Is Multifamily Growing or Overheated in Your Area?

Question

Glenn Mueller, Ph.D. has this on his website, which is http://blackcreekgroup.com . It's called the "Cycle Monitor". This is the same reference to "cycles" that @J Scott has popularized on BP.com.

It shows (though with a time-lag - this is 2018) which areas are growing and which are overheated for multifamily, in which cities.

We're talking about occupancy, in multifamily. Other aspects of the free report on this site are industrial, commercial, etc.

Phases 6-11 are the expansion phase of the housing market, and 12-16 are when "oversupply" of new housing starts is greatly outpacing the demand, creating "hypersupply".

Phase 11 means "equilibrium" between occupancy and demand. It never lasts, though. Builders build feverishly when they see a green light, but can't stop building when it turns yellow, and they still bring inventory on-line when the light is red. Such is life in real estate.

Where are you? And where are *we*?

Mo Takhim · Answer

When you understand real estate cycles, you understand that there is a time to avoid certain markets but you should bear in mind that not every market is cyclical.

There are markets that are Linear which tends to appreciate at the rate of inflation. They usually exhibit a “flat” growth curve with no major spikes or declines. Boom and busts rarely occur as these markets keep chugging along and you also have "Hybrid" markets as the name implies, these markets exhibit a combination of linear and cyclical characteristics. They can have linear, slow-growth for a period of time followed by period of moderate cyclical-style appreciation. They never boom and bust like Florida or California, but they also never correct like more volatile markets either.

Using the wrong technique in a particular market cycle could cost you a lot of money in lost profits— or lost equity. The average time for a market to complete a full cycle will differ, but from I am reading it can range from 10 to 25 years. East Coast and West Coast cities tend to be more dynamic than cities in the heartland of America, and their markets rotate faster. Heartland cities tend either to be slow, steady climbers, or stagnant for quite a while.

Markets definitely have their own distinct cycles but they tend to not fall too far off of the macroeconomic cycles of the US real estate market. Generally I would say that we're very much at the highest point pending correction...prices have begun to level off, the correction that will take place will be nothing near a recession. Lending practices were drastically tightened after '08 which has subsequently lead to better underwriting and better debt securities. The market expansion that we have experienced over the last decade has been built off of solid economic growth rather than lose lending by the banks.

Over time, employment and demographic trends have been the best demand indicators for apartments. The currently robust jobs figures help explain the dominance of the “Expansion” phase in the market cycle. Some risk may lie ahead, then, if the deceleration in employment comes to pass later in 2019 and beyond. All real estate is cyclical!

Chase McArthur · Answer

@Jason Merchey

So overall, yes we do hace a tsunami of new MF inventory slated to come online in the next 2 years, however, unlike other asset classes the MF space is going to react differently. The new inventory that will be pumped into the markets are Class A/B assets. Therefore the only MF markets that will be most affected will be those with heavy A/B inventories.

However, given that the demand for Class A is limited, this will have a negative impact on new inventory as well as competing inventory in those markets, essentially creating a concessions amd amenities war between rivaling assets. There has been and will continue to be a surge in Class C and workforce housing demand, which the new A inventories will have little to no affect on. No new C inventory is being created and B- inventory will continue to organically depreciate into C assets.

It is this high demand for value add assets that is fueling the MF markets in this cycle, which is compressing caps in primary markets which in turn is forcing capital to seek investments in secondary and tertiary markets. This migration is causing compression throughout secondary and tertiary markets as well, which is driving smaller investors out of the game.

As I see it, we still have a solid 2 or 3 years before we see any significant corrections in B- and C class assets.

Increasing interests rates may prove to be beneficial for small to midsize investors as the pricing gaps will be forced to compress as large cap investors begin to withdraw from secondary and tertiary markets easing pressure on cap rates.