U.S. multifamily acquisitions rose by 4.4% last year to $184 billion—the highest volume since Real Capital Analytics began tracking the market in 2005.
Tier II markets had the largest gains in 2019. Acquisitions in Tier II markets totaled $70.4 billion, up 8.4% from 2018. Investment in Tier III markets rose 2.2%. Tier I investment was unchanged.
Overall investment was largely driven by single-asset purchases—the best indicator for investment momentum—that reached $145 billion last year, up by 10.3% from 2018. Portfolio investment activity, which is more volatile, offset some of those gains, inching up by only 0.4% from 2018.1031 buyers, large institutional investors and emerging capital all drove pricing in 2019.
Washington, D.C. Rises to Second Place
Washington, D.C. moved up to second place with $13.0 billion total investment, just below New York's $13.6 billion. Washington buying activity rose 8.6% year-over-year, while New York's dropped 27.6%. Southern California (Los Angeles, Orange County, Inland Empire) had the third highest total ($12.4 billion), down 4% from 2018.
While New York was significantly impacted by the state's new rent stabilization legislation, California and Oregon metros were much less impacted by new rent control laws and discussions. Investment rose in San Diego, San Francisco and Portland, and dropped in Los Angeles and Sacramento. Changes in these markets were governed as much by for-sale asset availability as by changing investor sentiment due to rent control.
Dallas/Ft. Worth and Atlanta ranked fourth and fifth for total 2019 investment. Both metros also experienced gains in 2019 (9.1% and 20%, respectively). The leading five metros accounted for nearly one-third of all 2019 multifamily investment. The top 10 metros combined represented over half of total acquisitions. Among Tier I markets, Boston led for investment growth (77%), followed closely by Seattle (71.7%) and by San Diego (27.4%).For Tier II markets, Baltimore had the largest increase (48.1%) followed by Charlotte (30.3%), Phoenix (23.4%), Atlanta (20%), Tampa (19.7%) and Austin (17.8%).Las Vegas had the highest trading volume among Tier III markets ($3.8 billion) and also experienced the fourth highest year-over-year increase among all markets (65.6%).
Tier II Metros Achieve Highest Gains
Multifamily investment climbed the most in Tier II markets, rising 8.4% over the prior year. Investment in the Tier III markets rose by 2.2% and was essentially unchanged in Tier I markets.
Most of the 16 Tier II markets have been experiencing very strong demand growth and sustained favorable market performance even with robust construction pipelines. While capital is not shying away from Tier I markets (except New York and Chicago to a lesser extent) it is showing a preference for these larger high-growth non-gateway metros.
Five Leading Markets Capture 27% of Total Units
Dallas/Ft. Worth was the metro leader for 2019 investment by unit count with 80,100 units acquired, greater than all the major California metros combined (73,600 units).
More than one-quarter of all units acquired were in four Tier II metros (DFW, Atlanta, Houston, Phoenix) and one Tier I (Washington, D.C.). Tier II metros collectively captured the largest market share (40%). Furthermore, while total units bought in 2019 fell 2.7%, the count in Tier II markets was essentially stable year-over-year.
2020 Investment Patterns Similar to 2019
In 2020, Tier II metros should continue to attract the largest share of capital. Most Tier II markets are sizeable, experiencing high levels of demand and have a large supply of for-sale product.
Tier III investment should also continue to attract capital. While there is less product availability, most Tier III markets have favorable market performance and offer some yield premium.
Investment activity in Tier I markets will also stay a centerpiece of the investment story in 2020. New York will likely remain challenged, but most Tier I markets are still attractive to investors and some have become more attractive in recent quarters like Washington, D.C. Tier I markets benefit from having larger assets, being known internationally, and from improvement in market performance in their urban cores.