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:
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.
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:
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.
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:
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?
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?
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:
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:
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)
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%:
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.