View From the Top
The multifamily sector has been enjoying a good, long run for the past several years. Rents and occupancies have been continuously on the rise, investment appetite for the apartment product hasn’t abated and construction opportunities abound as developers try to meet demand. Yet there are concerns, if not signs, that the sector’s tailwinds could be losing steam.
At the recent RealShare Apartments 2013 conference—the ALM Real Estate Media Group’s biggest event of the year with 2,000-plus attendees—some of the industry’s biggest heavyweights shared their views on the industry. Editor-in-Chief Sule Aygoren sat down with prominent leaders from three segments of the industry—development, operations and investment—to discuss the “View from the Top.” That is, the trends they’re experiencing in the market, and what they see in the year ahead. What follows is an edited version of that conversation.
SULE AYGOREN: We’ve gotten used to apartments’ solid performance over the past several years. Yet recent data have shown that fundamentals for most areas of the multifamily market have shown a slight deterioration. Rent growth and sales volume has moderated, and financing conditions have tightened. Are we at a leveling-out period in the cycle?
RICK GRAF: On the broad national platform, we’re certainly seeing some pullback in rent growth, but I wouldn’t say that it’s pulled back as much as it has in the past, relative to the growth we’ve had in the past few years. From a transactional standpoint, there’s still a huge amount of capital looking for assets in the multifamily sector. It doesn’t seem to be slowing down. It’s still 30 to 40 deep on quality assets in terms of buyers and a lot of capital, both domestic and from a foreign standpoint, flooding into the US, which is something we haven’t seen a lot of in the past number of years.
BILL WITTE: First of all, some leveling off is healthy. When you have 20%, 25% year-over-year rent growth in parts of the Bay Area, 10% to 12% in Los Angeles—that’s not going to go on forever at that rate. The second thing is we often hear about national data, but a lot of what’s going on depends on markets and submarkets. In California, where we’re most active, the Bay Area is kind of furthest along in the cycle, and yet there is still some growth. That’s going to level off. The L.A. area is not quite as far along. So you have to be careful when you apply this matrix. But as long as there continue to be spreads between Treasuries and other alternative investments and interest rates, and as long as interest rates stay relatively low, you’ve got a lot of capital chasing this product.
JEFF DAY: One of the things you have to look at is that this year was a little better than last year, too. Treasuries went up 135, 140 basis points in the April-May-June time frame. Anytime that happens in the marketplace, it’s going to cause everyone to step back onto the acquisition platform. Fannie and Freddie overshot and slowed down in the summertime. That took a lot of capital out of the marketplace. So from the sales activity standpoint, I think there was an adjustment period during which everyone had to reassess whether it’s cyclical or secular.
On the demand side, I’m very bullish. Interest rates obviously are going to continue to go up at some point. That will impact home ownership even more than it’s been impacted to date. It’s really more a function of affordability than anything else. Certain markets are probably of interest, but all three of us are either empty nesters or close to it. What we’re facing is the bid that you pay your kid to move out and live in an expensive apartment because you don’t want them moving back home. I think there’s an untapped source of capital for rents that keep going up, which is all of us parents that don’t want kids at home.
AYGOREN: For now, lenders and equity sources seem to be showing signs of restraint, putting the curb on the risk of overdevelopment on a broad basis, but there are some parts of the country that have seen a lot of new and planned deliveries. Are we at risk of a bubble in terms of development?
GRAF: I am probably more optimistic than most when it comes to this. One of the earlier panelists said our start rate is probably in the 300,000 range. That’s high relative to what it was before the recession, yet on an historical average, that number is pretty much the norm. There are a couple markets that get a lot of discussion about this, one of those being Seattle. With all this construction going on, it’s just devastating. We got a new book of business in the Seattle market. We probably have 12 or 15 lease-ups under way, and some of those are with early development projects. Some of those are maybe just coming to market now. From our perspective, in every one of those cases we are ahead of pro forma rents, on which we are aggressive. We’re ahead on a velocity standpoint in terms of our monthly flow of leases, as that’s a market that obviously has jobs.
Another market you hear a lot about is Washington, DC. I, for one, am not a firm believer that on a long-term basis the federal government is going to reduce in size and scale. So that’s one of the big drivers in that market. The other aspect is that while development may be proposed, I’m not sure everything is on the boards.
WITTE: That’s a good point. In some of the more advanced markets like the Bay Area, some apartment sites are likely to go condo or get turned into other product types. Construction costs and cap rate compression will also control supply somewhat, especially in the coastal markets.
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