Tag: interest rates

Apartment Building, Commercial and Residential Real Estate state of the market video from Tom Barrack of Colony.

Tom Barrack was on CNBC last week to talk about real estate with the traders. Great TB quote to open the show: “It’s always great to be the slowest guy on Fast Money”. There’s more wisdom in that statement than any of the show’s regulars understood.

A couple bullet points but definitely worth watching the video. The link on the image below goes to the Colony website where they edited the three segments together (commercial free too):

  • Housing [of all types] is the best opportunity. Today there might be a Fed bubble but there isn’t a housing bubble.
  • The rise in interest rates while not big and still low historically speaking, will hit entry level housing. 100bp (basis point, where 100bp = 1%) rise in interest rates will cost a borrower an extra $150+/- a month on their mortgage payment for a $200,000 home. That will keep more people renting.
Apartment Building Investment and single family
Click on the image to go to the Colony website video (no commercials)

FHFA’s DeMarco re-affirms cutting Fannie and Freddie apartment building loan volume.

As reported by CoStar: “Given that the multifamily market’s reliance on the enterprises has moved to a more normal range, to move forward with the contract goal, we are setting a target of a 10% reduction in multifamily business new acquisitions from 2012 levels,” Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) said. “We expect that this reduction will be achieved through some combination of increased pricing, more limited product offerings and tighter overall underwriting standards.”

Fannie and Freddie Apartment Building Loans as percent of multifamily originations
Source: www.multifamilyexecutive.com/

While 10 percent doesn’t sound like much, Fannie Mae and Freddie Mac combined to finance about $62.8 billion in multifamily deals last year, meaning about $6 billion in liquidity will Continue reading FHFA’s DeMarco re-affirms cutting Fannie and Freddie apartment building loan volume.

Compare all mortgage rate indexes back to 1990 and beyond. Handy website and tool.

One of my clients who does distressed debt pools shared this link to a site that has mortgage rate index history and a tool to compare them. Very handy for deciding on an index or between competing mortgages. Also helpful research if you’re planning to sue over the LIBOR rate rigging scandal.

mortgage x dot com database

Continue reading Compare all mortgage rate indexes back to 1990 and beyond. Handy website and tool.

The Federal Reserve and Beer Goggles plus what Financial Repression means for Apartment Building Investments

James Montier, who works at the intersection of value investing and behavioral investing (Author of ‘The Little Book of Behavioral Investing’ http://amzn.to/X9Olzc on Amazon among others) has a great quote in his latest white paper published by GMO Global Investment Management entitled “The 13th Labour of Hercules:Capital Preservation in the Age of Financial Repression” Note that you may have to register at the site (free).

His paper discusses the effects of financial repression on portfolio stock and bond allocations and by implication the effects on real estate and particularly  apartment building investments. Financial repression is the term used to describe central bank’s strategies for forcing interest rates to zero or negative to spur investment and spending at the expense of saving. Take it away James:

William McChesney Martin was the longest-serving Federal Reserve Governor of all time. He is probably most famous for his observation that the central bank’s role was to “take away the punch bowl just when the party is getting started.” In contrast, Bernanke’s Fed is acting like teenage boys on prom night: spiking the punch, handing out free drinks, hoping to get lucky, and encouraging everyone to view the market through beer goggles. [Emphasis mine]

The paper goes into depth on the effects of financial repression on investments, which grow the longer the repression lasts, up to twenty years. Does the phrase: “… for an extended period” ring a bell? How about QE1, QE2, QE3, and now QE-infinity?

Financial Repression and Apartment Building Investment
Source: James Montier, GMO

 

Apartment buildings are the real estate equivalent of Continue reading The Federal Reserve and Beer Goggles plus what Financial Repression means for Apartment Building Investments

The State of US Commercial Real Estate, Single Family and Apartment Building Investment Markets. By Tom Barrack, Colony Capital

Tom Barrack of Colony Capital on what’s really happening in US real estate from an investor’s perspective. The clearest, most cogent look at the state of commercial, multifamily and single family markets today and where the opportunities are. The first five and a half minutes is about Europe and the bottom line there is don’t but after that it is all gold. If Tom wanted to be one of those real estate ‘gurus’ he could package this video with a big notebook and some advertising and sell it for $10,000- and it would be better than any of the other stuff out there. And you get it for free. I’ve watched three times and get an extra little nugget each time.

The state of real estate in the US, commercial, single family and apartment building investment
Click on the image to view the Bloomberg video.

The big takeaway for me is that (temporarily at least) Continue reading The State of US Commercial Real Estate, Single Family and Apartment Building Investment Markets. By Tom Barrack, Colony Capital

Good News and News: Apartment Q3 update web conference replay now posted from Marcus & Millichap

Good presentation on the current national apartment building investment sector from Marcus & Millichap. New supply remains constricted except for a few cities, they didn’t mention any names *cough Seattle cough* but if you’re in one of them and tracking the pipeline it’s easy to read between the lines.

Apartment Building Investment Market Improvement Expected to Continue

Another interesting trend is that Continue reading Good News and News: Apartment Q3 update web conference replay now posted from Marcus & Millichap

What do I do with my retirement money, one investor’s answer (with charts). Think apartment building investment-

Good charts on long term returns in this piece from Glenn R Mueller, PhD.:

I recently met with my financial advisor to “rebalance” my … retirement portfolio. Based on my “age and stage of life” his allocation model showed a 50% bond allocation. I laughed and asked him if the company allocation model assumed interest rates would rise over the next 10 years? His answer was “yes- of course.” I showed him the graph below which shows lower than average TOTAL returns in a rising interest rate environment and he checked his long-term data and found that bond holders between 1953 and 1980 had actually lost money. We all know that as interest rates rise, bond values decline and thus the total return can be small or negative. Not to mention that a 10-year treasury at 1.5% is below expected inflation and thus a NEGATIVE REAL RETURN. He agreed that a bond allocation did not make much sense, but since my investor profile was conservative what was the alternative?

Apartment building investments outperform bonds in rising interest rate environments

Dr. Mueller is Continue reading What do I do with my retirement money, one investor’s answer (with charts). Think apartment building investment-

PIMCO calls bottom in housing, but likes REOs-to-Rentals over apartment building investments?

In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.

Shrinking shadow supply but still more renters

One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.

While they do acknowledge the challenge of REOs-to-Rentals:

However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.

… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-

Hat tip: The Big Picture blog

The shape of the entire yield curve drives #CRE pricing, not single Treasury rate- CBRE Econometrics

Research out from CBRE Econometric Advisors shows that the typical risk-free benchmark rate, the 10 year Treasury, does not accurately reflect the cost of capital risks in asset pricing for commercial real estate. The whole yield curve or ‘term structure’ should be used instead. Highlights from their report:

  • Our research shows that it is not a single risk-free rate that drives asset pricing, but rather the entire term structure of interest rates (also referred to as the shape of the yield curve; we use these terms interchangeably). This term structure effect is so strong that relying upon a single benchmark rate in one’s analysis (as is typically done by analysts and investors) is inappropriate. We will demonstrate this below, using our empirical model of cap rates.

Cap Rates vs Yield Curve for Capartment building investment pricing

Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.

 

local lenders are making loans on small apartment building investmentsLocal and regional banks are working hard to fund ‘small’ apartment building investments in their local markets. Small loans in the $1-3 million dollar range are the ‘sweet spot’ for these lenders and investors looking for loans in the $3-5 million range are finding even more choices. For loans under $1 million the market is still pretty fragmented with lenders there averaging only five loans of that size.

“Banks are trying to create more aggressive lending programs in the small-balance multifamily financing space.”

In the West, banks like Sterling, KeyBank and Bank of The West are Continue reading Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.