What goes up, must go up?
[Notes from the Apartment Strategies Outlook Conference, National Multifamily Housing Council, January 19, 2016]
According to Trammel Crowe, even hot markets are leasing up at or faster than proforma. They have budgeted one month free rent in Houston, but are not offering concessions anywhere else in the country.
Cap rates and interest rates are not perfectly correlated. Cap rates are compressing down toward the level of B/AA bonds at 6% for average cap rate vs 5.5% average bond rate. These two asset classes are normally 140 basis points apart. Real estate is competing for global capital against other asset types. It is hard to think that cap rates can go lower, but we haven't seen the market let off yet.
Apartments are not discretionary asset type, since everyone needs housing. This dynamic tends to create a lower risk profile for multifamily when compared to other commercial asset types.
Many general investment funds are still under allocated to real estate. Foreign investors are looking at relative risk and US is good choice. Active foreign investors are often a sign of peak of market, however.
Values are stretched in multifamily, but have not gone too far, in contrast to some of the other commercial asset classes. Multifamily continues to be a relatively better choice. Some investors simply looking for capital preservation, rather than return.
Financing regulation is so conservative that it is helping to keep things from going off the rails. Lending is as conservative as it has ever been. Single family lending relies on one income stream, while a 100 unit multifamily, for example, relies on 100 household income streams. That's why default rates were so low on multifamily loans during the recession. Home ownership levels are as low as they have been since 1965. Yet, contrary to logic, annual caps on agency (Fannie Mae and Freddie Mac) lending are keeping capital away from the less risky multifamily asset class.
Millennials like lifestyle and flexibility, while seeing no stigma in renting like older generations. They are waiting longer to marry and have kids, while 1/3 of Millennials are still at home or in school. These trends should support continued demand for multifamily housing.
The economy usually exhibits a 6 year bull and we already in year 6 or 7. Strong demographic trends are favoring multifamily and suggest that fundamentals should remain positive for the next years.