Quote: “[A] very active market that continues to give strong weighting to underlying land value and potential future use, even if this use is far off in the future.” – James Glen, VP, Colliers Vancouver, BC [Emphasis mine]
Any time you see future and potential in the same sentence referring to real estate, watch out…
Oh and another sign is when the average cap rate for a low-rise apartment deal is 3% while high-rises are at 2.5! Just for reference, a 2.5 cap is the equivalent of a 40x multiple (aka PE or Price Earnings Ratio) on a stock meaning that it would take 40 years of earnings (NOI in the case of real estate) to repay the purchase price and that is definitely “far off in the future“.
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.
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:
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 Continue reading Do You Know Where Your Apartment Market Is Right Now?
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:
The Urban Land Institute/PriceWaterhouseCoopers annual report on Emerging Trends for Real Estate 2014 was released last week and apartment building investors and commercial real estate pros have some good things to look forward to next year. Note that this post refers to the Americas version of the report with separate sections on Canadian and Latin American markets but they also publish Asia-Pacific and European editions as well. This is the 35th edition of the report is it’s based on individual interviews or surveys from more than 1,000 investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.
Here are the 5 key trends we should all be aware of with my comments:
Survey participants continue to rank private direct real estate investment as having the best investment prospects. Pretty expected from this group but the National Council of Real Estate Investment Fiduciaries (NCREIF) recently released its property performance index for the third quarter of 2013 and on a trailing 12-month basis, the index’s return was 11.0 percent, split about 50/50 between income and appreciation. A pretty nice return compared to fixed income rates and a much safer looking bet than buying equities at their all time highs.
Dependence on cap rate compression to drive value is being replaced by an emphasis on asset management. Especially in the 24 hour gateway markets apartment building cap rates are about as low as they can get (well until you look at Vancouver BC) so property performance has to come from actually making the property perform. You also have the problem of what to do with your proceeds if you do sell, as you would be reinvesting right back into the same cap rate market that you sold in… unless you changed to a higher cap rate sector, suburban strip centers anyone?
Opportunities to develop property are finally appearing in sectors other than multifamily. CBRE Econometrics had a piece out last week showing that large (> 350k sf) warehouse properties are being snapped up as fast as they’re being built. Maybe developers who moved over to doing apartments the last few years will move back to their home sectors and ease off on the new supply of multifamily units.
Value-added investment ranked highest in terms of investment strategy; distressed properties and distressed debt ranked last. We were licking our chops a few years ago waiting for RTC 2.0 fire sales to begin and while we were able take down some bank owned inventory, the anticipated tsunami of defaults on commercial loans never materialized. At this point most everything has been extended and pretended into performing status or sold off and so it’s back to making money the old fashion way: Finding and/or creating value.
Both equity investors and lenders are widening their search for business to include secondary markets and niche property types. This will be a double edged sword for investors who are focused on those secondary and tertiary markets as debt financing will be more available but there will also be more competition from sophisticated outsiders with deep pockets. The key will be to make them your buyers so dig in, find the right properties and tie them up quickly.
Back on June 24th I wrote a post Analysis on Tapering QE3 talking about how traders fears about the end of the Fed’s money printing spree made the interest rate on the 10 year Treasury jump. And as I mentioned in a follow up post Update on the 10yr Treasury rate we care about the 10yr Treasury (or T10) because it’s the benchmark most lenders base long term loan rates on. But there is one more component of apartment loan rates (and lending rates in general) that I want to draw your attention to. First an updated chart:
I’ve updated the chart with the latest rates and also added the rate for an apartment loan with a fixed rate for 10 years from one of our lenders (details on the loan terms below). The other thing I added was the spread, or difference, between the two rates (on the Right Hand Scale). So far in 2013 the spread has averaged 2.65% or 265 basis points (bp) but it’s not a fixed amount that the lender adds to the T10. You can see that back in the beginning of May when the Treasury rate got as low as 1.66% the spread widened to 280bp because the loan rate was left at 4.5%. Then the spread narrowed back towards the average even while interest rates went up from there.
Then the Fed meeting notes came out in the middle of June and the T10 shot up but we got a double dose because the spread jumped up too. The Treasury went from 2.19% on the 17th to 2.57% on the 24th, and the spread jumped from 262pb to 283. It makes sense that in the uncertainty of a sudden rise in rates that lenders would widen their spreads to create a little breathing room but since then things have gotten quite interesting… in a good way. The good news is that since then the spread has Continue reading Apartment Building Loan Rates Fall as Spreads Narrow
Bill McBride over at Calculated Risk stares at this stuff all day and has a pretty good track record reading the Fed’s tea leaves. He believes that actual ‘tapering’ of QE3 purchases most likely won’t start before December although there is a slight possibility that it could happen in September if…..
3rd Qtr. GDP rose enough to make 2013 growth look like it will hit the low to mid 2% range.
Unemployment would have to dip enough to make it likely to get down to 7.2%-ish by year end.
Inflation has to be increasing. Currently the trend is in the wrong direction and Q1 produced only .3% which is well below the 2% annual the Fed Wants.
See Bill’s analysis here: Analysis on Tapering QE3 I highly recommend following Bill’s blog and this is just one of several posts in the last week on Fed comments around the end of tapering. Here’s the inflation chart he posted last week showing four different measures of inflation, note the trend since the beginning of the year:
Mark Hickey of CoStar put out a piece looking at who was responsible for the near record $65.8B of apartment building investment in 2012. CoStar’s numbers show that private owners/developers did just about half of all acquisitions last year and institutions were in for 12%, both near their recent trends. REITs on the other hand increased their share by a third, responsible for 12% of sales volume last year.
Interestingly the sellers were pretty much the same groups, except REITs who were the largest net buyers last year.