May 7, 2017
By Darell Schmidt, Allante Properties, Denver Based Apartment Developer and Investor | www.AllanteProperties.com, Darell @Allante Properties.com, 303-359-1210
The multifamily market continues to perform well even after beginning its 8th year into the recovery. Many analysts are reporting this recovery is lasting longer, a true double header recovery, and more of the same is expected for some time to come. Yes, there are likely to be small market corrections with slower rent growth and rising vacancies, but the demand for rental apartments is off the charts with recent years rent growth and the insatiable demand from domestic and foreign buyers. Prices for apartments are being driven higher and higher as America is still the number one country to invest in commercial real estate.
During the last Great Recession, the market bottom occurred in 2009, challenging the longest recovery of earlier recessions. But this recession was different and this recovery has shown it is different too. Of course, the questions about the length of this recovery started appearing in 2015 with forecasts for the recovery to end. However, the easing of credit by the Fed has prolonged this recovery, and for good reason. The Fed wanted to insure the recovery was and will be sustainable. Raising rates too early and too much would just put the US back a step. The Fed also wants to control inflation at around 2% per year. With job growth exploding, the unemployment rate is normal again, with indications of wage growth increasing as some companies are having difficulty hiring qualified personnel at yesterday’s wages. This is producing some wage inflation for the first time in many years. But one big part of our pre-recession economy was home building that provided significant economic benefit, but is now languishing because of having lost affordability capacity. Rising land and construction costs is the culprit, coupled with more stringent lending standards, making it quite challenging for buyers to find a home and to get qualified to buy it. The average price in most cities around America is higher than what the first-time home buyer can afford, leaving many buyers no choice but to continue to rent, which bodes well for multifamily owners. It is quite apparent that the home owner rate continues to fall as fewer and fewer home buyers can qualify for the entry level home, which also is a bonus factor to apartment owners, with more would-be owners renting instead. The single-family home buying market before the Great Recession was attracting apartment dwellers into buying their first home, with relaxed qualifying ratios and income requirements that also were coupled with amazing predatory financing not understood by most of the buyers. This would soon prove to be a catalyst that started the Great Recession. But if you think about it, it was the Great Recession that unleashed tremendous apartment demand in the market that led to an amazing run for multifamily apartments.
Will the Recovery Continue?
The recovery will likely continue longer as well because interest rates are still at historical lows and job growth has remained quite robust which has directly led to absorption that has kept up with the new supply being built in the majority of markets.
Other unknowns include interest rates and cap rates which are used by buyers to determine the value of investment real estate. Of course, we have witnessed historically low interest rates and cap rates, driving values higher in commercial real estate during this recovery. As interest rates rise, cap rates normally rise too, but not always. Since October, the 10-year Treasury has increased from 1.8% to near 2.5% after the election and now settling in at 2.3% as of May 3, 2017, with little to no impact on cap rates. The US Federal Reserve left interest rates unchanged in their early May 2017 meeting and is still contemplating moving rates higher later in the year. Rates will only rise though if the economy continues to grow. However, if rates rise, it presumes GNP growth in the economy with growth in wages too, which will allow consumers more money to spend which in turn can support rent growth in commercial real estate, keeping values high.
Plus, the banks have tightened their lending standards for developers across the country which is pushing on the brakes for run-away supply problems that plagued past recoveries. This is having a compounding effect of controlling supply because of lack of construction financing. Financing is only available now for the best developers with the best locations and the most conservative Loan-To-Costs in their applications for financing. Sure, interest rates can still increase which may have a direct correlation on rising cap rates, but saying this with certainty is difficult and challenging because of the predictable rise in wages too. We won’t really know until it happens. One thing is certain however. Change is always occurring and the best policy is to be consistent with a conservative and diversified investment portfolio that includes real estate that looks towards the long run, not the short run.
Darell Schmidt is Managing Partner with Allante Properties that develops new urban properties and acquires existing property in great locations and shares his investments with like-minded private investors. Additional information can be obtained by calling Darell at 303-359-1210 or emailing him at Darell@AllanteProperties.com
This Article is for informational purposes for Accredited Investors only and does not constitute an offer to sell or solicitation of an offer to buy a security. Allante will prepare a Confidential Private Placement Memorandum and related documents, which will be provided to Accredited Investors only that describes material terms and conditions and material risks involved in any offering in the future. Read it carefully before you invest.