A murky economic outlook has many multifamily investors opting to take a wait-and-see approach in 2019. So finds Capital One’s fifth annual RealShare Apartments Conference survey, which revealed more than 42 percent of respondents plan to be neither buyers or sellers this year—a dramatic increase over the 16 percent who last year said they’d be observing the market from the sidelines.
Stock Market Turmoil in Q4 2018 Spurs Investor Caution Heading Into 2019
While this finding is undoubtedly food for thought, it also warrants a closer look at the factors that inform it. The survey was conducted in October 2018, during which the S&P 500 lost $1.91 trillion—making it the worst month for the benchmark index since September 2011. It’s therefore fair to argue that this market turmoil spurred a knee-jerk reaction from a considerable number of spooked investors, who decided to sit things out until the dust settled. Clearly, the stock market’s fourth-quarter roller coaster ride, coupled with the spike in interest rates that followed soon after and killed a number of deals that were then in progress, fostered an understandably bearish buying environment heading into 2019.
Many investors remain on the fence as they anxiously await the stock market’s next turn—and another potential correction—before deciding what to do next. That said, anecdotally speaking, virtually all the clients I’ve spoken with are keen to buy and hunting for deals. The question they’re asking themselves is if the market is currently overvalued does waiting another six months mean a better buying opportunity? In the meantime, many are refinancing to take advantage of the still historically low interest rates.
On the sell side of the equation, a reluctance to unload properties can also be attributed to stock market uncertainty. With nowhere to stash extra cash given the investing environment and questions over whether properties are presently overvalued, sellers are deciding to hang onto their assets until they have a better sense of what’s to come.
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More Activity in High Cap Rate Markets
Beyond deciding whether to invest, prospective buyers are also considering where. Measurably more activity in higher cap rate markets like Texas, Nevada and the Southeast signals that undeterred buyers are searching for yield where market fundamentals are promising. Meanwhile, in places including Orange County, Los Angeles, and San Francisco, many were waiting to see whether Proposition 10—which would have repealed a California law limiting how cities enact rent control—passed before deciding to jump into the market. The measure’s defeat at the ballot box last November should be an encouraging sign to buyers for the foreseeable future, though whether Proposition 10 returns to the ballot next year or individual cities take things into their own hands regarding rent control remains to be seen.
It seems safe to say that despite a relatively rocky end to 2018, all signs point to plenty of opportunity in the multifamily market in the year ahead. Freddie Mac foresees rents nationwide increasing by 4 percent this year, and origination volume growing to $317 billion from some $305 billion in 2018, despite rising interest rates. Strong market fundamentals, coupled with a stabilizing stock market and a multitude of debt options from Fannie and Freddie should be an encouraging boon to both buyers and sellers.
Kristen Croxton is a Senior Vice President, Originations with Capital One’s Multifamily Finance team. She will also serve as a speaker at the upcoming Women of Influence 2019 conference July 10th and 11th in Broomfield, CO. The views expressed here are the author’s own and not that of ALM’s Real Estate Media Group.