Most of the economic statistics that we rely on to understand how the economy is doing (and contribute to the apartment building investment cycle) were created in the 1930s and ’40s, smack dab in the middle of the Industrial Age. They haven’t changed much
since then, you can find out a lot about woodworking-machine-setters but all web developers are thrown into a single category. Such as they are they were an attempt to measure something that seems quite radical especially coming from economists: Is the government making life better or worse for its citizens? Not how many pairs of shoes were manufactured, how long they sat in warehouses and the average price they sold for.
Are interest rates caught in a Catch-22? What if the Fed is waiting to raise rates until the economy is growing stronger but the economy won’t grow stronger until rates go up?
For three years everyone has ‘known’ that interest rates were going up but other than during the Taper Tantrum of June 2013 which affected loan rates more than Treasuries, the T10 only moved up to the 2.75% area which was just picking itself off the floor of 1.66 where it got down to in May that year.
The 10 year apartment building investment loan rate we track moved up to 4.454% from 4.375% yesterday after flatlining at the old rate since the middle of January:
Even so it is still below what we used to think of as the 4.5% floor for this rate. Meanwhile the ULI rate has been tracking the 10yr Treasury, rising from 3.37% April 20th to 3.76% yesterday, a climb of almost 40 basis points.
Is this the beginning of the long anticipated (The 3rd or 4th year in a row that everyone’s known rates were going to rise) rate hikes? It makes sense that the Fed would like them to get up off the floor if for no other reason that they would have room to lower them again when they needed to. But is now the time to do that when China, Europe and the rest of the world are slowing down?
…a community manager may occasionally resist a rate increase for a long-time resident or one who has become valued over the years. Business is business, however.
“When they start to say, ‘Oh, Mrs. Johnson has been here six years,’ we try to get them away from the emotional aspect of pricing,” he said. “We say if we really wanted to lift our rents and maximize our revenue, we have to make some tough decisions, and some people who can’t afford it may have to move out.” [Emphasis Mine]
As owners, operators and property managers who doesn’t love getting top dollar rents?
The math behind RMS (if done correctly) can definitely drive rents higher if it’s backed up by enough data to draw statistically valid references. At its most basic level it should look like this:
The apartment building investment loan rate we track remains at 4.375% where it landed back in the middle of January. Other than a brief one-week visit to 3.396% back in March which wasn’t even enough to move the chart line it’s been steady as she goes:
With the 10year Treasury dipping below 2% the spread has been widening as 4.375% seems to be the new 4.5%. Once again people are expecting rates to go up later in the year (is this the third or fourth year for that prediction?) but the Fed and the Government have been following the Japanese model step for step and their Ushinawareta Jūnen (Lost Decade) is old enough to drink and will be graduating college soon. I’m not sure why anyone thinks this time will be different just because we’re talking dollars instead of Yen. But there is this:
That men do not learn very much from the lessons of history is the most important of all lessons that history has to teach. – Aldous Huxley
Was looking at some data from Zillow that indicates about 17% of US homes with a mortgage remain under water:
Bad enough but the reality is that a much larger portion are effectively frozen in their homes: They can’t sell and net enough money to make the downpayment on a similar size home, forget about actually moving up:
The 10 year fixed rate apartment building investment loan we track fell 6 basis points (bp) to 4.369% today. (See loan details below):
That drop doesn’t show up on the chart very well but it’s the first change in the rate since the middle of January when it had been flatlining at 4.5% since the end of November. Meanwhile the T10 (10yr. Treasury) had been working its way higher since hitting 1.68% in the end of January which in turn has been reducing the spread between the two rates from the 2.5% range down below 2.25% and coming in to 2.169 today. I expect the Continue reading 10 Year Apartment Building Investment Loan Rate Drops Another 6 Basis Points Today
Was quoted in a Multifamily Executive piece this week by Joe Bousquin Cap Rate Limbo: How Low Can They Go? discussing where we are in the apartment building investment cycle, whether multifamily cap rates could go any lower and how do you make a deal pencil in this environment. It’s a good quick read with apartment pros from around the country sharing their thoughts on how things stand. I really got a kick out of the Barbara Gaffen’s story about a Chicago property trading for $651,000 a unit.
Here are the rest of my comments:
The market cycle peak is here, it’s just not evenly distributed. Cycle tops (in the absence of a financial meltdown) tend to be rounded and therefore very hard to call. We’re focused on markets in the Western US and in most of them existing sales are above replacement cost meaning that at the earliest, they’re midway through the expansion phase. As a value investor by nature I tend to think of replacement cost as the beginning of the peak but the expansion phase can carry on for quite a bit and it’s likely to do so this time. The exception would be in markets heavily dependent on oil.
There are three big types of demand that I see which will extend the peak; demand for apartments from tenants, demand from investors and deal demand. Deal demand is generated by brokers and lenders who are paid based on transactions and therefore are trying to generate as many as possible. Brokers are a constant but lenders seem to be getting on the train now too.
After flatlining at 4.5% for over 10 weeks, the 1oyr apartment building investment loan rate we track dropped to 4.375% in the middle of January and has remained there since:
All this while the 10 year Treasury (T10) got within 2bp of the 1.66 posted back in May of 2013, causing the spread to widen to the two and a half range from two and a quarter. That in turn is causing the trailing 6 month average to continue its upward curve, now in the 2.25 range.