As a value guy like you it’s hard to figure out how buying something in the sixes on cap rate works out to be a good deal. But what if the Fed is trapped at the Zero Lower Bound and we are turning Japanese? Their ‘Lost Decade’ is now old enough to graduate with a Master’s degree and we’re following the exact same playbook. I offer last week’s Fed decision as exhibit #1. They would dearly love to raise rates just to prove they can but there’s just thin ice between us and
The 10 year apartment building investment loan rate we track moved up to 4.454% from 4.375% yesterday after flatlining at the old rate since the middle of January:
Even so it is still below what we used to think of as the 4.5% floor for this rate. Meanwhile the ULI rate has been tracking the 10yr Treasury, rising from 3.37% April 20th to 3.76% yesterday, a climb of almost 40 basis points.
Is this the beginning of the long anticipated (The 3rd or 4th year in a row that everyone’s known rates were going to rise) rate hikes? It makes sense that the Fed would like them to get up off the floor if for no other reason that they would have room to lower them again when they needed to. But is now the time to do that when China, Europe and the rest of the world are slowing down?
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?
Only twice in the last forty five years has the level gotten this high without a recession following soon after. The chart is usually updated only once a month but I check it every week, especially since it had risen. When I checked this week I got quite a shock because the high levels I had seen earlier had disappeared:
Back in March I posted a FRED chart that Bill McBride over at Calculated Risk shared tracking a set of data that pretty reliably coincides with recessions. Even better is that in almost fifty years of data there have been only two false positives which brings us to a very interesting point. First, here’s the chart as it appeared when I posted back in March:
Next let’s look in more detail at those false positives:
In the Analysis on Tapering QE3 post Tuesday I included a chart of the US 10 year Treasury rates and you could see them going vertical in the days since the Fed announcement and Bernanke’s press conference last week. We’re in the middle of negotiations on an apartment acquisition with a client and so what interest rates do over the next few days and weeks is extremely important to us. So here’s the updated chart:
Yes the Fed is fighting DEflation but it sure doesn’t feel like deflation when we go to the store or pull up to the gas pump. While I am glad that Ben is battling the correct demon, it would be very helpful to know what ‘living inflation’ is doing to or for our apartment residents. Especially since on their National Apartment web conference earlier this week Reis said that in many of their largest 79 markets class B & C owners ability to raise rents has or soon will run into the 35% of income barrier. Watching what the costs of rent, food and beverages, energy and medical expenses are doing to our residents’ pocketbooks could guide us in raising rents. Today Pragmatic Capitalism had a very interesting piece on just that.
Bill ‘The Bond King’ Gross, founder of PIMCO says that the long run of stocks outperforming the overall economy is done and that the only policy option left for the ‘advanced’ economies in the world is inflating their way out of debt. Since Inflation = Higher Interest Rates and rising rates reduces the value of existing bonds issued at lower (currently near zero) rates, they don’t look to good as a long term investment either. See his letter here PIMCO Investment Outlook
So what’s a saver or investor to do, especially those nearing or at retirement? Chase yields in emerging market bonds? Who would you trust for information about those issues? Have those economies really decoupled from the US and Europe? Where could you find a decent stream of income with inflation protection build in and appreciation potential on top of that?
Apartment building investments. As we’ve laid out previously apartment owners can benefit from even small increases in rents, have demographics and social trends on their side and new supply has been quite limited over the last decade (see here, here and here for the details). Does the prospect of high single digit current income with inflation protection and even appreciation potential warm your retirement spreadsheet?
In this example, raising rents $25 or about 3% increases the value and owner’s equity $190,000 or almost 12% plus the income goes up more than 9%. That is the power of apartment building investment. Notice that in this example that the building is nearly full, if we were to buy a building that had more vacancies we could have paid a lower price based on the lower Net Operating Income and we would have the opportunity to create even more value by improving the management to bring in more renters. That is why we like apartments.
When I talk about investing in apartments I am not talking about being in the landlord business, I am talking about being in the property owning business and one of the expenses we gladly pay is for professional property management. We’re not in the tenants, toilets and trash business; we hire the pros to handle that and our job is to manage the managers…. And reap the rewards. Find out how we invest in apartments and how you can too by contacting me at firstname.lastname@example.org.
M&M covers 39 major apartment building investment markets in the US and have just published their Q3 reports. Here’s a list of the metros they cover:
They also provide snapshots of the Office, Industrial, Retail and Self-storage sectors in many of those markets, accessible from the tabs on the page. Note this information requires registration at the website to view.