The #Multifamily Market Cycle Peak Is Here, It’s Just Not Evenly Distributed Yet

 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.

Apartment Building Investment Cycle with Expanded Peak

Click on image for full size.

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.

Demand for investments is coming from overseas investors as well as yield hungry domestic investors. With currency wars now taking place the rising dollar combined with the slowing economies in China, Europe and ROW (Rest Of the World) are making multifamily investments here more and more attractive to those looking to move wealth to a stable, more secure market. Many of these investors aren’t Read more

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10 Year #Multifamily Loan Rate Now Below 4.5% on Falling Treasury

February 9, 2015 by · 1 Comment
Filed under: Apartment Rates 

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:

10 year apartment investment loan rate February 2015

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.

One other bit of news is that the 15 year am & term loan that we track got to 4.5% about the same time as the 10 year loan only it hasn’t fallen since then. Still if you have a property you want to hold for the long term that will support the higher debt service of the 15 year amortization, 4.5% is a pretty nice rate. Plus if you Read more

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3 Things I Learned Charting #Multifamily & #CRE Market Cycles

Seattle’s Strange Trip Through the Apartment Building Investment Cycle Part II

In part I we saw that some of the most widely followed market cycle research can’t be relied on without question. If knowing where we are in the market cycle is the most important thing (and not everyone agrees, see the comments from one of my private equity guys about that under part I here) then the best solution is probably to chart the cycles for the markets we’re investing in ourselves. If you’re in multiple CRE sectors in a lot of markets hopefully you have someone on your team or can hire a consultant (like Ashworth) to chart those cycles.

SEA occupancy v cycle position WTH

Click on images for full size.

Building our own CRE market cycle chart

To track a cycle for one market and sector we only need to answer five questions according to Professor Mueller’s methodology: Market occupancy, the 30 year Long Term Average (LTA) occupancy, rent growth, inflation and new unit construction. Later we’ll look at whether we can Read more

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Widely Followed Apartment Market Cycle Research Misses Widely

The Strange Tale of the Seattle Apartment Building Investment Cycle and Maybe Yours Too.

Back in 2012 it appeared that Seattle’s movement through the real estate cycle was stalling out. Not the actual market by any stretch of the imagination but instead where it was placed on the apartment market cycle charts in the Cycle Monitor report from Dividend Capital Research. These quarterly reports on the real estate market cycles for the five main Commercial Real Estate (CRE) sectors in more than fifty markets around the US were widely followed but something was wrong.

Seattle apartment occupancy vs. Cycle Monitor Market Position 2005 - 2014

Click on images for full size.

Why this up to date proprietary data is vitally important to your investment success:

You can fix a property but not a market cycle. Knowing where a market is in its cycle is critical for investors seeking to buy low and sell high. If signals are a year or more behind, prime opportunities will be missed to Read more

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Do You Know Where Your #Multifamily Market Is Right Now?

…In its apartment building investment cycle?

Well Integra Realty Resources (IRR) is just out with their 2015 Viewpoint Report covering where they think things are and where they might be headed in the five major sectors of Commercial Real Estate (CRE); office, industrial, retail, multifamily and hospitality… as well as a bonus piece on self-storage. IRR is one of the largest independent commercial real estate appraisal firms in the U.S and this is their 25th annual IRR Viewpoint in the fifteen year history of the company according to their chairman in his introduction. Not sure on the math there but I do have their reports going back to 2002.

In the report they cover cap rates, going-in cap rates, discount rates, yields, reversion rates and much more but the first thing I look at is their market cycle chart for the multifamily sector:

IRR Apartment Building Investment Cycle Chart Integra Realty Resources

Click on image for full size. Source: Integra Realty Resources

So IRR has an idea of where your apartment market is, provided your market is in one of the sixty plus places where they have an office. The big question is do you agree with their placement? It is very important to review the data and form your own idea on this because there are good reasons to doubt Read more

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#Multifamily Loan Spread Spikes as Rate Flatlines In Face of Falling Treasuries

January 8, 2015 by · 2 Comments
Filed under: Apartment Rates, Multifamily Investments 

Once again apartment building investment loan rates have hit the hard boundary of 4.5% even while the 10yr Treasury (T10) falls back below 2% for the first time since May 2013. This is causing the 120 day average spread to begin bending upwards. Currently it’s 2.178% on the back of a 2.46% weekly spread as of Monday when the T10 was passing through 2.04% on its way to 1.96% yesterday:

Apartment Building Investment Loan Rates vs 10 year Treasury

Click on image for full size.

The ULI <60 LTV rate has been bouncing in the 3.5-3.6% range but that’s a function of it being quoted on a spread basis and the only change there since the middle of November was when it dropped 1 basis point (1bp) in the middle of December; chalk it up to holiday season hibernation.

It really looks like The Great Columbus Day Apartment Loan Rate Massacre was the Read more

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Spreads Widen on 10 Year Apartment Investment Loan Rate, Trend or Seasonal?

December 8, 2014 by · Leave a Comment
Filed under: Apartment Finance, Apartment Rates 

The 10 year apartment building investment loan rate we track has returned to its old boundary of four and a half percent despite Treasuries in the two and teens again at the end of November. On the 28th the T10 was within 1pb of the mid-October Massacre low of 2.17. Something had to give for the loan rate to get back to the 4.5% range and it was the spread which jumped above 2.25 last week for the first time since February:

Apartment Building Investment Loan Rates vs Treasuries Yield Premium

The spread has gone from the Massacre low of 1.93 to 2.28, a 35bp climb in only seven weeks. Meanwhile the ULI <60%LTV last week was 3bps below its mid-October low, tracking the Treasury with a consistent spread of 1.38 in four of the last five weeks.

It’s interesting that the spread plunged below 2% at the same time the T10 was falling back to levels not seen since May of 2013 but more pressing is why the spread has been widening the last several weeks. Is just the year end, a time to get business wrapped up, AKA don’t bother us with new loan requests while we’re trying to lock in our bonuses for this year? Or is it really just the old 4.5% is the lowest we’ll go no matter what Treasuries do coming back into play after a momentary lapse?

With the Euro and Yen falling Treasuries are very attractive and are likely to remain that way for the foreseeable future, meaning the T10 could be hanging around in the low 2s for a while. In Jan. 2013 the loan rate was 4.5 and the spread was 30 basis points higher than today and got as wide as 2.8% in the end of April that year while the Treasury got all the way down to 1.7% so my thinking is it’s the boundary not seasonal.

Speaking of the spread between the T10 and the apartment building rate we track, the green line on the chart represents the six months trailing average spread. We track changes in the trend for signs apartment lenders becoming more or less competitive. Note that since rates are only quoted on business days the chart averages the last 120 business days which roughly equates to six calendar months.

We track the 10 year Treasury (T10) because that is the benchmark most lenders base their long term rates on. In order to lure investors away from Treasuries to buy mortgage bonds lenders have to offer a premium (AKA ‘spread’) over what can be earned on the Treasury. So when the T10 moves, rates on all kinds of longer term loans including on apartments tend to move also. As you can see in the chart, the spread also widens and narrows as market forces make an impact.

Notes about the apartment loan rates shown in the chart above: The rates shown here are from one West Coast regional lender for loans on existing apartment buildings between $2.5 – 5.0M. The rate quote they send every Monday that I track is a 30 year amortizing loan with a fixed rate for 10 years (They also have other fixed periods at different rates). The max LTV for this loan is 75% (they have an even lower rate on their max 60LTV loans) and the minimum Debt Cover Ratio (DCR, aka DSR or DSCR) is 120. Note too that these are ‘sticker’ rates, LTVs and DCRs and ‘your millage may vary’ depending on how their underwriting develops.  I usually figure that we’ll end up at a 70LTV which also helps the debt cover and provides a larger margin of safety, which is half the battle from a value investing standpoint.

The prepay fee is 5,4,3,2,1% for early repayment in the first five years and you do have the ability to get a 90 day rate lock. The minimum loan is $500k (at a slightly higher rate for less than $1M loans) and they’re pretty good to work with as long as you go in knowing that it takes up to 60 days to close their loan. If you are looking at acquiring an apartment building in California, Oregon or Washington I’d be happy to recommend you to my guy there for a quote. Send me a message through this link and I’ll make an introduction for you.

The other rate we track is the from the Trepp survey which the ULI (Urban Land Institute) reports on. According to the ULI the Trepp rate is what large institutional borrowers could expect to pay on a 10 year fixed rate, less than 60% LTV loan for a “crème de la crème” core property located in a gateway market. We track this rate as a barometer of what the largest lenders are offering their best customers on the most secure loans for any advanced warning about future rate and spread changes. Note that the spread we chart is between 10yr loan we track and the T10.

How the St. Louis Fed calculates the 10 year Treasury rate displayed above: “Treasury Yield Curve Rates. These rates are commonly referred to as “Constant Maturity Treasury” rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The yield values are read from the yield curve at fixed maturities, currently 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity. For even more detail see:

As a reminder, one basis point or 1bp is equal to one-one hundredth of one percent or .0001. When you hear ‘fifty basis points’ that’s one-half of one percent; ‘125bp’ would be 1.25% or a percent and a quarter, sometimes referred to as ‘a point and a quarter’. A bp seems like a tiny number, too fine to make a difference but in the debt world if you can squeak out an extra 20bp on a 100 million dollar deal (like a pool of apartment building loans) that’s $200,000.00 in your pocket. To paraphrase Everett Dirksen: 20bp here, 20bp there and pretty soon you’re talking about real money. If you did that every week for a year that would be $10,000,000 and you’d still have two weeks for vacation!

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QE is the most destructive policy for housing in world history. – Dr. Peter Linneman Good for apartments?

Was on NAI Global’s call with Peter Linneman, their chief economist who had some very interesting things to say for apartment building and commercial real estate investors yesterday. Note he’s an actual real estate guy as well as a Wharton professor and I would have lobbied for a better job title at NAI with his background.

First is about the bombshell quote from above. Linneman said there are many studies about home buying that show the down payment is the issue not the mortgage payment and disputes the whole people buy a monthly payment thing.

If I don’t have the downpayment it doesn’t matter what the interest rate is.

Young people are having a very hard time saving for a downpayment at zero percent interest and their parents and grandparents can’t afford to help at zero percent interest on their savings either.  Linneman summed it up by putting it in a golfing context: It’s not the green fees it’s the club membership that make it expensive. Japan is the poster child for this bad policy, they’ve been doing QE for twenty five years and it’s done nothing to fix their problems.

The most interesting thing from a multifamily perspective was that he believes we’re at the beginning of the capital cycle for CRE including apartments:

apartment building investment loans a beginning of long up cycle

He also believes that cap rates will Read more

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How to Prevent Politics from Causing ‘Black Swans’ in your Apartment and CRE Investments

As apartment building investors it’s easy to get so deep into the trenches of our market sector that we get blindsided by political events that don’t make any sense from an economic or investment perspective. With every market being so local and at the same time now subject to institutional interest it’s a stretch just to be able to track what’s happening in the lending environment at the same time. But this is the biggest risk we face; how to avoid Nassim Taleb’s ‘Black Swans’ that could destroy our investment plans. As an options trader  Taleb could very easily have been overtaken by black swans if his vision was limited to the distance from his eyeballs to the trading screens he stared at. How wide is yours?

How to avoid black swans in apartment building investiment

Short of an asteroid strike from another time dimension there really aren’t as many black swans as there are limited perspectives. Many people considered the mortgage meltdown a black swan but there were also quite a number with wider vision who understood how it would all end and some of them made fortunes putting their insights to work. Since we’re multifamily and CRE investors, not leveraged derivative traders we probably don’t spend a lot of time thinking about how to go short the apartment building in that bad neighborhood but how do we develop that wider perspective and still have time to do any investing?

The easy answer is Read more

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The Great Columbus Day Apartment Loan Rate Massacre and other interesting interest rate stories

What a month it was for apartment building investment loan rates. The week we were all wondering How is Columbus Day Still a Thing? The 10yr rate we track fell to a low of 4.139% with the spread between it and the 10yr Treasury (T10) breaking below 2% to 1.929 (See below for details on both). I have to hand it to the ULI, they’re good. They had just said:

If you are waiting for someone to ring a bell and say that we have reached the bottom, consider the bell rung. Think twice about ignoring these record-low levels.

It only lasted a week but the rate stayed below 4.5% through the end of the month:

Apartment building investment loan rates November 7, 20`4

As you can see, that one week the spread was also well below its six month average while the T10 got as low as 2.15%, territory it hadn’t seen since the middle of June 2013. We finally got some updated numbers on the ULI rate which would have been nice to have in real time as it was stepping down consistently for six weeks starting in the middle of September, foreshadowing the Read more

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