Industry media has been inundated for the past five years with stories of the booming market-rate multifamily sector. Weekly updates on cap rates, sales volume, and market fundamentals have flooded the market. But finding information on low-income housing tax credit (LIHTC) fundamentals or sales has been like finding the proverbial needle in the haystack.
Tax Credit Group of Marcus & Millichap has specialized in the resale of LIHTC properties for more than 14 years and has transacted $6 billion in tax credit property sales. We thought we would share our experience in the LIHTC market through this market cycle. The typical tax credit tenant profile and program income restrictions generate consistent, long-term occupancy rates and stable income. Due to this predictability, investor interest in the LIHTC market has been every bit as robust as the market-rate sector over the past five years. While there are many different types of transactions in the LIHTC market, we have limited the analysis of our data to fee simple transactions to normalize the information and make it comparable with market rate.
During the economic downturn, the LIHTC marketplace was significantly more stable than market-rate multifamily. Though we faced the same obstacles that challenged the entire commercial real estate world, reduction in activity in the LIHTC market was far less dramatic. Recovery was also swift—in 2010, we saw our total sales volume jump up 64 percent to $451 million.
Since 2010, we have seen significant increases in our sales each year, breaking the $1 billion threshold last year with total sales of $1.17 billion. As of August this year, we have already exceeded $998 million in sales and fully expect to surpass last year’s sales volume.
What sparked the LIHTC market? In a word: yield. As the fierce competition for multifamily assets drove market-rate cap rates to unprecedented lows, yield-driven investors increasingly discovered the affordable housing sector where first-year yields in the 7 percent to 10 percent range were common. These investors also found the stability of tax credit assets comparable with Class B and C properties. The yield-driven investor became a major driver of our LIHTC buyer pool in 2010 and has remained a dominant force since then.
This year, we have seen an uptick in the median LIHTC cap rate to 7.2 percent in our fee simple transactions. In those sales, the median price per unit is $59,900, although prices vary widely by region. For example, the median price per unit in our West Coast regional sales is $92,000 while the median price per unit in the Southeast region sits at $45,500. The highest price per unit in a single transaction we closed this year was in Anaheim, Calif., where the asset traded at $160,300 per unit. First-year yields have contracted slightly, running in the 6 percent to 8 percent range, but are still better than average market-rate returns.
Like cap rates, our experience with LIHTC vacancy trends tracks very closely with vacancy trends in the B/C asset class. Last year, the average vacancy rate of the 133 fee simple transactions we closed was 5.7 percent, while CoStar reported an average vacancy rate of 5.5 percent for B/C class properties during the same time. So far this year, the average vacancy of the stabilized LIHTC properties we have sold is running at 5.3 percent, the same vacancy rate currently reported for sold B/C class properties.
This similarity with B/C class properties ends when rents are analyzed, as LIHTC restrictions prevent huge rent appreciation when compared with B/C class market-rate rents. Last year, the average LIHTC asking rent was $726 per month. This year, average asking rent is $755 per month for LIHTC properties while B/C class properties are averaging $908 per month.
The tax credit sector has established its place as an attractive safe harbor for multifamily investors seeking solid risk-adjusted returns on their investment. The stability of tax credit investments and the maturation of the tax credit market have created a deepening pool of investors that are well versed and comfortable with the tax credit product. As more of these properties become available for sale and more market-rate investors enter the tax credit space, we expect the acceleration of these transactions to continue for many years to come.
John Fioramonti is a senior market analyst in the Tax Credit Group of Marcus & Millichap.