This past week was the National Multifamily Housing Council (NMHC) 2017 Annual Meeting, with nearly 4,000 apartment professionals descending upon San Diego, CA. Participants ranged from C-Suite executives from every major REIT to debt and equity providers representing hundreds of billions of dollars of capital, participating in and destined for apartment investment.
Amid the madness of that many apartment professionals, we heard one resounding conclusion:
We learned that if you’re feeling hesitation in 2017, you’re not alone.
To us, that rings of opportunity. Yes, opportunity. As Warren Buffet famously exclaimed, “Be fearful when others are greedy and greedy when others are fearful.” While I would not go as far as to report a collective consciousness of fear, this week proved a measure of abeyance not present in years past.
The following is a distillation of questions asked and answered by some of the brightest minds and most active investors our industry offers:
What Inning Are We In?
Real estate investors love asking this question. CRE investors, particularly apartment sector participants, have been questioning how far the cycle has progressed since 2014. As 2017 unfolds, it’s clear that the current game has extended through enough extra innings that we’re not sure we want this question answered – much less asked.
Nevertheless, at one point this week I heard an exaltation of the 15th inning!
The apartment sector recovered much sooner than every other CRE sector, and by every conventional baseball-analogized measure, the bleachers should be empty. Yet the seats are full and many believe a few more at-bats remain. In Seattle, this is especially true.
Students of history (as all good investors should be) stopped asking the question. Caution is the order of the day, and that sentiment punctuated each question asked and answered over the last several days of discussions.
Where are Interest Rates Headed?
Easy answer: they’re headed up! But how far and how fast? Those questions pose more difficult hurdles to clear. By mid-week, the 10-year Treasury hit 2.51%, without surprise or unfounded dismay.
Most expect the 10-year treasury to continue a slight upward trend, possibly resting between 2.75% and 3.0% by EOY. We must take this with a grain of salt as most everyone’s predictions for rate-movement over the last 36 months proved wrong!
Myriad factors will influence rates this year, not the least of which is the expiration of Janet Yellen’s term as Chair of the Federal Reserve in February 2018. The 100 BP rate jump experienced from July 2016 to present is unlikely to repeat itself as markets find equilibrium, yet President Trump’s policy mandates most certainly point towards inflation. Most all are in agreement that a +2.50% 10-T is here to stay.
Will the Glut of New Development Continue?
The apartment community loves to discuss the apartment development pipeline; eyes really sparkle when industry veterans pontificate on development. Such discussions are particularly apropos when one hails from Seattle. We are tracking 77,000 units planned or proposed for development in King and Snohomish Counties– CLICK HERE to receive our updated research when available in early February.
Big picture: developers are still eager to develop. Many national and regional players continue to raise large ($1B+) funds specifically aimed at core urban markets to develop luxury apartment communities. Others are diversifying into student/senior/active living products, yet still not straying away from developing luxury market rate apartments for “the right site.”
So far in 2017, it’s business as usual on the development front. Yet headwinds in the form of quickly escalating land prices/hard costs and mounting regulatory constraints regarding affordability stymie pipeline acceleration in the most urban of markets. Accordingly, look for increased development in secondary urban markets.
The Best Investment Strategy: Core or Suburban?
The answer is neither. . . sort of. The consensus is concern over (1) demand by renters and (2) demand by investors.
Demand by Renters (or tapering thereof): Apartment investors are growing cautious about renter demand keeping pace with new development of core (read: expensive) apartment units. Accordingly, investor demand to pay top-dollar for brand new, luxury apartments is (has?) peaking.
Demand by Investors: Conversely, investor demand (competition) for suburban, value-add deals has hit such a crescendo that investors are seeking out alternative strategies.
Investors are seeking alternative strategies for yield. Often investors find a particular strategy innovative or unique, yet with 4,000 people milling about a single hotel you are bound to hear a strategy or two repeated more than its disciples wish to believe. The strategy de jour?? Many groups are looking to invest in core-plus assets inside of or near urban centers and in second-ring markets playing off of fundamentals produced by urban markets.
Will Seattle Continue as a Darling Market?
Of course, but with caution. Seattle continues to punch above its weight, having earned itself a place in conversations normally reserved for NYC/LA/SF, all lauded as global cities.
As rental rates taper and condominium pricing show signs of weakness in New York and San Francisco, Seattle reigns strong as a rental market and nascent condominium play. Yet, perceived signs of weakness emerge because of the growing development pipeline.
As if 7 months pregnant, it’s pretty hard to disguise our +77k apartment pipeline baby-bump. So far, the only cracks shown are those of slowing rent growth – yet growth nonetheless. Our only apology is 6% – 8% y-o-y rent growth for the past 4 years.
As rent growth tapers in the core, value-add investors are pleased to find 8% – 10% growth in suburban markets. They are not pleased to find that competition for assets continues to grow. Appetite for Seattle/PNW assets remains strong, yet investors have left the core for yield only to find crowds have followed them there.
Having nearly “Madonna-ized” his name, The Donald needs no further introduction. As ripe as a discussion about such a polarizing 45th President may be, his presidency made for relatively mundane conversation fodder. Comments on Trump fell into two predominant camps:
Camp 1: Mr. Trump is a commercial real estate veteran, will push for deregulation and wants to spur growth. That is a WIN for the apartment sector.
Camp 2: Mr. Trump cannot be trusted, his draconian beliefs on immigration and trade policy will slow US growth and prosperity, and more people will remain in apartments. That is a WIN for the apartment sector.
Noticing a pattern here?
Is Capital Available for Investment & Development?
We talked to hundreds of people over the course of the last few days. Despite any feelings of concern or uncertainty in the market, no conclusion rang louder than the fact that there are billions upon billions of dollars looking for a home in the apartment market, and investors are certain they want to place those dollars.
Equity is a bit more cautious and debt is a bit more expensive, yet they both are in abundance and ready to get into the game. It’s just a matter of who is going to jump into the pool first.