Market Data and evaluating the future

I think most of the annual market reports are out and we are all looking at the data and trying to figure out what the market is doing and what it’s going to do.   Below are links to some of the market reports that I am focusing on this year.

ARA 4Q17 US Multi-Housing Market Overview

Berkadia Forecast 2018

Marcus & Millichap 2018 Multifamily Investment Forecast

America’s Rental Housing 2017

Best-Performing Cities

Looking at all these reports I’m stuck with a few major themes

  • Rent growth continues
  • Occupancies are strong and that should continue
  • In most markets new inventory is not having a significant effect, except on a submarket level an only on class A properties
  • Pricing is very high with lots of money available to buy new deals, in fact it seems like everyone is a buyer.

I keep thinking about what inning were in and if this is a bubble set to burst.   A lot of smart people seem to think that, but I would say in the middle innings of a doubleheader.  The biggest headwind we are facing are rates.  They are clearly up in the last few weeks and they are likely to continue to increase.  However, I don’t think the 10 year will get back to historical averages (6%+).  With respect to this increases effect on values I am not sure what that will be given current loan spreads and the level of capital available and looking to invest in Multi-Family.  It’s a fight between how much rates will increase vs the compression of lender spreads and expected investment returns.  It looks to me like there is at least 100 Bps or more that can be squeezed out of these two areas before increases in treasuries will have a lasting effect on values.

The good news is everyone continues to indicate rental growth will continue.  Both the demographic and supply-demand issues, particularly in BC product, support this assertion. Therefore, we may see pricing get to a top but we should continue to see growth in rents and strong occupancy for the next few years.  How this effects your investments all depends on your real estate strategy and time horizon.  If you’re a flipper or someone looking to cash out in the near future you probably should be concerned, but if you’re a long-term holder the market probably still works as long as you can match long-term fixed rate financing to a purchase today