Rice: Bearish about DC Apartments

WASHINGTON, DC-It is a given, it seems, that multifamily is hot in the DC market. Demand for the product type is strong, and lender financing for both acquisition and development can be had. In addition, the area’s job growth—while taking somewhat of a beating lately—is still strong, especially when compared to the rest of the nation. 

Federal Capital Partners principal Lacy Rice, however, is having none of it. He makes a contrarian case to GlobeSt.com about why he is feeling skittish about the asset class—a nervousness that in large part is based on what he feels are overly optimistic forecasts about job growth in the region. Namely, projections of 37,000 jobs next year, he says, “are not likely to materialize, especially after the failure of the super committee to come to a resolution about the US debt.” Depending on how low job creation really is next year, he says, some parts of the multifamily market could get ugly.

These are strong words from FCP, given that it has carved out a niche in value add multifamily and continues to invest in the asset class.

Rice doesn’t claim that he is pulling out of multifamily, though. Rather, his approach is nuanced—and far more critical than the ‘anything goes so long as it is multifamily’ that seems to permeate the region.

Besides his more conservative view of job growth in the DC area next year, Rice also has his doubts about sustained investment in any type of DC asset. “Since the government downgrade in August we have seen a material slowing in investor interest in commercial real estate in the area,” he says. “There is still strong demand for core assets, and on the other extreme of the continuum, severely discounted or troubled properties.”

Properties in the middle, though—the area that is attracting much of the interest in multifamily now—have slowed significantly, Rice says. “At the same time, a significant number of properties are being brought to market in the multifamily sector and we think that is, in part, because people spent the later part of 2010 and beginning of 2011 observing what appeared to be a material compression in cap rates, primarily in the A sector.”

The problem was, he continues, that “everybody who had a class B property assumed that they were also invited to this party.” Now, these properties are hitting the market in droves and the sellers are finding less buyer interest than anticipated.

“We are already seeing some core buyers pull back from Washington because of softening DC fundamentals,” he says. That, coupled with the specter of new supply and lower- than-expected job growth, add up to worrisome trends in Rice’s view.

“We believe real estate is large and inefficient market and there will always be pockets of opportunity no matter what the macro economic is like,” Rice says. It’s just that those pockets are a lot smaller than a lot of people are assuming now, he concludes.