Institutions and Apts: 5 Predictions for 2014
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LOS ANGELES—US apartment properties have been a favored investment sector among institutional investors since the Great Recession, and will likely continue to be attractive for the foreseeable future. So says Brian T. Murdy, the national director of Institutional Property Advisors, a division of Marcus & Millichap.
His 29-year industry career includes serving as portfolio manager of Hartford, CT-based Cornerstone Real Estate Advisers’ flagship core open-end fund, where he worked with state, county and city pension funds, off-shore investors, insurance companies as well as foundations and endowments resulting in raising and deploying over $2.5 billion of capital. He was also a director and portfolio manager for Henderson Global Investors, where he managed three apartment funds, two public and two private syndications, as well as Phoenix Life Insurance’s $1-billion real estate equity portfolio and a $2-billion mortgage loan portfolio.
The institutional apartment investment industry veteran recently talked with GlobeSt.com about his predictions for the market in 2014.
GLOBEST.COM: You have five predictions for the US institutional apartment market in 2014, so let’s start with the first.
MURDY: We’ve been talking about potential changes to the government sponsored entities for years now, but when it comes to Fannie Mae and Freddie Mac I do not believe that there will be a resolution in Congress this year. The mid-term elections will push the resolution decision to the sidelines until at least 2015, especially with both agencies turning a healthy profit over to Treasury.
GLOBEST.COM: Another hot topic is the Federal Reserve’s program of Quantitative Easing. Will they or won’t they continue to back down on the bond buying?
MURDY:Though the Fed has already signaled it will continue to ease its accommodation, I believe the pace of the Fed’s reduction will increase in the second half of 2014. One of the main reasons behind the reduced accommodation is continued improvement in the economy, which means that more jobs are being created. This would translate to continued demand for apartments. Unfortunately, it should cause an initial rise in interest rates as well.
GLOBEST.COM: Can the apartment market continue its winning streak, or will overbuilding stifle its momentum?
MURDY: The dire end of institutional apartment recovery will not occur, although it will moderate. Most likely, apartment units will continue to be absorbed as employment growth continues to improve, resulting in many of the Echo Boomers living at home creating new households. Although, the pace of absorption will be slower than in the past two years, occupancy should remain strong, helping to drive modest rent growth.
GLOBEST.COM: Given the pace of new construction and the changing demographics of apartment renters, how will the properties themselves be impacted?
MURDY: One of the biggest trends we’re seeing is that new class A apartment designs are reflecting a strong influence from the student housing market. That means they will be more community-based and feature higher-quality amenities, be even more technology-focused and have an increasing percentage of micro-units.
GLOBEST.COM: How will apartment financing fare this year?
MURDY: 2014 will be a transitional year on the financing front, back to historic norms of what is considered “positive leverage.” During the past 15 years or so, the industry has benefited from historically low interest rates that have been lower than cap rates, in most instances. As interest rates rise, I believe that there will be a brief rise in cap rates. However, with the continued strong interest in apartments from domestic investors and now also from international investors, cap rates should lower slightly, but still remain higher than interest rates.
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