We started receiving requests to post anonymous posts on our Multifamily ShareSpace group, which we are happy to do, and today, we were asked to post an anonymous blog! I can tell you I have heard similar thoughts from others on these topics, so this is definitely not an isolated incident. Please chime in within the comments on your perspective of this issue.
I have two thoughts I would like to offer anonymously to the group from a vendors perspective. I have been on all sides of the desk from on-site to corporate management to now a vendor. As a vendor I obviously don’t want to come off as complaining, but would like to offer some perspective to a couple of issues.
It wasn’t that long ago that alternative properties didn’t get much respect, but as yields compress in core property sectors, alternatives have caught the eye of investors, and 2019 should continue that trend.
“For many years, non-traditional real estate was not fully appreciated,” says Tyler Blue, vice president of the advisory and consulting arm of research firm Green Street Advisors. But alternative sectors have outperformed expectations in recent years, and investors have noticed.
“Once the broader real estate investment community caught on, more capital flowed in, particularly as the more traditional real estate sectors became fully valued. So, the more progressive investors benefited and the institutions have followed their lead,” Blue says.
Rents are likely to rise faster for older, class-B apartments in 2019 than for any other class of apartment property.
“We expect Class-B to continue to have the strongest average rent growth, as it has through recent history,” says Andrew Rybczynski, senior consultant at research firm the CoStar Group.
Rents continue to rise for new class-A luxury apartments as well. Strong demand is quickly filling new units as they open and, as a result, rents are rising faster than inflation. At the same time, rent growth is finally slowing down for class-C and class-D apartments—simply because many of those renters are already paying as much as they can afford.
“While occupancy is sky high in class-C product, rent growth in that sector is beginning to slow a little,” says Ron Willett, chief economist for MPF Research, a RealPage company.
Of the $500 billion in online U.S. sales last year, $75 to $150 billion worth of merchandise was returned, including $37 billion returns from holiday sales, according to a recent reverse logistics report from commercial real estate services firm CBRE. In fact, returns for online sales tend to be two to three times more frequent than returns for in-store sales: 15 percent to 30 percent of online purchases are returned compared to 8 percent of merchandise bought in-store.
A large number of these returns can be attributed to retailers sending customers the wrong size or wrong product, or giving an inaccurate description of the product, as well as product defects. Regardless of the reason, however, returns put enormous stress on the already tight warehouse space, labor and distribution networks that are not designed to handle reverse flow inventory and are eating up retailer profits, notes David Egan, CBRE global head of industrial & logistics research.
The single-family rental (SFR) industry appears to still be in growth mode.
“Institutional investors are still very actively buying homes in many markets around the country,” says Gary Beasley, CEO and co-founder of Roofstock, an online marketplace for selling and buying SFRs.
In addition to established SFR operators such as Invitation Homes and American Homes for Rent, the market has seen an entry of new firms, including Front Yard Residential and Cerberus, which are buying thousands of homes in spite of the fact that prices have risen sharply over the past four years.
“We are in the midst of a second wave of institutional buyers,” according to Jennifer von Pohlmann, a director with research firm ATTOM Data Solutions.
The average price of a single-family home has been going up since 2012. Since 2014, that rate of growth exceeded 5 percent a year. In the third quarter of 2018, home prices were up 6.6 percent compared to the year before.
This coming year, most real estate investors will want to stay away from the cities with soaring prices, where they’re more likely to end up holding the bag than to strike it rich.
You can never know when a real estate bubble will burst – I happen to think it won’t happen in 2019 – but in places like San Francisco, Seattle, Miami and Denver, caution is now the order of the day. If you own property in these spots and plan to sell, don’t wait until the market has peaked. And if you’re looking for a good place to put your money, you should consider instead the 20 markets I’m listing here.
In the closing weeks of 2018 I had the pleasure of interviewing 20 leaders in multifamily operations and technology about the outlook for 2019 and beyond. The content of those conversations will be discussed in detail on this site in a few weeks’ time, but in the meantime, one theme emerged that seems to be a 2019 priority for everybody: leasing.
That’s right folks, as the hangovers wear off and the post-holiday diets wear on, it’s normal to think about new year’s resolutions. And for many in multifamily, plans to re-vamp, re-focus and in many cases re-think their companies’ sales processes are top of the list. There are several different reasons for this. The now seemingly perennial question mark over whether the bull market on rents will add yet another year to its already historic trend provides a natural motivation for operators to get better at converting leads.
One of the more interesting perspectives that I kept hearing was the influence of new technology on the leasing process. It’s influencing our methods in a couple of different ways: through the increasingly tech-savvy behavior of prospects and through the rise of Artificial Intelligence (AI).
Despite rising interest rates and the nagging anxiety that developers are already building too many apartments in some markets, banks remain active lenders for multifamily construction projects.
“There is certainly no shortage of capital,” says Danny Kaufman, managing director in the Chicago office of HFF.
Apartment developers are paying more interest on their construction loans—but that isn’t keeping developers from planning and financing new projects.
“People have been predicting rates rising for 10 years—now it is finally happening,” says John Kelly, senior vice president and partner in the Boston office of CBRE. “But the cost of capital has not become an inhibitor of overall development.”
Developers will keep adding pressure on the apartment sector in 2019, with plans to open hundreds of thousands of new luxury units in 2019.
New renters filled most of the new apartments delivered to the market in 2018, but not all of them. The percentage of apartments that will be occupied in 2019 is likely to keep falling.
“Occupancy should backtrack slightly, but still prove healthy as the current occupancy performance is so strong,” says Greg Willett, chief economist for RealPage, a provider of property management data and services. Like most industry insiders, he predicts that multifamily occupancy in 2019 will hover around 95 percent, with almost no available apartments in class-B and class-C categories.
As a multifamily broker, I’m asked a lot of questions by first-time investors. Here are five things every new investor should know before getting started with multifamily properties.
It’s not about what feels comfortable to you — it’s about the quality of housing you can provide the market and at what rate that determines whether or not it’s a good investment. Too many people new to investing in apartments say, “But I wouldn’t want to live here.” My response is usually, “That has nothing to do with it. What matters is who would want to live here?”
It’s not all about the current rent price. Sometimes a unit is very outdated and simple renovations (kitchen cabinet replacement, new appliances, new tile in the bathroom) can have a significant impact on rent. Other times, the building is in good shape but owned by the same landlord for 30 years who never wanted to make waves (if they have long-term tenants, that’s a tell-tale sign their rents are too low). Look at the investment for what you can turn it into — not necessarily what it currently is. There are lots of new tools out there for helping investors determine optimal rent. I’m an investor in Enodo, an algorithm created to determine not only optimal rent but also the incremental rent you can charge for each individual improvement to the building or unit.