percent since 2009. Commercial real estate industry economists are worried that the industry is moving into a bubble created by unnaturally low interest rates. They point to the mismatch between property valuations and rental revenues as an indicator that the industry is moving into bubble territory.

Recessions are part of the industry’s history.

As Fed rates have increased over the years, commercial property values have grown over the past two decades.

“COMBINED WITH THE RELATIVE ATTRACTIVENESS OF U.S.

REAL ESTATE, LOWER HEDGING COSTS SHOULD SUPPORT MORE

INTERNATIONAL CAPITAL FLOWS INTO U.S. PROPERTY MARKETS.” SOURCE: NATIONAL REAL ESTATE INVESTOR

SOURCE: THE NEW YORK TIMES, BUREAU OF LABOR STATISTICS, THEBALANCE.COM

G REAT REC ES S I O N : 2008 - 200 9

2008

Jan 22 3 . 5%

Mar 18

2 . 2 5%

Jan 30 3 .0%

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Apr 30 Oct 8 2 .0%

1 . 5%

Oct 29 1 .0%

Dec 16

0. 2 5%

2015 Dec 17

2017 Mar 16

0. 5%

1 .0%

2016

Dec 16

0.75%

PROFITABILITY

2019

2018

2017

2007

2006

2005

2004

2003

2002

2001

2000

1999

40

1998

50

2016

60

2015

70

2014

90 80

2013

Index Value

110 100

2012

120

2011

130

2010

140

2009

SOURCE: GREEN STREET ADVISORS

2008

U.S. COMMERCIAL PROPERTY PRICE INDEX

0011110010101010 0010111001101010 1001000101010100 0101001111001010 101000101110011 0101010010001010 101000101001101 0011110010101010 0110100100010111 0010111001101010 0101 0010100110 KEVIN0 PUDER 1001000101010100 1010010001010101 0101001111001010 BRIAN KREBS 101000101110011 0101010010001010 101000101001101 0110100100010111 010100010100110 1010010001010101 SENIOR ASSOCIATE

The reduction in the U.S. Federal Reserve fund interest rate will have its most significant impact in specific markets and with specialty property types.

Finding the best opportunities for investment requires detailed knowledge of markets all over the U.S., with deep expertise in assessing valuations and deal structuring.

kevin.puder@barringtoncapcorp.com (562) 841-1789

MANAGING DIRECTOR

brian.krebs@barringtoncapcorp.com (949) 777-5988

For more information on how lowered interest rates could affect your property, or if you’re in the market looking to refinance or make a new acquisition, contact a Barrington specialized agent!

2017 June 15 Dec 14 1 . 2 5%

2019 July 31

2 . 2 5%

1 . 5%

2018

Mar 22

1 .75%

June 14 Sept 27 2 .0%

2 . 2 5%

Sept 18

Oct 30

1 .75 - 2 .0% 1 . 5 -1 .75%

Dec 19 2 . 5%

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IMPACT, AMBITION, AND COMPLEXITY “Do or do not, there is no try. At no point have we ever considered failure as an option.

Carrying these beliefs forward every day has led to the creation of a fundamentally different real estate investment services company with our culture as the cornerstone.

At Matthews, we focus on building long-term relationships and generating superior results.

Our unique platform has already begun to transform the industry, shift the atmosphere of the sales floor, and redefine the client’s expectations in a brokerage company.

This is Matthews.”

- DAVID HARRINGTON EVP & MANAGING DIRECTOR

W W W. M AT T H E W S . C O M

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Multifamily Report

The Current State of U.S. Markets in 2019

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Overall, multifamily continues to excel amongst

With a 46-22 vote, AB 1482 passed on September

asset classes and is driven operationally by

11th, 2019 in an attempt to protect tenants from rent

renter demand, which is fueled by a robust job

gouging. The bill prevents landlords from increasing

market. Certain submarket rents have softened

rents more than five percent, with inflation, annually.

due to recent new supply that still needs to be

Additionally, unless there is just cause, tenants

absorbed. The good news is, while the pipeline

cannot be evicted from their apartment unit.

of new units thins out, these areas can look to

With California suffering a homelessness crisis,

build on the solid employment fundamentals and

policymakers found that rent control served as the

realize future rent growth. New permitting and

best solution. The City of Los Angeles metro and

construction across the country are on a healthy

San Francisco who were already protected by rent

path. It is important to note that the majority of

regulation laws will now enforce these new laws.

the areas with weaker rents have been in the core Class A space. Class C apartment stock has been

So, while one could argue that with each passing

the most occupied in the country, which gives

day, we are closer to the immediate correction or

credence to a long runway for rent growth in that

recession, it would stand to reason that today, we

sector and opportunities for investors to add value.

can analyze the landscape of investment and still find solid opportunities with fundamentals that

On the transaction front, attractive interest rates

will stand the test of time. Now is a great time to

keep the cost of capital favorable and spurs a

be a buyer given the relatively healthy economic

mindset amongst investors to lock-in long-term

environment and its application to the multifamily

fixed-rate debt. In November of 2018, the ten-year

operational market. The same can be said for

Treasury topped three percent, which offered

sellers as low cap rates can be achieved across all

investors the chance to evaluate where the market

markets and there are possibilities to buy back into

would go from there. Ten months later, the ten-year

the healthy market. 2019 is met with stability and

Treasury is trading at well over 100 basis points

its share of resistance. 2020 is a different story as

lower, which was certainly unexpected a year ago.

the market will take a hard look at how the coming

While the deluge of domestic economic data affects

election will impact investment decisions. Monetary

interest rates, the global economic concerns ranging

policy, the regulatory environment, and plans for

from China to The EU have helped keep Treasury

economic growth will all be directly affected by

yields low. In addition to low interest rates, capital is

our governing bodies, which will play a huge role in

looking for a solution with goals and objectives that

determining the fate of our current real estate cycle.

are served by multifamily investment. While the cap rate spread between core, core-plus and value-add

The following report reviews the top cities

has compressed over the last 18 to 24 months, there

in California, Georgia, and Texas based on

still remains significant interest in all categories in

transaction volume, total dollar volume, average

primary, secondary, and even tertiary markets.

price per unit and square foot, and average cap rates from 2018 to 2019.

In recent years, there have been conversations about the resolution to the deep cyclical real estate market in the U.S. If the past has taught us anything, it is that the future cannot always be predicted.

In hopes to rescue California from its affordable

David Harrington

EVP & Managing Director

housing epidemic, the state government turns to rent regulation policies. In September of 2019, the

Disclaimer: All data sourced from CoStar

California Assembly passed Assembly Bill 1482 (AB 1482), enacting statewide rent control.

MATTHEWS™ | 73

Hollywoo d Los Angeles County

CONTACT INFO Luc Whitlock

luc.whitlock@matthews.com (310) 844-9371 Disclaimer: Now subject to AB 1482

NUMBER OF TRANSACTIONS The number of transactions in the Hollywood market has been sporadic from Q1 2018 to Q2 2019. The most prominent irregularity being Q2 and Q1 2018 where only six non-rent controlled buildings were sold. During this time, Proposition 10 was announced which if passed, would have removed current rent control regulations, allowing the state and city governments to enact rent control.

Q4 2018 saw lower transactional volume than Q3 2018 which is an anomaly in the market, a potential result of the interest rate scares throughout 2018.

74 | FALL/WINTER 2019

45 35 25 15 05

Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

TOTAL DOLLAR VOLUME

$200M $160M

In comparison to non-rent controlled buildings, the total volume

of rent controlled buildings from Q1 2018 to Q2 2019 were relatively stable, despite increases in Q2 2018 and Q2 2019 due to the sale of

$120M $80M

larger buildings. Non-rent controlled buildings experienced more

volatile year-over-year total dollar volume calculations. This is due to new construction, mixed-use, and luxury buildings being delivered

$40M

to the market in Q3 and Q4 2018. Compare that to the eight non-rent controlled transactions in Q2 2019 where the total dollar volume was just $64 million.

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT Due primarily to new developments in the market, the average price per unit of rent controlled buildings in Hollywood in 2018 and 2019 were all over $200,000/unit. The average price per square foot over the past five quarters for rent controlled buildings was $365.02/sqft. The average price per square foot for non-rent controlled buildings increased by $75.29/sqft from Q1

$500,000

Avg PPSF

Avg PPU

2018 to Q2 2019. Non-rent controlled units averaged $455,365/unit in 2018, and $449,788/unit in 2019.

$400,000 $300,000 $200,000 Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

$600 $500 $400 $300

Q2 ‘19

Rent Controlled

AVERAGE CAP RATE The average cap rate of rent controlled buildings in Q1 2018 was 3.82%, and 4.26% in Q2 2019. These numbers indicate the beginning stage of cap rate increases for rent controlled properties in California. The biggest surprise was Q3 2018 where the average cap rate was 4.12%, a result of a large number of vacant buildings trading. For non-rent controlled buildings, the cap rate increased dramatically throughout Q2 2018 to Q2 2019 from 3.72% in Q2 2018 to 4.54% in Q2 2019 to 4.21%, largely due to the lack of new developments.

AVERAGE GRM

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

5.0% 4.5% 4.0% 3.5%

Q1 ‘18

Q2 ‘18 Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

16.50 16.00

The average GRM of rent controlled buildings has decreased by 1.26 basis points from an average GRM of 15.69 in Q2 2018 to an average GRM of 14.43 in Q2 2019. The average GRM of non-rent controlled buildings in Q2 2019 is at 5.22. A lot of deals are becoming harder to pencil out for investors and are consequently seeing downward pressure on the average GRMs of buildings being traded.

15.50 15.00 14.50 Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

FUTURE OUTLOOK The fundamentals of Hollywood multifamily are still very strong. Interest rates are at a historical low, and if brokers properly manage seller expectations, deals can be made. Hollywood has seen 438 units delivered along with 279 units absorbed over the course of the past 12 months, and there are currently 2,800 units under construction.

MATTHEWS™ | 75

Koreatown Los Angeles County

CONTACT INFO Taylor Avakian

taylor.avakian@matthews.com (310) 919-5763 Disclaimer: Now subject to AB 1482

NUMBER OF TRANSACTIONS Transaction volume in Koreatown during 2018 was stable and consistent with the growing nature of the market at the time with 154 transactions total. Compared to the few transactions in Q2 2019, there is a slowdown in investor transactions. This could be attributed to investors waiting for the market to decline even further prior to jumping on better deals.

76 | FALL/WINTER 2019

50 40 30 20 10 Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

TOTAL DOLLAR VOLUME

$200M $150M $100M

The total dollar volume in 2018 averaged $52 million compared

$50M

to the Q1 2019 volume of $49 million. This decline could be attributed to a shift in the market’s perspective of future

prices or waiting for the economy to fall to capitalize on an

Q1 ‘18

opportunity. Q2 2019 total dollar volume averaged $76 million.

Q2 ‘18

Q3 ‘18 Q4 ‘18

Non-Rent Controlled

AVERAGE PRICE PER UNIT

Q1 ‘19

Q2 ‘19

Rent Controlled

$400,000 $300,000

The average price per unit in 2018 was $223,210/unit for rent

controlled assets and $343,529/unit for non-rent controlled assets.

Thus far, 2019 numbers are $204,024/unit, and $262,449/unit for

$200,000 $100,000

rent controlled and non-rent controlled assets, respectively. The

closing of the price per unit gap between rent controlled and nonrent controlled assets in 2019 could be attributed to the ongoing

Q1 ‘18

uncertainty of rent control in the greater Los Angeles area.

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

AVERAGE PRICE PER SQUARE FOOT

Q1 ‘19

Q2 ‘19

Rent Controlled

$500 $400

The average price per square foot for rent controlled assets in 2018 was $296.91/sqft while non-rent controlled was $441.12/sqft. The

$300 $200

average in 2019 for rent controlled properties is $270.24/sqft and $305.45/sqft for non-rent controlled. This shift in pricing is a good sign that there are plenty of opportunities for investors to maximize their property values in the current market.

$100 Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

AVERAGE CAP RATE & GRM The average cap rate in 2018 was 4.18% for rent controlled assets and 3.55% for non-rent controlled assets. In Q2 2019 the cap rate was 3.96% and 4.00%, for rent controlled and non-rent controlled assets, respectively. The increase in pricing can be seen

4.5%

Avg GRM

Avg CAP

as interest rates continue to climb and the Fed shifts to cool a blistering economy. The average GRM in 2018 was 14.37, and 18.39 for rent control and non-rent control. This data suggests that even though cap rates are rising, values remain stable. This offers investors the opportunity to maximize the appreciation of their assets over the past decade and capitalize at this point in the market.

4.0% 3.5% 3.0% Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

20.00 15.00 10.00 5.00

Q2 ‘19

Rent Controlled

Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

FUTURE OUTLOOK It seems like the economy is headed in a slow decline as the most prolonged period of economic growth comes to an end.

However, real estate is generally a lagging indicator of economic direction. This points to an excellent environment for real estate investment for another 12 to 18 months. 223 units have been delivered in the last 12 months while 526 units were absorbed. 1,900 units are currently under construction which are expected to complete before 2020. 1,000 of these units are among the concentrated developments along Wilshire Blvd.

MATTHEWS™ | 77

g n o L h c a Be Los Angeles County

CONTACT INFO

Jim Brandon

jim.brandon@matthews.com (562) 472-1499

NUMBER OF TRANSACTIONS Transaction volume throughout 2018 started strong with 90 transactions in Q1, but dropped in Q1 2019 to 80 transactions due to the de-emphasized concern in rent control regulations. As 2019 begins a non-election year, many owners have held off in search of a further peak in the market; a sentiment that may continue until 2020, when voting begins. However, such a position could change quickly as the city moves towards implementing a tenant relocation assistance ordinance at the owners’ expense.

78 | FALL/WINTER 2019

Hunter Hovland

hunter.hovland@matthews.com (310) 295-4378

120 110 100 90 80 70 60

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$350M

TOTAL DOLLAR VOLUME

$300M $250M

Similar to the drop in transactions, the dollar volume reduced in 2019. Q3 2019 has the highest average transaction size out of the five quarters. This may be indicative of larger deals

$200M $150M

trading. The average number of units sold was 21, which

$100M

reflects impressively on the market given the significant jump in just a short amount of time. In comparison, the average

$50M

transaction size of the previous quarter was only $3.0 million.

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT The average price per square foot experienced fluctuations throughout 2018 continuing into 2019, and the metric reached

close to $381/sqft for the first time in Q1 2019. Beyond price increases across the board, there continues to be a competitive market for buildings with studio units, which is common in older buildings throughout Long Beach. These apartments have comparable rents even with less square footage. As a result, buyers can further maximize their return on investment. $400

Avg PPSF

Avg PPU

$300,000 $250,000 $200,000

$350 $300 $250 $200 $150

$150,000

$100 Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q1 ‘18

Q2 ‘19

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE CAP RATE & GRM The cap rates dropped year-over-year with an 11 basis point difference that is notable in the context of prices rising. While rents have steadily risen, sale prices have increased at a greater rate. The average cap rate in Long Beach for Q2 2019 is at

4.5%

Avg GRM

Avg CAP

4.49%, with an average GRM of 14.00. The average GRM raised year-over-year by 0.72 points. This is a result of regular price and rent increases throughout the city.

3.5% 2.5% 1.5% Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

20.00 15.00 10.00 5.00

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

FUTURE OUTLOOK It was originally expected that the market would hold and finish strong in 2019 as investors shy away from rent-controlled Los Angeles. However, the political climate could upend the market overnight, as the City of Long Beach implements their tenant relocation assistance ordinance, and the California State Assembly considers statewide rent control and just cause eviction legislation. Given the sizeable inventory of dated buildings across Long Beach, many owners are also reconsidering their options as their investments will soon be over 100 years old. Long Beach has been a value investor’s market rather than a builder’s market which is reflected in the activity over the past 12 months - 317 units delivered and 97 units absorbed. The Downtown Plan has concentrated all development efforts in and around Downtown Long Beach. | 79 MATTHEWS™

e g n a r O County CONTACT INFO Michael Bouras

michael.bouras@matthews.com (949) 662-2252

NUMBER OF TRANSACTIONS Orange County remains one of the healthiest multifamily markets in Southern California with a total of 424 transactions in 2018, averaging 106 transactions per quarter.

The number of transactions peaked in Q3 2018 with a total of 119. 2019 has been consistent with this trend with 111 transactions in Q1 2019, and 119 transactions in Q2 2019.

80 | FALL/WINTER 2019

120 115 110 105 100

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

TOTAL DOLLAR VOLUME

$600M

The total dollar volume in 2018 fell south of $2 billion. This number was primarily affected by the sale of a few luxury apartment communities accounting for 30 percent of total dollar volume. Q3 2018 witnessed a drop in total dollar volume. However, Q4 2018 recovered with

$500M $400M $300M

$566 million. The momentum has not carried into 2019, with Q1 2019 finishing at $237 million and $376 million in Q2.

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT In 2018, multifamily properties in Orange County came in at a very healthy average of $338,332/unit. This number is supported by the sale of coastal multifamily assets bringing up the average tremendously. Q2 2019 averaged $344,362/unit. Orange County averaged $361.62/sqft in 2018. The market continues to benefit from this traction in 2019 with Q2 at $351.57/sqft.

Avg PPSF

Avg PPU

$350,000 $300,000 $250,000 $200,000

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

$420 $400 $380 $360 $340 $320 $300 Q1 ‘18

Q2 ‘19

AVERAGE CAP RATE Cap rates saw a downwards trend from Q1 to Q4 2018 starting at 4.13% and ending the year at an average of 3.98%. The decrease

directly correlated with the total number of transactions. Recovering from Q1 2019 with a 4.22% cap rate, Q2 2019 has decreased to 4.05%.

This was a good indicator of investors paying more aggressive cap rates as inventory decreased, chasing long-term rental upside

The average GRM for multifamily assets in 2018 was 16.65. Coastal market transactions also brought the average up with several deals closing at above 20 GRM. On the contrary, Q1 2018 and Q1 2019 saw the lowest GRM’s averaging 15.9 and 14.32, respectively. This is largely due to larger transactions closing in lessor submarkets.

With Anaheim primarily consisting of older inventory and blue collar workers, you will find the most affordable rents in the county at 12.5% below the metro average. The average GRM picked back up to 15.55 in Q2 2019.

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

4.20% 4.10% 4.00% 3.90%

potential, typically involving property enhancement by building curb appeal and interior upgrades.

AVERAGE GRM

Q2 ‘18

17.50 16.50 15.50 14.50

FUTURE OUTLOOK Despite the decrease in volatility, property values should increase by approximately two to five percent annually. With Anaheim growing 3.5% over the last year and offering $250/month less than the metro average, landlords have the flexibility to steadily increase rents and still remain affordable. Areas close to the airport and Anaheim are the focal point of development. In the past 12 months, 1,694 units have been delivered and 2,028 units absorbed.

MATTHEWS™ | 81

o d n a n r e F n a S y e ll a V Los Angeles County

CONTACT INFO Daniel Withers

daniel.withers@matthews.com (818) 923-6107 Disclaimer: Now subject to AB 1482

NUMBER OF TRANSACTIONS The San Fernando Valley remains one of the most active submarkets in Los Angeles. In 2018, there was an average of 81 transactions per quarter. Rent controlled transactions peaked in Q2 2018 with 80 transactions, and non-rent controlled assets performed well in Q1 2019 with 28 transactions. The majority of sales were rent controlled multifamily properties due to the amount of inventory in the submarket.

82 | FALL/WINTER 2019

75 60 45 30 15

Q1 ‘18

Q2 ‘18

Q13 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

TOTAL DOLLAR VOLUME

$500M

The San Fernando Valley had $2.09 billion in transaction volume occur between Q1 2018 and Q2 2019. Each quarter, the total dollar volume was consistently higher in non-rent controlled assets despite

$400M $300M $200M $100M

completing fewer transactions, except Q2 in 2018 and 2019. Rent

controlled dollar volume remained much more consistent throughout 2018. Q2 2019 is weak in comparison to the number of transactions

Q1 ‘18

completed year-to-date.

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT Rent controlled properties slightly fluctuated over the year, with a high in Q1 2018 of $250,929/unit. The average for this product type is $208,422/unit The average for non-rent controlled assets is $305,341/unit. Rent controlled properties started strong in 2018 at $289.66/sqft, dipping mid-year and bouncing back to $273.08/sqft at the end of 2018. Non-rent controlled assets in Q4 2018 closed at a high of $38.32/sqft. Q2 2019 is consistent with Q2 2018 data for non -ent controlled assets at $300.16/sqft. In

$350,000

Avg PPSF

Avg PPU

comparison, rent controlled assets are about the same with an average of $296.13/sqft in Q2 2019.

$300,000 $250,000 $200,000 Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

$400 $350 $300 $250

Q2 ‘19

Rent Controlled

AVERAGE CAP RATE The San Fernando Valley cap rates are low overall but have been trending up on rent controlled assets each quarter beginning in Q1 2018. This has resulted in an increase from Q1 2018 to Q2 2019. Cap rates on non-rent controlled properties remain compressed given the competitive landscape and aggressive pricing in the market, averaging 4.10% in 2018.

AVERAGE GRM

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

4.50% 4.25% 4.00% 3.75% Q1 ‘18

Q2 ‘18 Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

17.00 16.00

The GRM on rent controlled assets has been consistent, ranging from 14.40 in Q2 2018 to 13.37 in Q2 2019. The reason for the consistency is attributed to the fact that gross income can only increase by either a fixed amount or if the tenant vacates. The GRM for non-rent controlled assets had a more considerable margin with a high in Q3 2018 at 16.77, and a low in Q2 2019 of 14.05, reflecting high rents in the market.

15.00 14.00 13.00 Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

FUTURE OUTLOOK In 2019, we predict there will be fewer transactions than in the previous year. Despite the slowdown in activity, property values should increase by roughly two to five percent year-over-year with market supply as one of the main drivers. The supply surge in the late 2000s has delivered a high percentage of modern inventory, creating a slow-down in construction over the past 12 months, in which 0 units were delivered and 23 units absorbed. The high amount of transactions will continue to take place from legacy and baby boomer owners that are looking to reposition their portfolio into a less management intensive opportunity that provides a higher yield. As one of the smallest submarkets in Los Angeles combined with zoning and height restrictions, San Fernando Valley primarily consists of low-rise apartments.

MATTHEWS™ | 83

y a B South Los Angeles County

CONTACT INFO Nabil Awada

nabil.awada@matthews.com (310) 844-9362

NUMBER OF TRANSACTIONS The total number of multifamily transactions of five units or more in the South Bay region of Los Angeles for 2018 stayed consistent with an average of 69 transactions, while Q3 had a slight increase to 102 transactions. With a statewide proposition for rent control on the ballot, we saw nearly a 46% increase in transactions from quarter to quarter into the South Bay region, despite having no form of rent control. Around the election in Q4 2018, we’ve seen a regression toward the mean.

84 | FALL/WINTER 2019

100 90 80 70 60 50

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

TOTAL DOLLAR VOLUME

$260M $220M

Dollar volume from Q1 to Q2 2018 was reduced by nearly 60%

$180M

but increased in transactions. This shows that there were more transactions with lower-priced properties across the two quarters

$140M $100M

in 2018. From Q2 to Q3 2018, dollar volume spiked by nearly 130%, a

$60M

reflection of the number of transactions. Q3 to Q4 2018 experienced a 47% drop in dollar volume around election time. Q1 and Q2 2019

$20M

had dropped significantly in dollar volume compared to Q1 and

Q1 ‘18

Q2 2018, attributing to a lack of inventory and patient buyers.

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT The 2018 average came in at $302,243/unit. This was brought in by a lower trending Q3 2018 at $272,911/unit and a higher

trending Q4 2018 at $316,491/unit. The average cost per square foot was down 23% in Q2 2018. We’re seeing the average price rise again so far in 2019, with Q2 2019 at $413.52/sqft.

Avg PPSF

Avg PPU

$350,000 $300,000 $250,000 $200,000

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

$420 $400 $380 $360 $340 $320 $300 Q1 ‘18

Q2 ‘19

AVERAGE CAP RATE In 2018, cap rates consistently increased through Q3 by nearly 8% per quarter. This can be attributed to a growing volume of deals over the

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

4.50% 4.00%

three quarters. A 12% reduction formed in Q3 to Q4 2018 which can be credited to the decrease in deal volume. The smaller deal size attracts a larger buyer pool, and this added competition creates higher pricing and lower cap rates. We’ve seen an increase in cap rates, with a dip in

3.50% 3.00%

Q4 2018 to 3.64%.

AVERAGE GRM

20.00

The average GRM for 2018 was 17.15. From Q1 to Q2 2018, there was an 8.5% increase in the GRM, only to drop by 16% from Q2 to Q3 2018. We then saw a rise of 23% from Q3 to Q4 2018 and another 19% drop going into Q1 2019. The rise in GRM is in part due to overall deal volume and buyers either competing for inventory or pushing back on pricing.

18.00 16.00 14.00

FUTURE OUTLOOK As we continue to experience the most prolonged period of economic growth since the Great Recession, the South Bay real estate market exceeds expectations in terms of pricing metrics. While there is demand for more units, the community and politics will not allow for more development, even though 85% of the existing inventory is over 20 years old. We can see this isn’t expected to change as the past 12 months has only delivered 146 units and absorbed 25 units. While the economy may be starting to lose steam, the real estate cycle may be overdue for a downturn.

MATTHEWS™ | 85

s e i t i Tri-C Burbank | Glendale | Pasadena Los Angeles County

CONTACT INFO Michael Astorian

michael.astorian@matthews.com (818) 923-6123

NUMBER OF TRANSACTIONS Transactions throughout 2018 remained steady from quarter to quarter in the Tri-City area, and most of the activity during that time involved the sale of dated buildings. However, we saw an increase in younger properties sell in 2018 compared to 2017. Thus far, we are experiencing a decrease in transactions with Q2 2019 at 55 transactions.

86 | FALL/WINTER 2019

70 65 60 55 50 45

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

TOTAL DOLLAR VOLUME

$250M $200M

Total dollar volume was strong throughout 2018 with the

highest being Q2 2018 at $258 million, and decreasing through the end of the year. Q4 2018 saw an increase in more

$150M

substantial deals closing, potentially due to the shift in market

$100M

sentiment because of California politics, such as Proposition 10. We’ve seen a slowdown thus far in 2019 with Q1 2019 at $76.4 million in total dollar volume sold, but increased to $156.6

Q1 ‘18

million.

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT The average price per unit in 2018 and thus far in 2019 averaged above $300,000/unit except for a dip in Q1 2019. Overall, prices remained high throughout 2018, and averages remained consistent by the newer construction apartment buildings that sold in these areas. Price per square foot was the most sporatic in the Tri-Cities market. Q1 2018 averaged $394/sqft, Q2 averaged $408/sqft, Q3 averaged $516.46/sqft, and Q4 fell to $354/sqft. In Q2 2019, we saw a spike to $378.82/sqft, a direct result of selling older properties with fewer units.

$600 $550

$350,000

Avg PPSF

Avg PPU

$400,000

$300,000 $250,000

$500 $450 $400 $350 $300

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q1 ‘18

Q2 ‘19

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE CAP RATE & GRM The average cap rates increased after Q1 2018 but decreased towards the end of Q3 2018, to 3.81% in Q4 2018. As the market begins to soften, we see the repercussions in Q2 2019 as an average cap rate of nearly 4.00% has been recorded thus far,

4.00%

Avg GRM

Avg CAP

which was unheard of a year ago in this market. The GRM metric seems to follow the cap rate metric, with a spike in Q1 and Q3 2018 as properties with lower rents were selling with meager operating expenses.

3.90% 3.80%

20.00 15.00 10.00 5.00

3.70%

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

FUTURE OUTLOOK In the last 12 months, Tri-Cities experienced 894 units absorbed and 1,384 units delivered while, 777 units are under way.

We predict 2019 will have fewer transactions than in the previous year, along with a softening in values. The market has seen a nine or 10-year bullish market, and it seems the investment community is waiting for consolidation. Typically, these cycles come along every seven years, and when looking at this metric, the Tri-Cities market is long overdue for a softening.

Fundamentals remain strong in the Los Angeles metro market; suitable for owners and these types of investments.

MATTHEWS™ | 87

Ventura County CONTACT INFO Elle Ebizadeh

elle.ebizadeh@matthews.com (805) 823-0958

FUTURE OUTLOOK In 2019, Ventura County is expected to is expected to increase in the total number of transactions from last year, as new developments are brought to the market and cap rates remaining consistent or slightly higher. Throughout the past 12 months, 150 units were delivered with 208 units absorbed and 300 units expected to complete before 2020.

88 | FALL/WINTER 2019

NUMBER OF TRANSACTIONS & TOTAL DOLLAR VOLUME All multifamily transactions of five or more units in Ventura County from Q1 2018 to Q2 2019 remained within the same range, with Q1 2018 experiencing the least amount of transactions. There was an average of 11 transactions in each quarter in 2018 and 2019. In 2018, Ventura County had over $480 million in transaction volume. The first two quarters had a higher dollar

volume due to 100+ unit transactions occurring in the market. The average dollar volume in Q1 and Q2 2019 was around $30

Total Dollar Volume

# of Transactions

million which seems weak compared to 2018; however, this is because Q1 2018 experienced low-count unit sales, with the largest being 35 units.

16 13 10 7

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

$200M $150M $100M $50M

Q1 ‘18

Q2 ‘19

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FOOT The price per unit in Ventura County changed each quarter of 2018 with a high in Q1 2018 of $322,306/unit and low in Q4 2018 of $207,409/unit. However, Q2 2019 increased to $251,548/unit. At the start of 2018, the price per square foot was $333.87/sqft with

$450,000

$340

$350,000

$300

$320

Avg PPSF

Avg PPU

a small decrease in Q2 2018 to $319.68/sqft, and dipping to $253.86/sqft in Q4 2018. While the price per square foot decreased from Q1 to Q4 2018, 2019 is gaining traction with Q1 2019 at $285.85/sqft and Q2 2019 at $266.46/sqft.

$250,000 $150,000

$280 $260 $240 $220

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q1 ‘18

Q2 ‘19

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

AVERAGE CAP RATE & GRM Ventura County cap rates fluctuated throughout 2018, ending the year with a 4.71% cap rate. So far, 2019 cap rates have been relatively stable at 4.74% in Q1 and 4.66% in Q2. The GRM in Q1 2018 was at 17.17 then decreased to 13.09 in Q4. The GRM in Q2 2019 is at 14.17.

Avg GRM

Avg CAP

5.50% 5.00% 4.50%

20.00 17.00 14.00 11.00

4.00%

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

MATTHEWS™ | 89

e d i s st We Los Angeles County

CONTACT INFO

NUMBER OF TRANSACTIONS & TOTAL DOLLAR VOLUME In 2018, the transaction volume for both rent controlled and non-rent controlled assets totaled 381 transactions, compared to the 157 transactions sold in 2019 thus far. This drop in transaction volume can be attributed to the slow down and uncertainty happening in the market. 2019 is shaping to reach a lower transaction volume as investors become more precautious while we reach the end of one of the strongest and longest cycles in multifamily since pre-recession. The total dollar volume in Q1 2018 was approximately $212 million for both rent and non-rent controlled buildings. Q1 2019 experienced a slight in dollar 2019 volume of $191 million.

90decrease | FALL/WINTER

Dollar Volume

Disclaimer: Now subject to AB 1482

# of Transactions

Kyle Mirrafati

kyle.mirrafati@matthews.com (310) 295-4269

100 80 60 40 20

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$180M $140M $100M $60M $20M

Non-Rent Controlled

Rent Controlled

AVERAGE PRICE PER UNIT The average price per unit for rent controlled units in Q1 2018 was $342,339/ unit compared to $377,865/unit in Q1 2019. This significant drop in 2018 can be attributed to the difficulties and costs of tenant buyouts as buyers are not willing to pay the premium for these assets. The average price per

unit for non-rent controlled assets in Q1 2018 was $535,388/unit compared to $667,882/unit in Q1 2019. This enormous discrepancy in non-rent

$700,000 $600,000 $500,000 $400,000 $300,000

controlled assets is because of the new high-end multifamily construction coming to the market. Q2 2019 is off to strong start with $514,943.50/unit.

AVERAGE PRICE PER SQUARE FOOT In 2018, the average price per square foot for rent controlled properties

averaged $432.61/sqft, with its lowest point being Q1 2018. We saw gradual increases throughout 2018, ending the year at $453.69/sqft. The average price per square foot increased to $467.68/sqft so far in 2019. As a more desired product, non-rent controlled properties are performing as expected in a growing rental market with Q2 2018 at $503.60/sqft and

Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19

Non-Rent Controlled

The Westside cap rates have always been lower than other submarkets in Los Angeles because of the desired location and the limited number

of transactions. However, the limited data does not give an accurate portrayal of the actual cap rates. Cap rates on the Westside for rent controlled assets typically hover around 3.4% and have been consistent throughout the year. For non-rent controlled properties, cap rates have

$450 $350 $250 $150 Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19

Non-Rent Controlled

Q2 ‘19

Rent Controlled

4.50% 4.00% 3.50% 3.00% 2.50%

been approximately 3.7% because of the new construction projects coming to the market. For value-add, non-rent controlled properties, cap rates can be significantly lower because of the rental upside potential.

AVERAGE GRM

Rent Controlled

$550

Q2 2019 at $502.38/sqft. Rent controlled properties in Q2 2019 averaged $466.18/sqft.

AVERAGE CAP RATE

Q2 ‘19

Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19

Non-Rent Controlled

Q2 ‘19

Rent Controlled

22

The average GRM for rent controlled properties for Q1 2018 was 18.30 and was consistently around the same GRM throughout the year with a peak in Q2 2018 at 19.21. For non-rent controlled properties, because of the limited number of transactions and new development projects, there are some significant discrepancies among the data. The GRM for new developments is around 17.00, while value-add, non-rent controlled assets are predicted to peak at a 20.00 GRM in 2019 depending on the rental upside potential.

20 18 16 14 Q1 ‘18 Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19

Non-Rent Controlled

Q2 ‘19

Rent Controlled

FUTURE OUTLOOK There is a small shift in the future outlook of this unique market especially if these trends continue throughout 2019. As strict rent control laws are implemented and the uncertainty of the interest rates continue to be on the horizon, we expect 2019 to be a year where prices will continue to decline. However, the economy and fundamentals of apartments on the Westside are still robust and one of the safest assets to invest in. We saw 515 units absorbed and 666 units delivered in the last 12 months.

There are currently 4,193 units under construction.

MATTHEWS™ | 91

st a E + h t Sou

s e l e g n A Los Los Angeles County

CONTACT INFO J.A. Charles Wright

charles.wright@matthews.com (310) 295-4374 Disclaimer: Now subject to AB 1482

NUMBER OF TRANSACTIONS South and East Los Angeles are strategic targets for investors looking for opportunities to achieve excellent cash flow.

Both markets boast similar rent growth opportunities and long-term yield. The slowing of transaction volume shows the disconnect between buyers and sellers on pricing. Most properties in these submarkets are rent controlled, thus offering long-term tenants. There was a surge of tenant buyouts in 2017, pushing value in these submarkets. With stricter rent control laws, transaction volume has slowed because of the risk associated with a buyer paying a premium and the long-term tenants remaining in these rent controlled buildings.

92 | FALL/WINTER 2019

100 80 60 40 20

Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

TOTAL DOLLAR VOLUME

$100M $75M $50M

Transaction dollar volume saw an uptick in 2019 from 2018 due

$25M

to the sale of a large asset portfolio in South Los Angeles. South Los Angeles has seen a higher dollar volume compared to Boyle

Heights/East Los Angeles, primarily due to the anti-gentrification

Q1 ‘18

activity surround the submarkets.

Q2 ‘18

Q3 ‘18 Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

AVERAGE PRICE PER UNIT & PRICE PER SQUARE FEET Price per unit took a large dip in both South and East Los Angeles. South Los Angeles went from $162,376/unit down to $151,324/ unit in Q2 2019 for rent controlled assets. The market forecast by investors played a part in this decrease, as capital is being more careful as the months go on in the market cycle we are in. Boyle Heights/East Los Angeles remained consistent with an

average of $159,428/unit, but we did see an increase to $197,710/unit in Q2 2019. Consistent with the price per unit comparison of 2018 and 2019, South and East Los Angeles price per square foot fell for both rent and non-rent controlled buildings, from $241.01/sqft in Q1 2018 to $211.13/sqft in Q1 2019. $400

$400,000

Avg PPSF

Avg PPU

$500,000

$300,000

$300 $200

$200,000

$100

Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q1 ‘18

Q2 ‘19

Rent Controlled

Q2 ‘18

Q3 ‘18

Q4 ‘18

Non-Rent Controlled

Q1 ‘19

Q2 ‘19

Rent Controlled

AVERAGE CAP RATE & GRM Cap rates were more aggressive in Q1 2019. Though the price per square foot and price per unit dropped in 2019 in South Los Angeles, GRM’s were more aggressive in Q1 2019, as well as in East Los Angeles. Price per unit and price per square foot were

6%

Avg GRM

Avg CAP

more manageable for investors in 2019, thus allowing more risk acquiring properties with lower rents.

5% 4% 3% Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

15.00 14.00 13.00 12.00

Q2 ‘19

Rent Controlled

Q1 ‘18

Q2 ‘18

Q3 ‘18

Non-Rent Controlled

Q4 ‘18

Q1 ‘19

Q2 ‘19

Rent Controlled

FUTURE OUTLOOK As stricter rent control laws in Los Angeles continue to roll on and interest rates are predicted to continue trending upwards, we expect 2019 to produce fewer transactions than years previous. Pricing should level out in 2019 as there will be a lack of supply in the market. Tenant buyouts have become more expensive, and buyers will concentrate on the current GRM rather than the market GRM and the potential of the property. Seller’s price expectations will slowly become more in line with the market as buyers continue to be far less aggressive. In the past 12 months, 475 units were delivered and 332 units were absorbed while, 912 units are under construction in South LA. In East LA, we’re seeing a lot less activity as there was no new deliveries and only one unit absorbed. However, there are currently 170 units in development.

MATTHEWS™ | 93

a t n a l t A CONTACT INFO

Connor Kerns

connor.kerns@matthews.com (404) 445-1090

NUMBER OF TRANSACTIONS 2018 was a great year in terms of transaction volume, which is demonstrated from Q1 to Q4 2018 with a 95 percent increase.

The transaction velocity for 2018 was very healthy, with an increase of nearly 15 percent from the previous year. Q1 2018 started relatively slow but increased each quarter gradually until Q4 2018 transaction volume nearly double that of Q1 2018.

This high transaction count can be attributed to the ideal current “seller’s market,” with owners looking to capitalize on the compressed cap rates before there is any further upward movement in interest rates. The traction appears to have not slowed down in 2019, with 91 transactions in Q1 and 95 in Q2.

94 | FALL/WINTER 2019

Austin Graham

austin.graham@matthews.com (404) 445-1091

175 150 125 100 75 50 25

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$2.60B

TOTAL DOLLAR VOLUME

$2.20B $1.80B

Along with the number of transactions, the total dollar volume in 2018 rose quarter over quarter with the exception of a slight dip in Q2 2018. However, this decrease in Q2 2018 can be attributed to the fact that there was a decrease in the number of

substantial assets (200+ units) transacted. Overall, multifamily market fundamentals in Atlanta remain steady at the start of

$1.40B $1.00B $600M $200M Q1 ‘18

2019 with total dollar volume reaching a figure over $1 billion.

AVERAGE PRICE PER UNIT The average price per unit remains significantly higher than the historical average with no clear indication of slowing down. Q2 2019 price per unit came in higher than Q2 2018, demonstrating multifamily market fundamentals remain extremely strong.

Many owners are noticing this trend as they look to exit their investment at the height of the market.

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$135,000 $120,000 $105,000 $90,000

AVERAGE PRICE PER SQUARE FOOT This metric is interesting as the price per foot metric remains steady throughout each quarter in 2018 and on into 2019. Much like the price per unit metric, these results indicate strong market fundamentals. The lower average in Q2 2018 can be a testament to the location of these transactions. The price per foot decreases slightly when entering the Southern corridors

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$125 $100 $75 $50

within the I-285 perimeter.

AVERAGE CAP RATE

Q1 ‘18

7.0%

The average cap rates for the market have remained relatively steady throughout the year, fluctuating mostly in the low 6.00% from quarter to quarter. The average cap rate jumped significantly from Q2 to Q3 2018, from 6.28% to 6.65%. The market adjusted and has remained steady going into 2019 with an average cap rate of 5.94%. Cap rates are tighter than they have ever been in Atlanta but are still much higher than the national average of 5.60%.

6.5% 6.0% 5.5%

FUTURE OUTLOOK The interest in Atlanta can be attributed to the robust apartment demand and rent growth that continues to outpace the national average. Atlanta adopted the inclusionary zoning ordinances in January 2018 as they begin on projects by BeltLine and Westside. With Atlanta’s population and job growth expecting to continue, paired with the market’s affordability as it relates to the nation’s other large metros, the market will remain tight with more investors competing over fewer deals.

With 17,000 units on the way and 9,356 units delivered in the past 12 months, Atlanta is ranked one of the most active markets in the country.

MATTHEWS™ | 95

o i n o t n San A CONTACT INFO Josue Posada

josue.posada@matthews.com (512) 361-1048

NUMBER OF TRANSACTIONS 2018 was an active year for San Antonio with a total of 232 transactions. Transactions throughout 2018 continually increased, starting the year with 50, 50 in Q2 2018, 76 in Q3 2018, then settling to 56 in Q4 2018. The market has experienced 105 transactions thus far in 2019. The average transactions per quarter for the last five quarters averages around 56. As San Antonio is poised for continued growth and in-migration, there is no concern for whether we will see the same pattern continue in 2019.

96 | FALL/WINTER 2019

80 70 60 50

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

TOTAL DOLLAR VOLUME In Q1 2018, the total dollar volume was just over $202 million,

consistent with Q4 2018 at $334 million. Q2 and Q3 2018 were the strongest quarters in terms of total dollar volume with $388 million and $529 million, respectively. The increase in dollar

volume in the middle of 2018 coincided with the increase in transaction volume during those quarters. Comparing Q1 2018

with Q1 2019, we can see a slight increase in dollar volume to $169

$600M $500M $400M $300M $200M

million in Q1 2019. With the same number of units sold, investors have started to purchase assets that are geared more towards a value-add investment strategy in Class B and C locations.

AVERAGE PRICE PER UNIT

$135,000

Just as the dollar volume decreased between Q2 2018 and Q2 2019,

$120,000

the price per unit decreased from $123,870/unit to $112,948/unit.

In 2018, the average price per unit remained over $100,000/unit until Q4 2018, when it dipped below to $98,609/unit. At an average of $109,284/unit for 2018, we still see a healthy year-over-year increase in the market, and with a higher Q2 2019 we can expect

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$105,000 $90,000

prices to remain above $100,000/unit.

AVERAGE PRICE PER SQUARE FOOT Q2 2019 had an average of $116.81/sqft, a decrease from $134.10/ sqft in Q2 2018. The trend throughout 2018 matches that of average

price per unit with Q2 2018 having the most significant increase then dropping to $119.29/sqft in Q3 2018 and Q4 2018. The high price per square foot in Q2 2018 is a result of large amounts of Class A buildings traded due to new units being delivered to compensate

$130 $120 $110 $100

for the increasing population. The average $122.25/unit in 2018 shows another healthy year-over-year increase from 2017 and will likely continue into 2019.

AVERAGE CAP RATE Cap rates have been compressing every year during this last business cycle and will most likely stay constant through 2019. The largest compression occurred between Q1 2018 and Q2 2018 with the average cap rate moving from 7.62% to 6.17%. Since then, cap rates have compressed to 5.77% and 6.02% in Q3 2018 and Q4 2018, respectively. In 2019, cap rates went up, similar to the first quarter of 2018 to 6.19% in Q1 2019, and 7.89% in Q2 2019. We can expect cap rates to rise right above 6.00% for the rest of 2019.

8% 7% 6% 5%

FUTURE OUTLOOK In 2019, we expect prices to increase similarly to previous years. However, we anticipate better increases in comparison to other primary markets that have begun to plateau. Currently, 30 percent of the market’s inventory has been built since 2010 to present. With the majority entailing suburban garden-style apartments, developers are able to react quickly to the changing market. Over the past 12 months, 4,331 units were delivered and 5,744 units were absorbed. With attractive prices and cap rates, San Antonio is a hidden gem that is primed to make its debut in the coming years.

MATTHEWS™ | 97

Austin CONTACT INFO Craig Irvin

craig.irvin@matthews.com (512) 817-4975

NUMBER OF TRANSACTIONS 2018 was an active year for Austin with a total of 143 transactions. The market launched into Q1 2018 with 27 transactions. Reflecting on 2018, the number of transactions was constant after Q1 2018 with around 40 transactions per quarter.

Q1 2019 decreased slightly with 39 transactions, however, was above Q1 2018. As Austin is set to be one of the fastest-growing economies leading into 2020, there is skepticism as to whether the volume will trend upwards moving forward.

98 | FALL/WINTER 2019

50 40 30 20 10

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

TOTAL DOLLAR VOLUME Austin’s 2018 multifamily market locked just under $2.3 billion

$850M $750M

in volume. The first two quarters of 2018 were consistent in growth with enormous volume spikes in Q3 and Q4 2018,

$650M

Q1 2019 settled down with a dollar volume of $369 million.

Although Q1 2019 was an incredible drop in dollar volume

$450M

both above $500 million. After a successful end to Q4 2018,

from Q4 2018, it is consistent with the 2018 trend. Q2 2019 booked $283 million in total dollar volume. The market

$550M

$350M $250M

indicates tremendous upside as the Austin economy and

population are projected to experience continued growth.

AVERAGE PRICE PER UNIT The market’s average price per unit in 2018 came in at $183,503/ unit. This average went from a lower trending first and second

quarter, $139,257/unit and $144,205/unit, respectively. The increase in Q3 2018 came in the strongest at $278,933/unit, while Q4 2018 settled at $171,619/unit. Q2 2019 came in strong with $208,831/unit, and Q1 2019 is a close second at $206,117/unit.

The discrepancy in prices can be explained by the location in which the transactions occurred. Many transactions in the last two quarters of 2018 and the first two quarters of 2019 took place

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$260,000 $220,000 $180,000 $140,000

in primary Austin markets.

AVERAGE PRICE PER SQUARE FEET Austin’s average price per square foot in 2018 came in at $203.49/sqft. This was brought on by a strong Q1 and Q2 2018

demanding $162.22/sqft and $172.36/sqft. Q3 2018 recorded $293.14/sqft, while Q4 2018 settled at $186.12/sqft. The price per square foot started off strong in 2019, with $207.15/sqft in Q1 and $227.82/sqft in Q2.The price per square foot in the Austin market is reassuring as it continues to float at higher averages.

AVERAGE CAP RATE

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Q1 ‘18

Q2 ‘18

Q3 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

$300 $250 $200 $150

6.00%

Cap rates remained strong in 2018 averaging 5.68%. Throughout 2018, cap rates fluctuated 50 basis points. Q1 2019 began at 5.93% which is explained by new product and rehabbed product sales. This cap rate should remain strong while inventory is low and demand remains high.

5.75% 5.50% 5.25%

FUTURE OUTLOOK Austin adsorbed 9,309 units and delivered 6,121 units in the last 12 months. Developments are primarily concentrated Downtown, in South Central, or Eastern submarkets extending to suburbs such as Round Rock to San Marcos. With this healthy demand, we can expect Austin’s development to continue on this trajectory in the coming years.

MATTHEWS™ | 99

Dallas + h t r o W t r o F CONTACT INFO Danny McQuaid

danny.mcquaid@matthews.com (214) 932-1284

Nick Dell

nick.dell@matthews.com (214) 932-9155

ECONOMY The surrounding submarkets in Dallas, such as Plano, Frisco, Allen, and McKinney, are some of the fastest-growing populations in the country, and feed into the economic growth the metro is experiencing. The companies looking to relocate to these areas will likely keep the residential demand healthy. The tremendous job and population growth will give developers and investors plenty of incentive to continue activity.

100 | FALL/WINTER 2019

NUMBER OF TRANSACTIONS

2,000

The Dallas-Fort Worth multifamily market saw another

1,700

strong ending in 2018. Throughout the year, there was overwhelming talk of oversaturation and inflated

1,400

pricing within the marketplace. This carried into

2019, where the market slowed down from last year’s transactional achievements. In Q1 2019, there were 1,355

1,100

total transactions across the board, approximately a 30 percent decrease in volume from Q4 of 2018.

800

Thus far, Q2 2019 has completed 237 transactions.

500

Another factor, and quite possibly the most prominent

200

proponent for this decrease, is interest rates. Interest rates rose between Q3 and Q4 of 2018. The price expectation of sellers relative to where interest rates

were in Q4, did not allow buyers within the marketplace to remain as active as they were throughout 2018.

Q1 ‘18

unit residential tower will soon be the tallest building in Victory Park. The fast-growing neighboring cities account for roughly 7,500 units currently under construction.

Deliveries in Units

construction in nearly every corner of the metroplex combined with more than 35,000 units in the pipeline.

Nearly 6,000 of those units in development are within a three-mile radius of Downtown Dallas. A 39-story, 334

Q3 ‘18

10,000

CONSTRUCTION & DEVELOPMENT Dallas-Fort Worth is experiencing a robust development environment with thousands of units currently under

Q2 ‘18

Q4 ‘18

Q1 ‘19

Q2 ‘19

Forecast

8,000 6,000 4,000 2,000 0

2017

2018

2019

Net Deliveries

2020

2021

Deliveries

FUTURE OUTLOOK In the last 12 months, we saw 24,447 units delivered and 23,707 units absorbed. Many of the developments are focused on urban areas surrounding and within downtown. Currently, there are roughly 6,000 units under construction all within three miles of Downtown Dallas. The most notable projects are located in Victory Park and Deep Ellum.

Interest rates have dropped so significantly from Q4 2018, that the market is currently at a 15-month low. With Dallas-Fort Worth as one of the most active multifamily markets in the country, we will see activity bounce back for the remainder of the year. As for what lies ahead in 2019, we expect Dallas-Fort Worth to remain among the top markets in terms of all transactional categories.

MATTHEWS™ | 101

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HEALTHCARE SALE LEASEBACKS Benefits to Unlocking Equity in Your Property

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STARBUCKS TRUE LOGOS. GENERATED BY CHI NGUYEN (CHISAGITTA)

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W W W. M AT T H E W S . C O M

™

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