Running on Empty, …but I’m running behind.”
©Jackson Brown/Swallow Turn Music
One of the greatest things about attending an NMHC meeting, besides the hospitality and amazing resort locale, is the camaraderie and openness that permeates through most of the meeting. The interim meetings between the national events are smaller, and lots of conversations are shared in earnest about market conditions, competitive pressures and capital structures. You have no doubt heard about the rapid compression of cap rates, which in some instances in all property sectors, particularly multifamily, provide for returns so low that in previous years people scoffed at the rate when compared to other alternatives. Funny how experience is what you get when you don’t get what you want.
I was on a panel talking about how institutional capital views the apartment industry and what they perceived to be options and opportunities in the near term. I hadn’t planned on being on the panel, but one of the participants, an exceptional individual was unable to make it due to a family emergency. After they asked all of the really smart people who already turned the panel down, they went with me. To be honest, when they called, I thought they wanted me to bring in some Panini sandwiches (bad cell clarity), so I said yes.
Here’s the basis of what we talked about, that all of the trends are pretty positive for the apartment business, except for those trying to get into the apartment business, expand their portfolios and grow. There just isn’t enough institutional quality multifamily out there to meet the needs of buyers, so at almost every class and quality level, demand is very high.
The assumption of many is that cap rates are going to rise against the tide of logic, effectively decompressing back to their long-term average rate. I suggest to you that for at least the foreseeable future, that isn’t going to happen. I am forecasting that real estate will actually get more costly going forward and we will once again see great pressures on investors and owners of over-levered properties in the next five to seven years. This isn’t a Fannie or Freddie issue so much as a common sense one. Institutional investors jumped in, bought or built advantageously and are now running for other investment types more suited to their risk profile. I don’t think multifamily trading is at the end of the cycle, at least through the mid-term elections (ugh! Can you believe it, they’re almost here, bad commercials and all) and prudent investing will probably be relevant for the next 30 months. After that, a lot of poorly managed and financed properties are going to change hands, again. Then we’ll hear the sound coming out of the compressed cap rates with a sigh of relief.
Jack Kern is an in demand speaker, especially at the drive thru, where he shouts his order into the face of the clown. Occasionally he speaks in public at industry events and rages against the machine. For the most part, he serves as the research editor for Multi-Housing News. If you think Jack’s opinion of cap rates are full of cap (high or low), you can reach him while he bays at the moon and answers email at firstname.lastname@example.org.