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:
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.
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:
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:
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’.
Commercial Real Estate prices post double-digit annual gains in May
Momentum picks up in the General Commercial segment
Improvements in market fundamentals underpin growth in commercial property pricing
Capital flows remain healthy
Distress levels continue to dissipate
See link for numbers and details-
CoStar has been tracking the indexes of repeat commercial real estate sales since 1996. Note that the Value Weighted index is driven mostly by core properties while the Equal Weighted index is mostly driven by smaller, non-core property sales.
The apartment building loan rate we track came in today at 4.765% (see below for loan details), making it 22 straight weeks below the five percent mark. The spread to the 10 year Treasury (T10) also remained in the 2.1 and change range where it’s been since the beginning of March, indicating that the very competitive market for multifamily loans continues on.
For the gold plated ULI less than 60% LTV loan the spread dropped into the 1.2s from the 1.3 range where it had been holding since late February, taking the implied rate for these core institutional apartment loans down to 3.77%.
A MacArthur Foundation survey conducted by Hart Research Associates shows that 70% of Americans polled think that the housing crises isn’t over and 19% think the worst is yet to come, good for apartment building investment I believe. As reported by the Wall St. Journal in an article titled: Allure of Homeownership Slumps Amid Worries of Continued Crisis the worst is yet to come figure is unchanged from last year, which may reflect a segment of the population that has been deeply scarred by collapse of the lending and housing bubbles. The still in the crises figure is down from 77% a year ago but it is still a big number that’s having a positive effect on apartment demand: