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During the boom in multi-family housing, we have seen a large compression in what we consider very aggressive cap rates. Why is this happening? The Fed continues to keep rates artificially low in an effort to stimulate the economy and promote growth in gross domestic product (GDP). Many investors are left to wonder what all of this means for them, especially as it relates to multi-family property investment.
That said, these low rates make the multi-family market – which currently yields a much better return on investment (ROI) than almost any other product – attractive to investors. Not only will low interest rates make multi-family real estate the favored product, but in select markets, the high demand and low supply will also give investors better operating fundamentals and returns. The key will be, picking the “right” markets.
However, cap rates are not the only consideration. Capital gains tax rates are also a factor to evaluate when investing in multifamily properties. Even with the recent revision to the capital gains tax rubric, it is still preferable to the higher income tax rates. Couple this tax benefit with the low cap rates and investors will be more economically satisfied when investing in multifamily assets.
Will that stimulus – the artificially depressed cap rates – last forever? No. Because of its inflationary nature, the stimulus is not sustainable in the long term. Our ability to continue printing greenbacks and adding to the debt cannot be maintained. Interest rates will eventually go up and cap rates will follow.
As a result, investors must be particularly sensitive to the interest rate movement over the next five years. The fundamentals of this current market require investors to be on their toes, hedging their investment portfolio while watching rates as well as supply and demand. Nevertheless, those who watch, then wisely invest, have the potential to be rewarded greatly. While the Fed can print greenbacks, they cannot print real estate – this is the ultimate fundamental.
Moving forward, I would caution investors to keep an eye on interest rates, lock in rates for the long period and, if you are going to exit over a two to five year term, make sure you have some type of cap rate and interest rate increases in your baseline underwriting. As a result, when those fundamentals are carefully monitored or hedged, the investment will be a success.
Forbes Magazine has put out another list with Jacksonville looking pretty good. This one lists the 10 best cities in the country for finding employment. Using data from Adecco Staffing U.S., the magazine has Bethesda, Md., at No. 1, followed by Austin, Texas, and then at No. 3: Jacksonville.
"No 3. Jacksonville is another example of a city with a diverse and highly educated labor force. With unemployment at 6.5 percent, Jacksonville is seeing the heaviest hiring in higher education, healthcare, IT, food services, transportation and logistics, and government work from the city’s three military bases.
“'Jobs are being added in Jacksonville because of the recent addition of several companies and headquarters that are new to the area including finance and manufacturing companies,' says Sam Gillespie, an Adecco branch manager. 'The IT job market has been hot throughout the city with the addition of these companies.'”
With the increasing popularity of multifamily properties as an investment class, some industry pros are beginning to question whether the sector might end up overbuilt.
So far during this real estate cycle, developers have been extremely conservative in delivering new product to the market. In 2011, less than 40,000 units came on line, the lowest figure in more than 30 years, according to Reis Inc., a New York City-based research firm. Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm, estimates that multifamily construction completions last year totaled just 35,000 units.
Yet going forward, construction activity in the sector will undoubtedly expand.
In October, 47 percent of respondents to a quarterly survey administered by the National Multi-Housing Council (NMHC), a Washington, D.C.-based trade group, reported a substantial pick-up in land acquisitions, financing deals and permit applications for multifamily properties in their local markets. In 2012, Reis expects to see between 72,000 and 85,000 newly completed units, while Marcus & Millichap anticipates 85,000 new unit deliveries.
Given the abundance of demand for new apartments, that still won’t put the sector in danger of overbuilding in 2012. In 2011, the national vacancy rate for multifamily properties declined 120 basis points from the year prior, to 5.4 percent, Marcus & Millichap reports. Effective monthly rents rose 4 percent, to $995 per unit. This year, multifamily vacancy should fall another 40 basis points, to 5 percent, in Marcus & Millichap’s estimates. Effective rents will likely rise 4.8 percent.
About 43 percent of respondents to the NMHC survey said that multifamily development is near the right level given existing demand, while 54 percent said that demand continues to significantly outstrip supply, even with the expected ramp-up in new construction.
“It is improbable that we will face overdevelopment in 2012 because strong demand should remain in place through the coming year,” says John Chang, vice president of research services with Marcus & Millichap. “For example, the prime renter cohort, aged between 20 and 34, will continue to grow significantly and enjoy an outsized share of job gains. Although employment is not expected to grow at an exceptional pace, it should outpace 2011 performance in the coming year, generating significant housing demand.”
“Almost all markets will experience vacancy declines in the coming year as demand outstrips supply additions,” he adds.
Jubeen Vaghefi, managing director and national leader of the multifamily practice with Jones Lang LaSalle, a Chicago-based real estate services firm, echoes Chang’s sentiments. He anticipates that in core markets, multifamily rents will grow between 5 and 8 percent in 2012. In secondary markets, rents might rise another 3 to 5 percent.
“If you look back over the last five years, there hasn’t been much in the way of new supply, and most people are leaning toward renting versus buying,” Vaghefi says. “Occupancies in most markets are up, so in 2012, we see a continuation of last year.”
Things might get trickier, however, once 2013 comes around.
The NMHC reports that 22 percent of its survey respondents said that apartment market conditions in their regions were looser than three months ago, compared to only 3 percent in July. About 51 percent said that conditions remained the same, compared to 30 percent in July, and another 27 percent reported that conditions have tightened, compared to 67 percent in July.
The NMHC Market Tightness Index in October stood at 56, down from 82 in July and a peak of 90 in April. A reading above 50 indicates that market conditions are getting tighter; below 50 shows that market conditions are getting looser.
Even with substantial demand for new apartments, net absorption in the multifamily sector decreased significantly in 2011, to 153,000 units from 225,000 units in 2010, according to Marcus & Millichap. With less than 40,000 new units added to the market last year, lower absorption levels haven’t threatened to become a problem so far.
But as the number of new construction units spikes to between 105,000 and 250,000 in 2013, over-building may become a legitimate concern, according to Victor Calanog, vice president of research and economics with Reis. In the past 20 years, new multifamily construction peaked at 188,870 units in 1999.
As of October, permits for apartment buildings containing at least five units increased 45 percent year-over-year, to 232,000 units, reports Marcus & Millichap. Given a 12-to-18-month construction window, that means the industry might begin to see an imbalance between supply and demand starting in 2013.
“We’ve been bringing up the possibility [of overbuilding] for more than a year now,” says Calanog. “In terms of timing, we don’t think much of the supply will hit till late 2012—that doesn’t even account for the usual delays we experience in commercial real estate construction. If there is indeed a deluge of new buildings coming to the market, the sector will probably feel the brunt of any pain it might cause in 2013.”
T
he housing market remains a potent drag on the economy as home prices continue to slip, foreclosed homes fill some neighborhoods and millions of construction workers scramble for jobs.
But one group is sitting pretty: landlords.
T
here was fresh data from the government Tuesday showing that the American dream of owning a home is fading fast.
The share of all U.S. privately-owned houses that stood empty fell in the fourth quarter
T
he multihousing industry is poised for a strong year in 2012, according to Doug Bibby, president of the National Multi Housing Council (NMHC).
In a video interview with REIT.com at the NAREIT headquarters
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he reports on multi-family’s continued surge keep coming in, and the latest comes from Marcus & Millichap Real Estate Investment Services Inc. In the company’s 2012 National Apartment Report, the multi-family sector takes center stage amid a supporting cast that includes customers of prime renter age, the larger investment picture and, of course, jobs.
T
he US apartment sector powered through last summer’s economic doldrums to record strong absorption gains and higher occupancy rates. So says a 2012 National Apartment Report, which was released by Marcus & Millichap. Tight supply conditions exist, especially in metros with high barriers to entry, says the report. “Foreclosures in the single-family market,
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eal Estate agents are switching gears thanks to the poor shape of the market. Property Management is becoming a common trade with local real estate companies.
The Weidman family just built their dream house in Daphne. There’s just one problem. It’s time to move in, but they can’t move out of their old one.