Current State of the Market

3 Replies

I wanted to put a feeler out for the current state of the market at large. I recognize that Real Estate is local, but interested in hearing investors thoughts on macro, and even micro trends we are seeing right now. Here are a few questions to start the conversation, but feel free to expand.

1. How will recent Fed actions and global macro trends affect Real Estate over the near term? What about the next few years? 

2. How do you see recent volatility in equities affecting Real Estate?

3. Where is most of the capital within Multifamily flowing to right now? Class A/B/C? Stable buy and holds, mild value adds or deep value adds?

4. Do you see anything currently under the radar that threatens Multifamily investors? What are we as investors not talking about right now?

5. Based on your thoughts above, where does the greatest opportunity lie? 

6. Based on your thoughts above, where will investors get burned in the near future?

I look forward to hearing your thoughts, thanks!

@Scott Trench had an interesting blog article on these themes recently. Basically he made the argument that multi-family commercial is maybe a little more vulnerable in a raising interest rate environment than say single families, which are financed on safer term and terms loans. Here's the link to his work/thesis

I am not, nor have I had a commercial loan on a multi before so I am not qualified to answer these questions. What I know is that in my local market multi family housing and building permits for multis are flying of the shelf, relative to new construction for entry level single family homes. I think this is partly because the entry for single family is too high for most local shoppers so they need to rent. Also, younger folks can't yet afford to buy a SF. I have to believe that this is cyclical however, and that these apartment dwellers will eventually want to enter the SF market. 

On balance, interest rates going up should make it less affordable for folks to finance, and put downward pressure on home prices. It should also drive up the cost to rent, which, in theory should benefit all landlords. 

While I am not an expert, my thoughts are, be careful in this market not to over leverage, be ready to lower rents by 20% and still be able to service your debt obligations, be ready to see 20% vacancy. Buy property below market value regardless of multi or single family. Get long term loans that allow prepayment, and fix your rate. If you can do all of this you're likely able to keep growing, stay profitable, and ride out the bumps that will come. At least, that's my approach.

@Andrew Gingerich all great points on being conservative with your underwriting. Also a good article from Scott. His point regarding growing demand for SFR as opposed to renting Multifamily units is pretty interesting and something I think most Investors are not thinking about. We typically assume that because affordability is being squeezed across the board and ownership is a tough hurdle to get over for many potential home buyers, these tenants will stay in Multifamily housing. As mentioned however, that may not be the case long term. Thanks for sharing.

@Kevin Dean Here are my thoughts on a macro level:

The Fed's actions are absolutely contributing to the volatility in the stock market but not for the reasons people think. Their actions have caused the short term interest rates, the 2yr Treasury Yield, to sneak up to long term interest rates, 10 year Treasury Yield. 3 weeks ago the 2yr note surpassed the 3yr and 5yr notes effectively causing what's known as a partial yield curve inversion. Since, the 2yr has gone back slightly below the 3yr.

At this writing the 2yr is at 2.518% and the 10yr is at 2.716%. At every point in history, since 1960 when they started tracking this, when the 2yr passes the 10yr in value cause a yield curve inversion, the Country has gone into recession within 6 to 8 months.

A month ago I was seeing interest rates tick up from the GSA's about 50 basis points, bps, or one half a percent. At that time the 10yr treasury was at 3.2%. It has since gone back down.

Capital is flowing into all classes. The class "C" value add space is getting the most attention but inventory is getting scarce. Out of the "A" and "B" properties, the class "B" space has the best chance for adding value and the capital loves this space because because of the low vacancy. The 1031 buyers are dominating this space.

REIT's love the class "A" properties, particularly just built and stabilized assets.

We are definitely at the top of the National market and most primary and secondary markets. Some terciary markets still have room to grow, which is why it's wise to invest outside outside your local market.

Since value have gone through the roof in last couple of years, you can't even buy a class "C" property over a 7 cap in most places these days, it's smart to focus on building investor relationships and getting your available equity from investors up so you have the opportunity to pounce when the market is ripe again.

Investors need be aware of the market they're investing in, especially where in the cycle the market lies. There was an offer recently circulated for a large property on BP in my local market and they took the word of the listing broker about our market fundamentals, the broker isn't from our market, and now they may be in a pickle because they didn't take the time ask local experts what's going on.

My best advice is don't stop looking for deals, I found a true 10.28 cap in Texas this year and took it down. There is still a couple of opportunities out there.