The Apartment 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

3 Things I Learned Charting Apartment Building & Commercial Real Estate 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

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

Do You Know Where Your Apartment Market Is Right Now?

…In its 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

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

Apartment Market Tightness, Equtiy Financing Slide Backwards in Latest NMHC Survey

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:

NMHC Apartment Investment Survey October 2014

Source: NMHC

While the Sales Volume and Debt Financing measures both improved, Equity Financing also slipped. As you can see from the charts above the results tend to be noisy and I suspect that with the survey format it carries a few behavioral biases as well. You can see that the world was ending according to Read more

It’s a 3 cap but it’s a Sweet 3 cap and if we jack rents 13% year 1…

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-

Skate to where the apartment building investment puck is going: Top US markets for future population and job growth.

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:

Show Me The Apartment Building Investment Markets

Fortunately two different sources provided data and maps to answer Jerry’s demand. The first is from the NAHB (the National Association of Home Builders) in an Eye On Housing piece called Uneven Aging. The report actually has two maps, the first showing the 2000 to 2010 growth in the Read more

More important than unemployment for apartment building investors?

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:

jobs required to fill one multifamily unit

Source: Note that we compressed Mike’s four charts into one for brevity.

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

Looking at the chart we can see that while currently it takes about eight jobs to fill one unit it wasn’t always so and in fact the twenty year average is closer to nine. Mike explains Read more

Job growth vs. revenue growth chart of top apartment building investment markets in the US- updated.

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:

Job Growth and Rent Growth for Apartment Building Investment

Click for full size image. Source: Axiometrics

Before I get sidetracked onto a long discussion on the importance of understanding just Read more

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