Photo byShutterstock

|

Buyers will be out in force in 2020. That was the emphaticmessage delivered by attendees who took our annual survey at theGlobeSt. Apartments Conference in Los Angeles late last year. In2018, just 19% of the respondents to the annual Capital One surveysaid they anticipated primarily being buyers during the followingyear. In fall 2019, 74% declared their intention to focus on addingto their holdings.

|

There are multiple reasons for the pendulum to have swung soabruptly. The first is the economy. Job growth continues. Consumerspending remains strong. Interest rates are low. Capital isabundant. Taken together, these factors produce the kind ofstability that makes it easier for investors to feel more certainabout the future. Interest rates, for instance, are lower than theywere a year ago, but, equally significant, they are much lessvolatile. Furthermore, after years of worrying about when therecovery was going to end, investors now seem confident thatmoderate growth is the new normal. With certainty and growthaligned, it is no wonder that multifamily investors are bullish onthe market.

|

Charlie Mentzer

|

Multifamily market fundamentals are also favorable. While thebalance of supply and demand varies from market to market, demandis growing. Part of this is the leveling out of the householdhomeownership rate over the last two years, which has stabilized inthe 64% range according to the US Census, down from 69% in 2004-05.The shift to renting has been particularly acute in cities. Since2006, metro areas like Tampa, Sacramento, San Diego, Reno, andAustin have joined such majority-renter strongholds as New York,Boston, and Los Angeles. The growing overall population onlyamplifies the significance of this trend. The result is that, on anational level, vacancies are hovering at or below 7%, rents arerising steadily, and valuations are surging.

|

The respondents' positive view of the multifamily market nodoubt reflected the FHFA's announcement a month before theconference that it intended to raise Fannie Mae and Freddie Mac'smultifamily caps to $100 billion each. Although these record capsreflect significant changes in the way they are computed, the factthat the FHFA, for the first time, announced its annual guidelinesbefore the year began was seen as a strong endorsement of themarket.

Casting a Wide Net

The substantial buy-side enthusiasm among multifamily investorsreveals a growing acceptance of compressed cap rates in majormarkets. This reflects investor confidence that rent growth willcontinue, but it is also a recognition that multifamily is saferand less volatile than other real estate classes and otherinvestment choices like stocks. As a result, there is a growingwillingness to tolerate slightly lower returns in exchange for lessrisk.

|

Investors seeking higher cap rates will find opportunities insecondary and tertiary markets. Many cities in the Southeast likeLouisville, Savannah, and Jacksonville have seen strong job growth,an influx of new residents, and healthy apartment demand. But asnational firms begin to compete with local and regional investors,cap rates will begin to compress in these markets as well.

|

Whether they focus on major metros or secondary and tertiarymarkets, investors are likely to find greater opportunity incentral business districts rather than in the suburbs. This hasless to do with renter preferences — Millennials' enthusiasm forurban living is well-known — than economic and regulatory forces.Extensive suburban development during the last cycle provoked areaction that has put a damper on new projects. Suburban landprices have risen, zoning has become more restrictive, and NIMBYismis more commonplace. At the same time, many suburban residents,especially in gridlocked sprawling cities, have grown tired of thecommute. They see the city as a way to escape the suburbs. Takentogether, our GlobeSt. Apartments Conference attendees looking fora deal in 2020 will likely find more demand and more attractiveproperties in urban cores.

|

Brad Waite

Finding the Right Bank

Capital One's survey underscores the vital importance forinvestors of having a capable financial partner. In a market wherethree out of four investors are looking to buy and only one in fourintends to sell, investors can expect competition for each deal tobe intense. The prudent response is to build a relationship with alender before they go on the hunt.

|

In these conditions, the ideal financial relationship shouldoffer a variety of capital sources, including balance sheet, FannieMae, Freddie Mac, and FHA financing. By presenting differentoptions, it can help investors select the financing that best meetstheir needs. The ideal partner should also have aligned its creditand origination teams to maximize speed of execution — and possessthe scale to provide certainty of execution.

|

In 2020, investors are going to have to work hard to find gooddeals. Access to the right financial institution will separateinvestors who grow their portfolios — and those who let opportunitypass them by.

|

Capital One Multifamily Finance SVPs Charlie Mentzerand Brad Waite are co-heads of the SoutheastOffice.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.