Filed under: Commercial Real Estate, Multifamily Investments, Neuroscience and Behavioral Economics
The latest ULI/EY (Urban Land Institute/Ernst & Young) Commercial and Apartment forecast shows that respondents expect price growth to slow during the next three years but they expect better growth than when queried in April this year:
Back in Q2 the economists and real estate pros thought prices would appreciate 7% this year and 5.7% in both 2015 and 2016. Now they expect 10% growth this year and 5.7% next year falling to 5% the year after. These kinds of surveys and charts usually set off all kinds of behavioral economics warning bells in my head but I’ll let you be the judge… The web piece is here, the full report here.
That said, this chart probably is the clearest depiction of how the statistician drowned in water that averaged only three feet deep. What happened to those deals underwritten with the average growth number when 2008 and 2009 came along? To avoid this fate I highly recommend reading Sam Savage’s The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty (http://amzn.to/PKIaOc on Amazon)
Filed under: Multifamily Investments, The Economy and Current Affairs
Video: Dr. Philippa Malmgren explaining the connection between your investments and all the geopolitical wrangling taking place right now.
The exec sum:
- Leading industrialized nations carry (and continue to pile on) unsustainable levels of debt
- Most options for reducing the debt are non-starters:
- Reduce current spending- Not good for re-election in a democracy
- Reduce future spending by cutting retirement and healthcare benefits- Also politically untenable
- Repudiate debt- Advanced economies run on debt and can’t afford to be cut off from debt markets
- Restructure debt- Again advanced economies can’t afford to cut off from debt markets
- But there is one tried and true method
Update 2:51pm Wednesday Oct. 15- updated to reflect that the 10yr apartment loan rate was lowered on Oct 1st but the spread was higher.
Well apartment building investors, things just keep getting interestinger and interestinger as a friend used to say. Just last month I was asking if 4.5% was the lower limit on the 10 year loan we track and sure enough a few weeks later it plunged through that to come in at 4.139 Monday after a brief stop at 4.365 last week. Note that both the 10yr Treasury (or T10, which drives these types of rates) and the spread between the T10 and the apartment rate fell with the spread dipping below 2%, coming this week at 1.929%:
The spread has been jumping up and down quite a bit as you can see, I think because initially the bank was going to try and hold the 4.5% minimum rate and they let the spread go out to 2.25 as the T10 continued to fall from the middle of September. Note also that this volatility came with Read more
Filed under: Apartment Markets and Demograhics, Multifamily Investments
UPDATE Oct. 14: See below for Part 3-
UPDATE Sept. 24: See below for Part 2-
Apartment building investment broker ABI Multifamily’s Research Director, Thomas M. Brophy is out with part 1 of a pretty in-depth ‘overview’ of water rights in Arizona this week (Part 1 of 3). This is important not just because most of AZ is a desert (duh) but because Phoenix is expected to grow by the size of Denver over the next twenty-five years (See Phoenix population to add 2.6 million by 2040, housing supply not keeping up). They’re going to need a lot more apartments but the biggest limiting factor will be the ability to provide water for that many new tenants.
Brophy begins with the background so that as the story unfolds we will understand how things got to be the way they are, and most importantly, how to make sure your residents aren’t walking to the town well every morning with a big jug on their heads. Not light reading but it just might give you an edge- See part 1 here: The Motions, Notions and Commotions of Water! Part 1: Arizona Water, an Overview.
Part 2 is Read more
Filed under: Commercial Real Estate, Multifamily Investments
Updated 1:46pm Correction: Updated to reflect that CalPERS is only shutting down its hedge fund investments, not its private equity placements. See Calpers Is Done With Hedge Funds; Paid $135 Million in Fees Last Year for 7.1% Return at Bloomberg.com
Was just on a call this morning with Peter Linneman, Chief Economist at NAI Global where they were discussing CalPERS’ decision to eliminate their investments in hedge funds. That hasn’t had any effect on their apartment building investments however [Or has it in a positive way?]. While I was on the call I received a note from PERE announcing that the California Public Employees’ Retirement System (CalPERS), the largest public pension plan in the US has committed more than S2,000,000,000 additional funds to multifamily investments during meetings this past July:
- $1.33 billion to Institutional Multifamily Partners, seeking multifamily acquisition and development opportunities throughout the US.
- $412.79 million to a partnership with Invesco Real Estate for core apartment properties in the West and Midwest.
- $200 million went to a joint venture with Pacific Urban Residential for Class B multifamily assets in the western US.
- Note that the 200M was in addition to the 214M committed when the JV was formed in January this year.
- A less than $100M commitment to apartment lender and asset manager Centerline Holding which is now owned by Hunt.
All this was part of a 6.6B commitment to commercial real estate joint ventures, one of the largest single month investments made by the $300 Billion retirement plan. For the details see CalPERS commits $6.6bn to RE on PERE. Note: registration may be required.
Filed under: Apartment Operations, Apartment Technology and Management, Multifamily Investments
Fannie Mae launched their Energy Star program for apartment building investors by releasing their study on utility use. The report, called Transforming Multifamily Housing: Fannie Mae’s Green Initiative and ENERGY STAR for Multifamily (PDF). It’s loaded with great info on reducing energy and water use as well as stats on use broken up by unit, square foot and region. They also talk about their Green Preservation Plus loans which combined with certified Green Buildings they have financed $130 million in loans on as of Q1 2014. But let’s cut to the chase, key findings [Emphasis mine]:
- On average, a 100,000 square foot property spends $125,000 on energy and $33,000 on water annually.
- If this property saved 15% on energy and water costs, it would increase asset value by almost $400,000, at a 6% cap rate.
- The least efficient properties use over three times as much energy and six times as much water per square foot as the most efficient properties.
- When owners paid for all energy costs, median annual energy use was 26% higher than when tenants paid for them.
- High-rise properties use almost 10% more energy per square foot than low-rise properties
- Properties in the West use almost 50% more water per square foot compared to properties in the Northeast.
Clearly reducing common area utility costs and getting tenants to pay for their own use are the two of the best ways to improve Net Operating Income (NOI) and they have a nice graphic showing just how to do that:
It’s an interesting finding that buildings in the West use Read more
The apartment building investment loan rate we track was down to the high 4.5s the last couple weeks of August and clocked in today at 4.603%. The spread between it and the 10 year Treasury has been trending above the 120 day average for five weeks and I’ll have more on that below. The ULI <60LTV rate has been noisy and almost looks like it’s fighting to continue lower:
While the ULI rate works its way south, it seems like 4.5% is the hard boundary for the Read more
Filed under: Multifamily Design & Development, Multifamily Investments
In an Axiometrics piece out today “Multifamily Completions Will Continue to Rise” they had a chart showing apartment building completions versus starts lagged 1 year:
Why lagged 1 year? Because “the Census Bureau’s average length of time from start to completion for projects with 20 or more units was Read more
The apartment building loan rate we track remains in the 4.6-4.7% range where it’s been since the middle of July. Meanwhile the ULI <60% LTV loan rate has fallen 10 basis points over the same period with its spread to the 10 year Treasury coming in from 1.32% to 1.27%. That’s a very slim margin indicating a very competitive market for those loans. Typically the 10yr apartment loan rate loosely tracks the ULI rate with a lag so we’re hoping to see the rate come in a little more for deals closing in the next few months.
While everyone seems to ‘know’ that rates must be going up influential economist Anatole Kaletsky (the Kal in GaveKal Research) makes a pretty convincing argument that the central bankers in the US, UK and Europe will be following their contemporaries over at the Bank of Japan, keeping rates ‘lower for longer’ in a piece out this week from Evergreen/GaveKal. Note that registration is required but they will only send you the weekly ‘Virtual Advisor’.
About the spread between the T10 and the apartment building rate we track, Read more
Filed under: Apartment Building Investment Cycle, Multifamily Investments
Do the pitches you’re getting on apartment investment deals sound like this lately?
LOL but true right? Have a great weekend; we’ll think about what happened last time prices got this crazy next week-