This past week I spent several days in Los Angeles as the RealShare Apartments 2017 conference. Attendance was in the thousands and among participants were investors, developers, lenders, brokers – and just about every other possible participant in the apartment investment market ecosystem.
It was yet another vibrant event, full of cautious optimism and sharing of thoughts on where both the apartment market, and economy, may be headed. The following are 5 concepts I heard that I believe will help shape activity in 2018.
1. Affordable / Workforce Housing
There is no question that during the current market cycle we have experienced a demonstrable focus on luxury and market-rate apartment housing. The pipeline of new construction is focused on higher-end apartments and a great majority of sales volume is comprised of this same product type. Given affordability constraints, the market is starting to focus more on affordable and workforce housing.
With a new focus on affordable/workforce housing, there are a few new considerations. First, not all of this housing is low-income, quite the contrary. The focus is on renters who earn 60% to 80% of AMI (area median income). Second, a considerable number of these units are in existence, it’s just a matter of updating and modernizing this older stock of apartments for today’s modern renter. Finally, not all affordable/workforce housing is the same. Developers are looking into smaller units and locating at TOD sites to minimize the need for (and cost of) parking.
2. Freddie Mac Construction Loans
Freddie Mac is focused on affordability as well. They are working on a construction-to-permanent financing product that focuses on affordable housing. In an effort to incentivize affordable development these loans would offer higher leverage and better spreads than conventional financing through the GSEs.
As conventional construction debt is becoming scarcer – and costlier – this is a very interesting offering. Expect to continue seeing developers shift their business models to stay ahead of the curve.
3. Cautious Underwriting, Yet Still Investing
At RealShare Apartments there is always talk of “what inning are we in?” – yet since 2015 that question has not made headlines as we know we are in advanced innings of this market cycle. Yet given market dynamics in West Coast cities, developers and investors alike are continuing to invest in the apartment market.
Underwriting is often taking a more granular approach – and sometimes longer as buyers go through best-and-final rounds of offers – however buyers are excited to continue investing in the apartment market. Expect strong investor demand for apartments, especially continuing upward pricing pressure on core-plus and value-add opportunities.
4. Merchant Built Apartments Create Buying Opportunities
Lots of cranes dot the skies of most all West Coast metros. As we have learned this cycle, much of what is being developed is by merchant builders with an exit strategy at stabilization. Investors are seeing a great buying opportunity for newly built apartments, especially in tight markets with high entrance barriers.
Given the strong economic drivers along the entire West Coast – think tech-driven urban centers – investors remain bullish on investing in these markets for the long-term. Although pricing for newly-constructed assets remains high, investors expect good buying opportunities on the horizon and are positioned to acquire these buildings as they come available.
5. Rising Interest Rates
Yellen’s term expires in February 2018 – and we’ve sat with low interest rates for about as long as we can imagine. Although most speculated a rise in interest rates in each of the last 4 years, most believe it will truly happen next year. The expectation is that a rise in rates will have impacts throughout the commercial real estate market.
Asset values (and development deals) are priced on current rates and with upward pressure on rates, these pricing metrics are bound to change. Investors are bracing themselves for such changes – taking advantage of both good selling and buying opportunities right now.
What else could change with rate hikes? Municipal bond defaults. What else? We don’t yet know. However, these are matters that we must take into consideration.
As 2017 draws to a close, it’s time to really sharpen the pencil on 2018 planning. While the apartment investment and development market remains both healthy and robust in Seattle and the Pacific Northwest, the best strategy is to stay ahead of market cycles and anticipate changes, rather than merely react to them. Give us a call to help structure a plan for 2018 – allow us to Turn Our Expertise into Your Profit!