At the end of last year (See my Dec. 28 post Why buy Multifamily in ’09) I laid out a number of factors pointing to the opportunity to secure good returns on income producing apartments this year. As time marches on we are receiving more corroborating evidence of a market bottom for multifamily at the same time as the credit market for these properties still has money available for acquisitions.
From a diverse range of reports starting with the ULI/PricewaterhouseCooper’s Emerging Trends in Real Estate 2009, Real Capital’s report published mid-Feb to Marcus & Millichap’s conference call last week (Feb. 24th) we are seeing a real buyers market develop in multifamily.
First of all multifamily starts are projected to be down at least 30% this year on top of being down 50% in ’08, meaning starts are down 85% from two years ago. Balanced against this lack of supply is the fact that Census Bureau projections show the growth in the prime renter segment of the population (20-34 year olds)will accelerate significantly over the next five years forcing rents higher over that period. There will also be a steady if not growing stream of immigrants who tend to long term renters.
Even in the markets that dodged the worst of the mortgage meltdown (remember that the vast majority of the damage was done in only four states: CA, AZ, NV, FL) home prices and mortgage availability are keeping many from buying a home, or from considering home ownership to be a good investment. Net-net, supply down and demand about to rise. Markets that are poised to benefit from stimulus spending, especially in infrastructure and energy will experience the economic recovery sooner than other locations in the country and multifamily properties in those markets will turn around sooner as well.
Financing while requiring more equity, is still available. The GSEs are full of cash, are actively lending on multifamily and are authorized to continue doing so through the end of 2009. Regional and local banks are also lending on multifamily, albeit at slightly higher rates than the GSEs. There is also foreign capital finding good multifamily values here in the continental US.
With all these positives, why isn’t everyone out there acquiring? There are both challenges in the short term and a large group of buyers waiting for ‘the bottom’ of the market before they wade in. The primary challenge is that vacancies in most markets are rising and rental rates are projected to be flat to down through ’09 and maybe into the first part of 2010. This has many buyers afraid of ‘overpaying’ for properties which puts them in the waiting for the bottom group.
Our strategy is to buy based on higher vacancy and lower rental rates so that the property will operate positively while we wait for demand (and inflation) to pick up. During the latter part of the anticipated seven or eight year holding period the property will benefit from increased demand, inflationary pressure on rents as well as the return of growth in the economy and amortization of debt. We will also utilize technology to insure operating costs are kept to a minimum.
Those waiting for ‘the bottom’ will naturally be paying more for their properties because the confirmation of the bottom is rising prices of course. There is an old saying that the smart money is typically thought to be ‘early’ and we believe now is the time to be part of that group.
For the statistics and charts we are seeing or to learn more about apartment investments and the multifamily deals we are uncovering please contact us:
Giovanni Isaksen
Ashworth Partners Ltd.
