Recent Trends and Cycles in YOUR Market

19 Replies

I just finished listening to episode 52 of the BP podcast with Ken McElroy, and towards the end of the show, he discusses how his investment company was focusing mainly on expansion of their large multi-family/apartment portfolio. To give some context, if you haven't listened to it, the episode was published in January of 2014. Ken predicted that the apartment investment market was going to peak in 2-3 years, or roughly early 2016 to early 2017. He then goes on to mention that the next cyclical investment for his company will be either mobile home parks or self storage. My questions to you are:

1. Would you agree that the peak for apartment style and large multi-family investments has already been reached in your current market?

2. What cycles or recent trends in real estate are you seeing in your markets that are coming off of a peak or will see a peak in the coming years?

To answer my own questions, I don't feel that I've been following the market long enough to be able to notice a peak in apartment investments in the Fort Myers, FL market, but it certainly appears that the self storage market is now over-saturated. @Brandon Turner  has shared a lot about his recent mobile home park investments, and this seems to be a hot market in this area as well.

Thoughts?

1. No but I think we are quite close, lots of new construction just finishing up.

2. I think self storage has a long term problem in that people just have less stuff than they used to.  not many people have a giant collection of DVDs or CDs or Records or Books anymore all of that can be stored on a laptop or tablet.  People also seem to be embracing more minimalism where they don't want to accumulate stuff.

I know parts of Brooklyn have been on fire the last 10 years and I think SFH that originally had bidding wars are now starting to sell just shy of asking.

I'm also a believer of not trying to pick the highs and lows. Just buy smart with staying power if you're a long term investor. 

Hello Stetson!  Every area is different.      Each area should be evuated to determine its population and employment growth, future business plans, and the overall demand that fits your plan/goals,  it’s proximity to major employers, it’s school district reputation, and any public transportation that has a nearby stop.  What it’s past look like and if you think the future will continue to do that, it’s exterior looks, and it’s parking.  That is not a complete list of what to look at but feel free to ask other questions on this site and you probably will get several answers from those who have traveled down this road and give you great advice.

Good luck to you!

@Stetson Miller Storage is so much more local, based on typically a 3-5 mile radius (smaller in very urban areas) so it’s really hard to say a city/region is overbuilt because that could be true for one area and be very under supplied just 5 miles away.

1. We are active multifamily investors throughout the Midwest with the majority of deals in our home state of Indiana. While multifamily cap rates are compressed compared to the cyclical average, they are still high in Indiana relative to other markets. Because of that we are now seeing more and more new capital sources from the coasts or from abroad who see our ability to deliver solid cash yield as a major opportunity.

If interest rates continue to fall and the global chase for yield continues asset prices will continue to rise. Compared to Europe and other developed nations that have pursued similar easy monetary policies, commercial real estate in the US is cheap. Furthermore, multifamily is a relatively new asset class for larger institutions and especially foreign investors/institutions. Traditionally the larger and international groups have stuck to Commercial Office and Industrial, they are now becoming much more comfortable with Multifamily as an asset class that is worth allocating serious capital towards. There is currently $5.2 TRILLION in unfunded pension liabilities. Those pensions are being left holding the bag as bonds are bid up and yields drop. CRE, multifamily included, is going to be bid up even more with the pensions needing to find yield anywhere and everywhere.

This will be good for appreciation of existing assets but will make buying increasingly difficult and will drive down cash on cash yields of new acquisitions.

2. Older, value add deals are over priced compared to newer assets. "Value Add" is what everyone is looking for and individuals are paying up seeking to force a significant amount of appreciation. There is less and less opportunity to add value to projects but every broker is marketing every project as a "rare value add opportunity." The rent growth of 2012-2015 has slowed and we are in a period of low inflation and slow growth.

An example: We are buying a 272 unit A- class property with minimal deferred maintenance in a great sub-market for $112k/unit. It should produce an average 9% coc and a 16% IRR over 7 years. There are C+ class "value add" deals that are going for $100k/unit in the same market, in worse locations. I've seen value add proformas with minimal cash in the first three years and that eak out a 17% IRR. We've done over a dozen heavy value add projects in the past but there was a significant premium being paid for the additional reposition risk. Value add proformas that claim double digit cash on cash returns can just as easily be low single digits because of the nature of the heavy lift. Why take that risk for 200 bps of potential IRR return for significant risk? There are still diamonds in the rough, and off market opportunities to buy true value add deals at a basis that makes sense, but they are fewer and fewer.





@Zach Quick Absolutely, it is this immediate area that is becoming over-saturated as many new self storage facilities are still being built as average prices for the existing facilities are already competitively being lowered. 

@Spencer Gray I had no idea unfunded pensions were that big of an issue, everything you explained makes perfect sense. The "value add" label is certainly one that is being overused. I really only see it now as a term to attract starting potential investors who haven't done research about the property that they're purchasing, only trusting the broker's word. Thank you for the awesome response!

@Stetson Miller I forgot to mention the "silver tsunami" of baby boomers flooding to retirement who have plans were expecting traditional fixed income products to yield enough income to pay their expenses throughout retirement. If interest rates continue to drop then more retirees and seniors will need alternative assets that produce some substantial cash flow/yield. This may lead to more new capital entering the CRE market.

@Stetson Miller

Would you agree that the peak for apartment style and large multi-family investments has already been reached in your current market? (Yes multifamily is definitely peaking at the moment. Correction coming soon, but wont be as bad as 2008-2009. You can still find great opportunities you just have to be more persistent and conservative in your approach)

2. What cycles or recent trends in real estate are you seeing in your markets that are coming off of a peak or will see a peak in the coming years? (We feel storage facilities, mobile home parks and multifamily apartment communities as vehicles that can weather the storm against UN-forseen circumstances)

I second @Aaron K.  's concerns about self storage - I'm 28 and don't feel confident investing in that asset unless the value-in-land is significant. Digitization of goods and records, combined with my generation's enchantment with minimalism suggest that that industry may have a shakeout coming in the next 10-20 years. I'd want to see the zoning and location of the land allowing me to pivot in the next 10-20 years to be confident in buying self storage.

@Michael Haas I'm 30 and buying as much storage as I can. It's all personal preference, but I have a hard time believing that Extra Space, Public Storage, LifeStorage and their hundreds of millions of dollars on research and demographics aren't considering millennial's and their 'habits' while they are expanding and buying as much storage as they can. I think in general the 'minimalist millennial' is a bit overblown. 

@Michael Haas @Zach Quick I think I'd really have to agree with both of you. Although the 'minimalist millennial' idea is completely blown out of proportion in terms of ways big companies and marketing towards that demographic, I'm definitely in agreeance with the fact that people no longer have what storage facilities were previously used for. That's smart to look at the land use for the building before investing, hadn't thought of that, but still too risky for my area at least. Because the Fort Myers/Naples area tends to be more upscale, I'm seeing a lot of self storage companies converting portions of their buildings into wine storage and climate controlled vehicle storage which may be one of the ways that they're trying to diversify and break into new market share.

I feel Millennials want to THINK they are minimalists, but in reality, it’s really not very true. Millennials just have different stuff. They don’t keep commemorative plates and collectible spoons, but they keep clothes, kayaks, bikes, Christmas decorations, old computers, instruments, tools, etc. I’m 35, and I see just as many Millennials renting my storage units with gobs of stuff as much as other generations. 

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