3 Questions to Determine If We Are In a Multifamily Bubble


First, a story torn from the history books:

“In 1593 tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. After a time, the tulips contracted a non-fatal virus known as mosaic, which didn’t kill the tulip population but altered them causing “flames” of color to appear upon the petals. The color patterns came in a wide variety, increasing the rarity of an already unique flower. Thus, tulips, which were already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits.”  See Investopedia   

Are seeing a bubble forming in the multifamily market?   Are apartments prices behaving like tulip bubble? My assertion is we are not likely to see a bubble in the multifamily market in 2014.  With the caveat that predictions beyond a year tend to be susceptible to error, the next several years appear to continue the gilded age of multifamily.

To answer our question of the day lets look at the definition of a speculative bubble provided by Robert Shiller in his must read book Irrational Exuberance:

“A situation in which temporarily high prices are sustained by investors’ enthusiasm rather than consistent estimation of real value.”

So we will now turn to the three prongs of the definition to reach our conclusions:

1.  Are Prices Temporarily High?

The best way to compare apples to apples across the US multifamily market is to evaluate cap rates.   The cap rate is simply the net operating income divided by its value.   Consider the following chart:

MM Apt cap rate slide

see: Marcus and Millichap Report 

Cap rates and pre-recession price per unit seem to look like 2006, so we can say it appears the market looks frothy by the look of the chart- but is that enough to state we are in a bubble?  Lets turn to investor expectations to delve into why that is not the case.

(Side observation:  I would argue that commercial lending standards keep a higher level of sanity in commercial real estate.   Loan to value maximums in the 75% to 80% range and debt service coverage ratio of 1.2 times.  I decline, however, to declare any market with human participants strictly driven by rational behavior.)

2.  Are Investors Overly Optimistic?

Trying to judge the rationality of investors is an interesting endeavor.  We know from the Urban Land Institute’s  (ULI) annual economic survey that we see optimism for multifamily across the board the 2013.   But is the optimism OVERLY optimistic?  Only time will tell but lets look at some of the signals we are trying to read from the demand side and competitor supply side to gauge the appropriate level of exuberance.

  • Household formation stats show pent up rental demand through 2016

“Shocking new data reveals that of the 5.5 million new households that will be formed between now and 2016, an estimated 3.8 million, or nearly 70% , will be renters , not homeowners according to Jeffrey Friedman, CEO of apartment REIT Associated Estates Realty (Nasdaq: AEC ).” See Renter Nation

  • On the supply side we see construction permits still below historical levels:

“My view is that we are nowhere close to a bubble in the multifamily industry. Last year, we only had 233,000 five-plus multifamily unit starts, and that’s well below the average we did in the past 10 years, when production was very stable. It was really close to 300,000 units. We haven’t even gotten back to that level. I think if you look at the demand levels, we can justify at least 300,000 and perhaps as many as 350,000 to 400,000 multifamily units going forward, to cover pent-up demand, ongoing demand, and the loss of stock that comes in the wake of a hurricane or older buildings deteriorating. Nationally, we’re a long way from meeting the level we need. Permits are higher, so that may be an indication that we may be picking up the level of new construction. And demand is certainly higher now than it was before.

— Mark Obrinsky , vice president of research and chief economist, NMHC”

See Multifamily Executive Article

3.  Is There Basis for Current Estimations of Value?

Indeed when we look to the ULI  consensus forecast we find evidence of market equilibrium.  The long-term average rental vacancy rate is 5.3 percent.  The consensus forecast for 2013 is 4.9% with a stable 5.2% for both 2014 and 2015 projected.  The e long-term average rent growth is 2.7 percent.  The 2013 through 2015 forecast appear inline with that rate.

So overall, absent a black swan event (unforeseen major shock) the multifamily market is quite healthy.   So what do you see?  Anything cause you to disagree with my findings that apartments are not tulip-like for now?

Post Script: For a great read on the the history of market meltdowns see This Time is Different by Reinhart and Rogoff.

Photo: La Citta Vita

About Author

Douglas Dowell

Douglas Dowell J.D. is a commercial and multifamily investor. His blog will focus on legally raising private money, risk mitigation with due diligence and management science. He is also an avid student of success principles with a focus on modeling success factors.


      • You may be reading the wrong news sources. Traditional, corporate-owned media outlets only ever report the “all-things-rosey” side of the market. Head over to ZeroHedge.com, they’ll absolutely tell you there’s a bubble before it has burst, in both domestic and international markets, with plenty of empirical data to back it up.

  1. Investment bubbles are exceptionally difficult to detect before they occur or while they are ‘inflating.’ Bubble are almost always (I dare say always) determined after they have burst.

    If anyone can can direct me to an article where the author declared a bubble while it was occurring, I’d like that citation.

    • Jeff Brown

      I didn’t ‘declare’ publicly, as I wasn’t online ’til 3 years after I ‘acted’. But in 2003, Kevin, I thought I’d perceived what later became ‘the bubble’, and completely abandoned my home market in SoCal. 3 years later, Kaboom! That decision turned my life upside down for almost 2 years. I’ll let my actions speak for themselves. Make sense?

    • Douglas Dowell

      Thanks for the comment Kevin,

      I agree with your assessment. The big problem is bubble detection is detecting it…sensory acuity if you will. A few economist such as Robert Shiller, Raghuram G. Rajan, and Nouriel Roubini called it overall the folks at the Fed just did not grasp it for sure.

  2. I’m so glad to see an article that is finally bringing focus on the correlation between macro-economics factors and the multifamily market. Thank you, Douglas. With your permission, I’d love to expand a bit more.

    Using more recent asset bubbles (over the Dutch Tulip of 1637) would probably give us a more accurate perspective when analyzing whether a bubble exists in this economic sector. With the introduction of the central banking system and its roles in the monetary policies of nations, it wouldn’t be wrong to look at the 1929 stock market crash, 1987 stock market crash, the dot.com bubble of 1991-2000 and the real estate bubble 2002-2007. According to the famous Austrian Economists, Ludwig Von Mises and Murray Rothbard, the primary cause of asset bubbles is the result of the central bank’s inflationary policy (of expanding the money supply). For a brief explanation this is a good read: https://mises.org/daily/672

    When money supply expands in the economy, this money ends up in various assets rising the price of those assets. Remember this is not a natural event of the market but it’s an artificial one based on the central bank’s intervention. In short, money inflation leads to price inflation.

    Another interesting event taking place when money supply is expanded, is the suppression of interest rates. As a side note, this is the main reason explaining WHY we’ve had such low rates especially since 2008 when the Federal Reserve (which is the U.S. Central Bank) had started its incredible (some may call it infamous) money inflation program. http://research.stlouisfed.org/fred2/series/BASE

    Entrepreneurs often make decisions based on the price of interest rates, whether directly or indirectly. When the price of interest rates is suppressed it causes distortions in the asset evaluation. In bubble cases, it artificially increases the value of asset leading to the irrational exuberance and speculation. Note, that the first step must have happened before such optimism penetrates the minds of investors.

    It then prompts me to go to your final topic which elaborates on what current economic statistics reveal. My concern in using the mainstream statistics is that most modern statisticians are trained in the Bernanke academic system. It was late 2007 when Ben was assuring the nation that there was enough evidence supporting there was NO real estate bubble. So, I wouldn’t rest well at night merely relying on statics.

    Finally, do I think we’re in bubble? I think that before we answer this with a final yes or no, it would be wise to enumerate factors that could potentially determine the formation of a bubble.

    1. Interest Rate. From this angle, when rates are artificially low, it’s not crazy to think the price evaluation of the average apartment complex may be distorted.
    2. Future of the interest rates. If the rates rise (whether as a direct contraction of the Fed’s money supply or China, the Fed, or any other creditor country starts selling in mass their reserves of Treasury Bonds) it could very well cause a deflationary effect on the real estate pricing.
    3. Lending guidelines for residential borrowers. If these guidelines become more buyer friendly (with low down payment, loose credit, weak financial criteria, etc.), it could cause higher vacancies in the rental sector. I doubt banks would resort to the same criteria that jeopardized their past.
    4. New generation. The good news I think is that it’s more evident that today’s youth is not as eager to be tied down to the idea of “the American dream of home ownership”, they want to be mobile and many of them learned though the mistakes of their parents. If such generation prefers rent versus own, the future appears optimistic for the investor.
    5. Local economy will also have an impact when determining whether there’s a bubble or not. For example, one cannot think that owning a Multifamily property in Detroit is as opportunistic as owning one in Austin, TX.
    6. Present and future maturity of commercial loans. It’s known there are yet many commercial loans which are maturing and soon to mature, which will be difficult to refinance. A 7 year loan originated in early 2007 at the peak of the real estate bubble which is maturing in 2015 is going to be more challenging to refinance than back during its origination time. If a large enough portion of these commercial loans cannot be renewed it could cause another deflationary effect.
    7. Banks are encouraged by the central bank to maintain strict lending criteria. Sure, it’s not bad to think that banks don’t want to have non-performing assets on their balance sheets. But in addition, an interesting economic event that could impact us – and which the central bank is fearing – is that if banks start lending a large portion of their $2.3 Trillion in excess reserves, this money will spread throughout the U.S. economy leading to a serious inflation. If masses experience a major drop in their standard of living it could lead to negative social events.

    So, what is the final answer? From where I stand, realistically speaking everything which is in demand could be in a bubble when interest rates are tampered with. But more relevant questions would be: 1. In what bubble stage are we? 2. Is it close to bursting? 3. Am I buying at a low enough price where a burst would not heavily impact my cash-flow? 4. Are my current investments financed on a fixed rate for a longer period of time so that I can weather a possible storm? 5. Do I have enough liquid reserves to invest when and if a downturn occurs and prices drop again?

    No one can accurately know when the turning point in a market (or submarket) will be. But knowing that one could be occurring in the future and preparing for it would probably be the lead indicator of who will survive and prosper and who will be loosing his shirt.

  3. Douglas Dowell

    Thank you for the comment Carmen,

    I always welcome extension of my post. I am very interested in the Austrian perspective on things. I am having trouble with the end the Fed argument. I agree they missed the boat but the overall benefit of ability to attempt to smooth out inflation overall is worth the cost.

    While a very hot debate could be had over how is responsible for the meltdown, and while I love to whipp on wall street investment bankers, to me the blame is cross-sectional in my final analysis. Main street wanted a loan damn the realities. Mortgage brokers maid a killing . Wall Street took irresponsible risk. The Fed missed the boat.

    In the end, to me the answer is all of the above.

    • Hi Douglas, I’d be happy to make some book recommendations on the Austrian Business Cycle and other fascinating economic topics, should you be interested. I have never met a person who after fully diving and grasping the basics have ever gone back to approving the Keynesian system we’ve experienced for the past 100 years. Fully grasping took a bit of focus but it’s very common sense. Let me know and I’m happy to make a few recommendations. Cheers!

      • Douglas Dowell

        Thank you for the offer Carmen,

        I think the problem that the Austrian school misses on is market imperfections. Consider the following: A owns a factory that gives off toxic pollution. B the neighbor lives next door is unable to farm his land. To say that we should let A pursue his economic freedom at any cost imposes harm on B?

        My second problem is it seems to dismiss monopolistic power. I think in extreme cases serious power concentration is a problem i.e. too big to fail banks.

        I think the free market should be largely given free reign but market economies do fail. Markets do impose cost that need a counter-weight. Despite what people want to brand Keynesian economist, we prefer a market solution first…but when a market collapse occurs, aggregate demand stimulation from the government sector is the way to go.

        I appreciate the libertarian underpinnings of the school and have alot of the same views however to me it breaks down as economic policy basis.

        • Hi Douglas,

          Excellent points you’re making for which I am prompted to give as brief and concise answers as possible.

          1. “I think the problem that the Austrian school misses on is market imperfections.”

          The Austrian Scholars address imperfections. Simply put, there are two kinds. The imperfections which are caused by government intervention, which we have been made to believe they could have not been prevented. Classic example is the credit expansion policy of Mr. Greenspan being at the core of the real estate bubble, which led to other indirect events which eventually manifested themselves in a bubble and which, like all bubbles eventually burst. Secondly, the imperfections that occur known as being the result of the free market. Which leads me to address this by commenting on your next argument.

          2. “Consider the following: A owns a factory that gives off toxic pollution. B the neighbor lives next door is unable to farm his land. To say that we should let A pursue his economic freedom at any cost imposes harm on B?”

          Austrian view is the classical liberal view of ‘protecting the property rights’. The socialistic/democratic/corporatist system we have does not enforce these rights. When farmer B tries to enforce his property rights of breathing clean air on his property the tort law is not on his side. That is the courts (legal branches of the govt) dismiss his right to clean air claiming the benefits of the rest of the people enjoying from the existence of factory A (local employment, goods manufactured, etc) are important for the common good. Common good has been recognized as superior to individual rights (Power of Eminent Domain). Most courts don’t even recognize the air above the land as private property. Just like most bodies of water air is the property of the state.

          The Austrian answer to this problem, is in enforcing tort law and recognizing the clean air on someone’s property is a right the owner has. Thus the court should rule against the factory B. The factory owner is then faced with complying and finding methods to solve the pollution he’s creating. For a more elaborate description of the Austrian View here is a good link:

          3. “My second problem is it seems to dismiss monopolistic power. I think in extreme cases serious power concentration is a problem i.e. too big to fail banks.”

          Monopolistic power is attained with the help of the state. How do you explain the state was not involved in your example of the too big to fail banks and this was a result of the free market? Douglas, the too big to fail banks have been saved with bailouts from the govt. We were told that the world would end if the hundreds of billions of dollars bailouts would not be used to save these corporations. Since the govt. is not a productive entity they have to collect taxes and borrow money. In other words it is the power of the govt that approved taxation of the population and excessive borrowing (which is our kids’ liability) to save these banks with bailout money. This is called ‘moral hazard’ when corporations are behaving in hazardous procedures and not allowed to go bankrupt as they should. So, the govt is in actuality encouraging bad behavior because there are no repercussions to the bad behaviour.

          4. “but when a market collapse occurs, aggregate demand stimulation from the government sector is the way to go.”

          So, does this mean you agree with the govt bailouts? My interpretation says yes, but please do correct me if I am wrong in my interpretation. I come from a country where the govt was in control, and when you say the govt sector is the way to go I can’t help wondering how productive IS the govt. How did govt taking over Fannie and Freddie help the economy? How did the govt taking over the railroad industry from private to public help the economy? Why is the post office bankrupt? Central planning (meaning govt being in control of the economy) has been the underlying cause of any communist system failure. While we are not there yet, a full 180 degrees turn would be worth trying if our society aims for market balance and individual liberty. Cheers to you!

        • Nicholas Spohn on

          I understand your point about externalities, however the Austrian’s have a very strong emphasis on property rights. A factory polluting a farmers land would be invading and damaging his property and the farmer should thus have legal recourse to the damages. Our current crony system lets the factory bribe the politicians and sweep the issue under the rug.
          The monopoly concern is a good one as well. In the Austrian viewpoint there are no damaging monopolies in the free market. Monopolies (that are harmful) arise exclusively from intervention of government. In a “Free Banking” system banks don’t get too big too fail due to diseconomies of scale and other factors, but in our system where the banks write their own regulations (regulatory capture aka fox guarding the hen house) and control politicians they do get to big too fail. This is not a misstep by the free market, but a misstep by government. Free banking systems like ones that existed in Scotland and Canada were very effective and had few liquidity problems and no systemic panics.
          So since the “market collapse” is usually a side effect of the government goosing the economy and causing distortions it makes little sense to allow them to fix it. The collapse is the healing part that clears the malinvestment and allows scare resources to shift back to their highest value use in the market, not the where the government desires it.

      • Hi Carmen,

        I’d be very interested in some book recommendations on Austrian economics if you’d be willing to provide some.

        Douglas, a very thought provoking article and comments, thank you!


        • Required first book is “Economics in One Lesson” By Henry Hazlitt, it busts the common fallacies of Keynesian economics and the unintended consequences of government actions. Honestly I think reading articles on Mises.org is probably the way to begin. Find subjects that interest you and read a few articles on it. Once you get started you will fall into the rabbit hole and that will keep leading to more and more resources.

          I am reading “Human Action” by Mises right now and it is phenomenal, a little deep for someone new to Austrian theory.

        • Hi Matt,

          I’m in complete agreement with Nicholas Spohn. Henry Hazlitt’s “Economics in One Lesson” would be a great start. There’s a little book (45 pages) called “Economic Depressions. their cause and cure” by Murray Rothbard. Murray also wrote “What has government done to our money” where the fractional reserve banking system is explained. Mises.org is an the encyclopedia of free market economics.

          Nicholas, congrats on reading Human Action. Very impressive.

      • Nicholas Spohn on

        Ahh… I have that at the top of my Amazon wish list. Is it a buy, get from the library, or skip? I am actually just wrapping up my Master’s degree in Econ at George Mason, which has a strong Austrian focus. My professor highly recommended “Capital and its Structure” by Ludwig Lachmann, as a good way to understand Austrian capital theory and the business cycle. So much to read, so little time.
        Some day “Austrian Economics” will just be called, “Economics” because thats what it is. Once you really begin to understand it, everything else just seems kind of silly. Carmen, we should write an article together on Real Estate Investing from an Austrian Perspective.

        • Nicholas, I am so glad to finally meet someone studying Austrian Economics at George Mason. I believe Walter Williams is a professor at George Mason, is that right?

          An article on RE investing from an Austrian perspective. That sounds interesting. Let’s discuss outside this thread. Cheers!

  4. William Shaffer on

    In my area, we are in a bubble. How much longer it goes I don’t know. Is it 2003 or is it 2006 again? Will this area buck the trend and continue to expand because of the inflow of people? So many questions, so few answers. My approach is to play it safe and stay back of the curve. Purchase for cash flow and do so conservatively. I may get burned but a lot of others will before I do. Hopefully I can weather the storm when it comes. If the storm doesn’t come I won’t be as rich as I might have been.

    • Thanks for the comment William,

      I have to agree with increased conservatism as we move forward. One thing that is a great point you make is that all real estate is indeed local. I was hoping to hear from some Texas folks to talk about their markets. However, as crazy as the competition is down there even the demographics of household formation are ‘extraordinary”.

  5. Nice post. I think it’s probably too early to say whether or not a multifamily bubble is inflating. There’s a lot of pent up demand for rental housing and we still don’t have a complete picture as to how far the single family homeowner market will go in this tepid recovery. This is not even mentioning the effect of institutional investment in single family homes for the purpose of building mega rental portfolios. If I had to wager a guess, I’d say there’s still a fair amount of room for growth, but how much is a little uncertain.

  6. Nicholas Spohn on

    It is really difficult to know where we sit in Real Estate right now. I think if you have long term fixed debt and good cash flow you will do just fine. When asking if we are in a bubble you have to compare real estate against other asset classes.
    When the Fed suppresses rates by buying securities they distort the price of EVERYTHING in the economy, since money is 1/2 of every transaction. Low rates encourage overconsumption and undersaving (due to low opportunity cost of spending). They also encourage over borrowing, as long term investments look more profitable than they actually are. These two scenarios eventually create a shortage of real capital available and many projects that once seemed profitable are now no longer profitable and construction stops before completion. This is exactly what happened in 2006…
    Bonds are undoubtedly overpriced for their risk, and it seems that this has trickled into stocks as the US market is one of the most overpriced (p/e) in the world. Liquid assets are currently the most undervalued classes and as the market corrects these will go up in real value and purchasing power. In 2006 it was cash that did well, but with all this money printing an inflationary collapse is likely as well, which would mean… Gold may be a good place. Either way I am still borrowing to buy houses!

    • Thanks all for the lively discussion on Austrian Economics.

      To me it just does not follow to say when we have a market event for example the stock crash of 1929 or the sub-prime meltdown that we can indeed rely on the free market to fix the situation. It seems to me if we follow an Austrian approach to shocks to the system then we wait…wait….wait….wait. for demand to pick back up at some point. Private enterprise and free market incentives to employ workers for the entrepreneur are the way to go. It should be the default condition for little to no barrier to entry.

      However, when demand for goods drop it seems to me the logical thing to do is spur demand with government investment as a resort when things go really wrong.

      I think its a very interesting debate to say the least and I appreciate a good one always.

      • Hi Douglas,

        Good points to bring up and I do appreciate your thoughts sharing. It’s refreshing to have fluent discussions on subjects that directly (but unknown to many) impact the world of investing.

        The idea that the Austrian approach shocks the system is a bit far stretched. Many folks think of the free market as a chaotic market. This is far for the truth. Chaotic markets are in reality the markets which are tampered through the government’s and Wall Street’s intervention (current events). The best analogy that I can think of is our own bodies’ healing process. When we get sick, the medication that we take is not directly healing us. It is our own body’s healing mechanism that eventually heals us. The medication we take is generally to alleviate symptoms but not to cure disease. All too often, the medication we take has side effects, some of them leading to serious problems. Does it mean that if we don’t drug our bodies with medication we don’t heal? Of course we do, unless of course, our immune system is suppressed and can’t do its job.

        My point is to emphasize that Keynesian economics is mainly geared toward treating the symptoms rather than the underlying cause. Austrian economics is all about determining what the problem is, where does it originate, prevent the problem by eliminating its cause, and cure the problem by allowing the market to adjust. Like, for example the expansion of the money supply which leads to asset price inflation and asset bubbles could be prevented by not expanding the money supply. The natural response of the market is to deflate when bubbles burst (and they always do).

        The Austrians say “let the markets clear” so it can adjust and start fresh. Thus MALINVESTMENTS (this means no bailouts, no QE’s, no governments subsidies, etc.) clear and balance is regained. The currency gains strength by not been debased through money inflation.

        The Keynesian answer is to add money in the economy to spur consumerism, which means throwing good money after bad money. When you say that “demand for goods drop and it it is logical to involve government investing in the economy”, again where does the govt get the money to invest? The govt does not have the reserves (savings) to invest. They tax productive people and companies, and they borrow. The other question is what makes people in the govt more qualified with business/investments than the people in the private sector? When demand for goods drops is for good reasons (people losing their jobs, or simply the product has been replaced with a better product). When a deflationary event sets in (like when bubbles burst) prices go down and if the consumer need still exists for that product most likely the consumer will buy it. Keynesians are afraid of deflation but what’s wrong with consumers getting lower prices on food, gas, shelter, etc? What happens via the Keynesian approach is that deflation will eventually occur, except through its implementation it will be a more powerful collapse. There is a say which you may be familiar with “Kicking the can down the road” and that is what Keynesians are doing. In simple terms, the market wants to adjust but the man won’t let it. Our economy is addicted. In order to work it must have its cocaine (money). The more we pour into it the more it needs. Case in point with the Great Depression of the 1930’s and the Stagflation of the 1970’s. Cheers!

        • Douglas Dowell on

          Wow Carmen! I really appreciate your grasp of the field. It has really fired me up to go back and assess why I believe what I believe. For me, the folks like professor Shiller are working on some fascinating work in the behavioral arena.

          I think the real key point is why all this theory? For me I need to trade based on what I believe. Thank you for your engagement. This discussion is part of the fun for me!!!

  7. Nicholas Spohn on

    The problem with empirical data is that you can get the numbers to say anything you want them to say. I can show you evidence that the economy is healthy and at the same time that is abysmal. I can show you data that shows the gold standard as a period of incredible price stability and find other data the looks different. I believe this is why there is no unified theory in economics. Thus we have to have a strong theoretical base from which to understand the data. Otherwise we would just find data that confirmed what we already suspected. The Austrians have developed an “a priori” understanding of economics, which means even before the data we can conclude certain things. This why the theory side is important. Like Carmen hinted at entrepreneurs have a much better understanding of how to use scarce resources to meet the needs of consumers than the government does. So to give the government a free pass to spend money will undoubtedly lead to even more waste.

    This entertaining piece was done by a professor at my school and is a great explanation of the Keynesian and Austrian schools. http://www.youtube.com/watch?v=GTQnarzmTOc

    • Hi Douglas, I’m glad that this conversation has fired you up to go back and assess your beliefs. I think though that it would be a fair assessment if you get familiar with the Austrian School, as well, since you are already familiar with Keynes. You know what I mean, there are two sides to the story, it’s best to be exposed to both, and then make determinations. As far as the behavioral arena the Austrians have a good grasp of it through Praxeology, which is the science of human action.

      You are right. The real key point is to make sound investment decisions. The challenge is in determining the economic factors that impact the investment. I look at theory as an essential tool in assessing current events and possibly future forecasts. Beside that, it’s brain challenging and helpful to engage in enlightening debates. Thanks for the opportunity, it’s been a pleasure.

  8. I think I will stay out of the Bubble Theory discussion.

    But I do know that in the Denver multifamily market, Good Times always end when too many new units get built. The builders just get too much momentum going. Their business plan is “Building”. But it should be “Build, but Get Ready to Stop”.

    So inevitably, overbuilding hurts rents, and lower rents in turn hurt values.

    It happened in 1973, 1986, and 1999. In 2007, most of the multifamily action was in condos, not apartments, so in Denver the great recession only produced a slight dip in rents.

    • Douglas Dowell on

      Thanks for the input Kevin,

      I am very very interested in the timing of the boom and bust. Cycles are just a fact of life…how respond as investors will determine our fate I believe. It seems to me the difficult thing about when to say stop is return on investment versus loosing your shirt. If we stop too soon we leave money on the table. Really appreciate your take.

  9. I would say that, one key indicator is the actual net income (cash flow) that properties are actually bringing in. Much like stocks, for a real estate asset to represent long-term value, it has to have reasonable “earnings.” If this consideration ever drops from being the value equation, I think it is strong sign that prices are out of whack with underlying value.

    “Anectodally,” many of the REO-to-rental hedge funds, I am told, are in the process of getting OUT of these “investments.”

    • Douglas Dowell on

      Thanks for that great point Shane,

      I am looking into using the Warren Buffett style of value investing in real estate investment. Very few have written on this topic but I think you have put the nail on the head.

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