Western Buyers Are Out in Force
NEWPORT BEACH, CA—How do real estate professionals view the future of apartment market? To find out, Capital One Multifamily Finance polled 200 experts last month at the RealShare Apartments Conference in Los Angeles.
Their feelings came across loud and clear: Western buyers in particular are decidedly bullish. Forty-three percent declared their intention to be net buyers in 2015, while just 14% planned to be net sellers. Not surprisingly, when asked what sort of financing would be most important to their business, 52% pointed to acquisition financing.
There are solid reasons for this sentiment. As the recovery took hold, Western markets bounced back, with consistent rent growth, minimal vacancies, and few concessions. Although an influx of new properties is expected to slow rent growth somewhat in Orange County and Los Angeles, no such slowdown is expected for markets like San Jose or San Francisco. San Jose’s steady influx of new companies has made Santa Clara County the fastest growing region in the state and pushed the population over 1 million. In San Francisco, the thirst for housing remains intense; the city’s overall vacancy rate dropped from 4.4% in 2010 to 3% today and in submarkets like Hayward or Fremont, it’s less than 2%.
The experts at the RealShare conference don’t see this situation changing much over the coming year. They don’t view overbuilding, for instance, as much of a concern. Just 16% of the respondents identified this as the issue that keeps them up at night, compared to the 57% who worried about rising interest rates and the impact of global uncertainty.
The Challenge: A Scarcity of Deals
Potential buyers, however, are finding that bridging the gap between word and deed may not be as easy as they would like it to be. A shortage of acquisition opportunities in many Western markets is driving an imbalance between supply and demand, pushing prices up and cap rates down. This situation has a counterintuitive effect on the supply side. Sellers need to park their cash in newly-purchased apartments, but when they have doubts about finding them, they hang on to their existing properties.
As a result, the ranks of actual purchasers in major markets are thinning to those with the deep pockets, economies of scale, and long-term investment horizons that can make the numbers work. These tend to be large multifamily specialists, many backed by institutional or pension fund investors.
Taking a More Proactive Approach
But no one likes to sit on the sidelines. As a result, individual buyers are putting a premium on creative financing and interest-only payments that will enable them to absorb the impact of higher purchase prices. Increasingly, they are turning to banks to provide shorter terms and floating-rate debt, making a bet that interest rates will not skyrocket overnight. Forty-six percent of the multifamily professionals at the RealShare conference said they expect to go to banks for most of their financing.
It would be a mistake, however, to count out the agencies. One reason that 28% of the survey respondents preferred agency financing is the advantage of taking on more leverage—and many are attracted by the pre-stabilized financing and other initiatives that Fannie and Freddie are now offering. Since the beginning of the summer, the agencies have come out swinging, aggressively courting new business.
Individual buyers are also responding to the shortage of properties by pursuing a value-add strategy, raising rental prices after renovation. In fact, when asked which multifamily housing trend they expect to gain the most momentum in 2015, 42% of the professionals at the RealShare conference singled out renovations and modernizations of existing properties. Finding the right location, especially in markets such as the suburbs of Seattle, is critical to this strategy.
Entering new markets is an alternative approach that was cited by 37% of the respondents—and for many this means leaving California behind and exploring cities in Arizona and Utah. Phoenix, for instance, has seen its multifamily vacancy rate drop from 9.8% at the beginning of 2014 to 7.3% at the start of 2015, and sustained employment and population growth are elevating demand. Careful investors could position themselves to benefit from the eventual recovery of the market.
Finally, Supply Is Loosening Up
There are signs, however, that multifamily supply and demand in the West are beginning to move toward equilibrium. More product has come online in the last few months, and as supply improves, owners holding their apartments off the market will put them up for sale. Thanks to this virtuous cycle picking up speed in 2015, more of the professionals who attended the RealShare Conference will have the chance to realize their goal of being net buyers.
Kristen Croxton and Greg Reed are SVPs at Capital One Multifamily Finance. The views expressed in this column are the authors’ own.
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