South Florida Multifamily 2018 Mid-Year Update

counties respectively. Aside from demand/supply factors, economic factors were improving. South Florida’s unemployment rate was 4.3%, the lowest level in over 10 years. In the past year median salary’s increased by 3.4% in Miami-Dade, 3.1% in Broward and 3.8% in Palm Beach County. For only the second time in ten years, income levels grew at a higher percentage rate than rental rates. Stronger employment and income levels will help with affordability and bodes well for multifamily fundamentals. Rent growth slowed from previous years but we anticipate it will continue to range from 2%-4% in 2018 for several reasons: 1) New rental supply was hitting the market with higher rents which increases the average rent in the market; 2) The headroom between B/C properties versus Class A remained significant, and can be over $600 per month in certain submarkets. Value-add buyers were improving many B/C properties and increasing rents to fill the gap in pricing within the market; and 3) Increasing rental supply continued to be quickly absorbed with few concessions or rent decreases. VACANCY RATES Year-to-date vacancy rates decreased in all three South Florida counties. For example, Miami-Dade’s vacancy rate was 4.3%, down from 5.1% at the beginning of the year. Class B and C properties have the lowest vacancies ever recorded in South Florida. Class B & C vacancy was 4.2% down from 5.1% in 2017. Only Miami- Dade experienced lower vacancy before at 3.4% in 2005 and 2006. Broward (4.5%) and Palm Beach (5.6%) have record low vacancy rates whereas Miami is lower at 3.6% but slightly above the 3.4% from 2005. We expect vacancies to remain low, albeit certain submarkets may experience short-term higher vacancies as new supply comes online. CAP RATES/INTEREST RATES The effect on cap rates relative to further interest rate increases is the biggest potential threat to the current market. In the past year interest rates increased +/- 60 basis points and are now nearer to 5% than 4%. Previous interest rate hikes were offset by spread compressions and there is a case that this can still continue to an extent. Currently, spreads on 10-year, moderate to full leverage loans range from 155 basis points (bps) to 165bps

CAP RATES Class A: 4.25% - 4.75% Class B: 4.75% - 5.50% Class C: 5.50% - 6.75% through the agencies. By comparison, during the previous real estate cycle, credit spreads on 10-year CMBS loans were as low as 90bps to 100bps. There is still room to lower spreads to offset any marginal up-tick in interest rates. However, if we see another 60 basis point increase in rates it will effect cap rates and pricing. Focusing on income growth and NOI should be considered to alleviate any potential cap rate movement in the coming years. FINANCING The availability of all forms of debt financing continues to be as plentiful as ever in recent years, with lenders specifically favoring multifamily over most other asset classes. Agency financing spreads tightened but remain volatile, with agencies now able to compete with life companies for Class A, well-located deals. Fannie Mae, Freddie Mac, and HUD remain the de-facto lenders for Class B and C properties as well as those located in secondary and tertiary markets, with rates in the mid 4% range. As transaction cap rates on core properties have continued to decline, Life companies have shown caution in underwriting, reducing maximum available proceeds to 60-65% of purchase price from the 65-70% max Loan-to-Value (LTV) available six months ago. Agencies continue to offer financing up to 80% of purchase price where they are not cash flow constrained. The most active area of the debt market is transitional bridge financing, with several new entrants who will lend up to 85% of the total project capitalization (purchase price, capex & closing costs) for value add deals. These floating rate lenders are pricing as low as L+225 for 60% leverage, L+275 for 70%, L+325 for 75%, and L+400-450 for 80- 85% Loan-to-Cost (LTC) where available. All transitional deals are structured as 2-5 year terms and are generally interest only with limited to no prepayment penalties. For future rate movement, short term interest rates are expected to increase two more times this year (0.50% in total)

though investor consensus is waning that the Federal Reserve will be able to keep increasing rates steadily through 2019. The spread between the 2-Yr and 10-Yr has continued to narrow, resulting in a relatively flat yield curve, and continued flattening has resulted in less of a measurable impact of rate hikes on the 10 year treasury yield. For generational assets there has never been a better time to finance long-term (over 10 years) as the spread between the 10 and 20 year treasury is 12 basis points, and only 5 basis points of yield differentiate the 20 and 30 year treasury notes. FINAL THOUGHTS Multifamily investments remain the most desired and transacted property type in South Florida based on the strong market fundamentals and long-term positive outlook. 63% of global capital is being raised to target real estate assets in North America. South Florida, as a “gateway” region for global capital, is awash with money seeking acquisitions, with investors using shorter due diligence and non-refundable deposits to entice sellers. Debt markets remain open for business and still provide historically low interest rates. We expect strong sales in Class A properties. Value-add properties are hard to find and are well received if marketed correctly. Opportunities exist to acquire smaller properties within portfolios as competition is less fierce. Appreciation of values will continue although many investors are looking at 5-10 year holds versus the quick “in and out” buys of previous years. Keep an eye on Opportunity Zones. These zones were established in the federal Tax Cut and Jobs Act of 2017, and provide a tax incentive for investors who invest in property in these areas. Investors can defer capital gains taxes through investments in federally-established Opportunity Funds. Owning a property for at least 10 years in an Opportunity Zone can mean you pay no tax at all on any appreciation in your investment. Understanding where these opportunity zones are and structuring an acquisition accordingly may offer significant buying opportunities. Likewise, if you own a property in an opportunity zone, it may have become more valuable and attractive to investors. To help you better understand this, we will produce a “White-Paper” on this subject in the coming weeks.

MU LT I FAM I LY I NVE S TMENT | SOUTH F LOR I DA T E AM 4