Zero Bound Interest Rates, The Zirp Dimension, Stagflation and #Multifamily
Filed under: Multifamily Investments, The Economy and Current Affairs, Value Investor's Guide to Apartment Buildings
Zero interest rates and apartment building investment.
First my condolences to Bill Gross on the loss of his brother-in-law. Reading his piece in PIMCO’s latest Investment Outlook it is clear that the world’s biggest bond manager is running out of places to generate returns for their investors and by extension this applies to all income investors, especially retired people trying to live on interest income. For those would like to retire soon you may have to delay that decision for “an extended period’ as Edward Harrison over at Credit Writedowns put it in Permanent Zero and Personal Interest Income.
Gross’ points out that the Fed’s zero interest rate policy (ZIRP) which they have just announced to maintain through 2014 and their defacto though opaque continuation of quantitative easing (QE2.5 as he tweeted it) threaten to take us into another dimension where their policies have the opposite effect of their intentions.
“Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.” – Bill Gross
His bullet points:
- Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.
- Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.
- We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.
For more views on this and Europe too see also Entering the Debt Dimension from Phil’s Picks on the Phil’s Stock World Blog.
What does this mean for Multifamily?
The Zirp Dimension leads to Stagflation where economic growth remains anemic yet prices on essential Read more
Find the freight trains in your life and get on them instead of in front of them.- Barry Sternlicht Video via @Michael_MBA
Filed under: Commercial Real Estate, Multifamily Design & Development, Multifamily Investments, The Economy and Current Affairs
Great advice from Barry Sternlicht plus much, much more on real estate, investment, capital, leadership, opportunity, Europe, China while speaking at the Schack real estate conference. He is one very smart guy while being personable and humble, a rare but valuable combination. Reminds me a bit of my virtual mentor Tom Barrack, and not just because of the haircut! Barry even mentions wanting to learn how to surf, something Tom could definitely help with.
Here’s the link to the video: Barry Sternlicht at Schack RE Conference For more great video from the conference Read more
Record Rent Growth & Q4 Demand in Dallas/Fort Worth Multifamily Markets: Video
Filed under: Multifamily Investments, The Economy and Current Affairs
Year-over-year rent growth reached a two-decade high in the Dallas/Fort Worth apartment market. And demand in 4th quarter — typically a slow leasing period — was unusually strong.Record Multifamily Rent Growth in DFW
Only 38k Multifamily units added in 2011; demand = 300k+. Grubb & Ellis 2012 Forecast
Filed under: Multifamily Investments, The Economy and Current Affairs
New development is picking up but is restrained by lack of lender appetite.
Senior housing to see vacancy decline below 10% also.
Via Grubb & Ellis’ 2012 Real Estate Forecast available here: http://bit.ly/xfBnmd
Thanks to Jason Brumm of G&E San Antonio
Extra 100-150bp of risk premium (good!) for Multifamily says Freddie’s Brickman.
Filed under: Multifamily Investments, The Economy and Current Affairs
AFT: When you look at some of the cap rates on recent transactions, do you feel like the multifamily industry is getting a little overheated in some markets?
Brickman: I do not. I think it is perfectly rational where cap rates are now. The cap rates are driven by financing costs, and what you’re really saying is, can cap rates go up? Of course they can, and if [interest] rates go up significantly, cap rates would likely go up, but it’s not one for one. What you have to look at is [that] the spread of cap rates to Treasuries is actually quite wide.
AFT: It’s probably more than 400 bps now, on average.
Brickman: Exactly, and historically it has not been anywhere near that wide—it’s been more like 250, 300. And so you’ve got a very healthy risk premium to real estate right now, and you’ve got strong growth forecasts. There are very positive influences lining up behind demand and a relatively anemic level of supply. So, I think you can legitimately sign up for pretty healthy rent growth. And that [in] itself justifies a low cap rate even independent of the interest rate.
See the whole interview at: http://bit.ly/xp9VM7
Converting Cap Rates to Earnings Multiples
Filed under: Multifamily Investments, Value Investor's Guide to Apartment Buildings
Converting Cap Rates to Earnings Multiples
After a recent speaking engagement I was asked about how and why I use the earnings multiple concept when evaluating apartment investments. It was a great question and so I’m sharing my answer here in this blog post.
As a value investor two of the fundamental questions I always ask is what am I buying and how much do I have to pay for it. With an apartment investment (or really any investment) I am buying current income and the potential for appreciation so the second question comes down to “How many years of earnings do I have to pay for these returns?” The question can be answered by converting the cap rate to an earnings multiple. The Cap Rate is the return in current income on an apartment investment you could expect if you paid all cash. To convert a Cap Rate into a Earnings Multiple use the formula: Read more
Why are Cap Rate explanations so complicated?
Filed under: Multifamily Investments, Value Investor's Guide to Apartment Buildings
If you listen to any conversation about commercial real estate (CRE) within a minute the subject of cap rates will come up. Those who are just beginning to explore CRE are often thrown off by what one is and how it is calculated. A cap rate is really a simple thing that is often made overly complicated by the way it is explained. Let’s walk through what a cap rate is and then we’ll look at how they are used so that the next time the conversation turns to CRE you’ll be right there in sixty seconds when they get to cap rates.
A Capitalization Rate or Cap Rate for short is simply what you would earn on a property if you Read more
Apartment Buildings are the classic Value Investment
Filed under: Multifamily Investments, Value Investor's Guide to Apartment Buildings
With today’s stock and bond markets overrun by insiders and the volume of options, futures and other derivatives dwarfing actual investment in good companies while driving wild swings in their prices what is a traditional value investor to do? What about the accounting trickery that happens when CEOs raid their own companies for the short term results their huge bonuses are based on? Should you shrug your shoulders and be patient, very patient hoping eventually value will be recognized? What kind of income will you live on while you are being so patient? With interest rates so low and the Fed trapped into keeping them that way how can you earn decent current income without taking unreasonable or unknowable risks?
There is an alternative for conservative value investors: Apartment buildings.
- What if you could find good value stocks in a market where the price was dictated by the financial results, not market ‘sentiment’, momentum traders, short sellers, high frequency trading programs or what a butterfly did in Shanghai?
- What if you could find good value stocks in a market where the cycles were observable and understandable?
- What if your favorite value stocks paid annual cash dividends of 7, 8, 9% or higher while at the same time increasing their equity like clockwork?
- What if you could walk into the boardroom of your favorite value stock and dictate that they improve their performance? What if you could fire boardmembers who didn’t perform?
- What if you could buy a second stock with funds from your first stock without having to sell it or pay taxes on the capital gain?
- Plus Inflation Protection: What if the dividend went up when inflation did? Read more
Why We Like Apartments- Owning them that is.
Filed under: Multifamily Investments, Value Investor's Guide to Apartment Buildings
Recently I’ve been working with several new clients who are conservative investors looking for better returns than CDs and Treasuries but aren’t interested in taking on the volatile market risk of stocks, bonds and derivatives. I was explaining why apartment investments make sense and there are quite a few reasons but the biggest one is how the math of an apartment building investment works. In this post I’d like to share that with you in case you’re also looking for conservative income producing investments with inflation protection and upside potential.
Here’s the numbers on a typical apartment investment:
In this example is a 100 unit building with 850 per month per unit average rents which is purchased with a down payment of 25% and a 30 year loan for the balance at 5.5% interest. Vacancy is 5% of Gross Potential Rent, expenses total 50% of Gross Operating Income and a cap rate of 7.5% is used. Today in some markets cap rates are higher (buildings less expensive) and in a few others cap rates are lower (buildings more expensive).
Apartment Buildings are valued on the income they produce. (This post is about properties larger than 4 units, smaller properties are valued more similarly to single family homes.) There are several ways to calculate the value based on the income but the most common is the capitalization rate, or cap rate for short. The cap rate is the percent of the property value that the Net Operating Income (NOI) represents: Read more
The Apartment Building Investment Triple Opportunity Is Right Now
Filed under: Multifamily Investments, Value Investor's Guide to Apartment Buildings
For value investors, Demand, Supply and the Cost of Acquisition are the three factors affecting the apartment building investment decision and all are saying the time to buy is now. There is a tidal wave of new renters coming into the market and there has been little apartment construction to meet this growing demand. Outside of the gateway cities the prices of existing apartment buildings remain below the cost of building new. Fixed rate financing is available for apartment buildings at rates lower than we will see again for years if not decades.
“The multifamily sector is probably the only commercial real estate sector that has very positive fundamentals behind it,” said Jeffrey Baker, managing director at Savills LLC, a real estate investment bank that raises capital for multifamily owners and developers. “You’ve got a demographic that is producing more households that want to rent an apartment. You’ve got virtually no new supply that’s been added over the last several years.”1 Read more
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