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.
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.
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.
Why this up to date proprietary data is vitally important to your investment success:
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:
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 Continue reading Do You Know Where Your Apartment Market Is Right Now?
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:
The National Multihousing Council’s (NMHC) latest apartment investment survey out today has market tightness falling to 52 from 68 last quarter. With 50 representing the better vs. worse divide, results show respondents are feeling the bite of new supply plus a bit of seasonal slowdown as well I sense:
A lot of the usual suspects when it comes to multifamily markets have moved pretty far into their cycles and if your home area is like ours ti’s getting pretty fully priced. With our value investor mindset that means we’re looking for the next markets to do well over the coming 10-20 years. As apartment building investors we say:
We all know that jobs are a critical driver of the apartment building investment cycle and so we dutifully follow along with the talking heads when the unemployment number is estimated, released and then its potent debated. But Mike Scott over at Dupre+Scott points out in a piece posted Friday that apartment building investors should be following employment, not unemployment. Specifically he recommends measuring how many jobs it takes to create demand for one apartment unit. Currently in King County (where Seattle is the county seat and where Dupre+Scott is located) it takes about 8 jobs to do that:
The formula is simple: Net new jobs / apartment units absorbed. And if you’re an multifamily investor in the tri-county area (King, Pierce and Snohomish in WA State) that Dupre+Scott provides apartment investment research for, they’d be happy to supply you this information http://www.duprescott.com.
Back in February we posted an Axiometrics chart plotting the revenue growth vs. job growth in leading apartment investment markets in the US. They were out last week with an updated chart but not just in the way we might think since the numbers are Axiometrics’ 2013 forecasts for revenue and job growth updated through May this year. To me the real ‘update’ is that they reversed the axises on the chart and I think it makes more sense laid out this way: