I am running a friend's campaign for city council so I've been talking to a lot of people the last few months. Most of the conversations have been about our home town of Bellevue WA and the local issues we are facing but I've also had a number of conversations about the economy, real estate and the credit markets. The majority of the people, many of whom are developers, property/asset managers or owners, are searching for the turn in the cycle and are looking forward to the opportunities that will arise when things return to normal.
I too am looking forward to the upswing in the real estate cycle but I'm not sure that back to 'normal' is where we headed. I believe for the last two decades we have been and are living in the ultimate payoff of the Marshall Plan and its siblings. We have successfully avoided a third world war by creating market based economies where enemies might have arisen. This is an entirely positive outcome and surprising to me, a child of the cold war era.
Economically this means that we are living on a planet full of competitive market economies where prices are set by the lowest cost producer and the only margin available to pay our workers more is the cost of shipping the product from the low cost producer to our markets. Any industrial age product and even most modern technology based products can be produced competently in hungry economies around the world and the premium US workers enjoyed in the past is now gone. While productivity gains can help hold wage rates up they ultimately reduce the number of workers required to produce a product and in the aggregate tend to be neutral to negative on the amount of total wages.
Since these workers are also tenants, consumers and clients we are directly effected by their fortunes. Going forward their wages will continue to fall or at best be flat while the world catches up. In this environment I believe the demand for different housing types will change and will be to the advantage of long term multifamily owners. With dimming economic prospects and conservative banking back in favor, fewer people will want or qualify to buy a house, especially since single family homes won't be viewed as wealth creation machines.
That means renting will be much more in favor. With multifamily construction starts falling precipitously a real shortage of units will arise in the next 4 to 6 years, presenting investors a great opportunity to acquire properties at distressed prices today and liquidate at the top of the cycle when new stock begins to come on line. Long term rent growth will be moderated by wage growth but multifamily properties should enjoy a premium because of their better inflation protection compared to other income property types.
The credit crisis will in time be seen as a final chapter in the Marshall Plan success story and will be revealed as a symptom of the end of US preeminence as an economic power rather than the disease.
Wednesday, September 2, 2009
Monday, March 2, 2009
More Positive Indications for Multifamily
At the end of last year (See my Dec. 28 post Why buy Multifamily in '09) I laid out a number of factors pointing to the opportunity to secure good returns on income producing apartments this year. As time marches on we are receiving more corroborating evidence of a market bottom for multifamily at the same time as the credit market for these properties still has money available for acquisitions.
From a diverse range of reports starting with the ULI/PricewaterhouseCooper's Emerging Trends in Real Estate 2009, Real Capital's report published mid-Feb to Marcus & Millichap's conference call last week (Feb. 24th) we are seeing a real buyers market develop in multifamily.
First of all multifamily starts are projected to be down at least 30% this year on top of being down 50% in '08, meaning starts are down 85% from two years ago. Balanced against this lack of supply is the fact that Census Bureau projections show the growth in the prime renter segment of the population (20-34 year olds)will accelerate significantly over the next five years forcing rents higher over that period. There will also be a steady if not growing stream of immigrants who tend to long term renters.
Even in the markets that dodged the worst of the mortgage meltdown (remember that the vast majority of the damage was done in only four states: CA, AZ, NV, FL) home prices and mortgage availability are keeping many from buying a home, or from considering home ownership to be a good investment. Net-net, supply down and demand about to rise. Markets that are poised to benefit from stimulus spending, especially in infrastructure and energy will experience the economic recovery sooner than other locations in the country and multifamily properties in those markets will turn around sooner as well.
Financing while requiring more equity, is still available. The GSEs are full of cash, are actively lending on multifamily and are authorized to continue doing so through the end of 2009. Regional and local banks are also lending on multifamily, albeit at slightly higher rates than the GSEs. There is also foreign capital finding good multifamily values here in the continental US.
With all these positives, why isn't everyone out there acquiring? There are both challenges in the short term and a large group of buyers waiting for 'the bottom' of the market before they wade in. The primary challenge is that vacancies in most markets are rising and rental rates are projected to be flat to down through '09 and maybe into the first part of 2010. This has many buyers afraid of 'overpaying' for properties which puts them in the waiting for the bottom group.
Our strategy is to buy based on higher vacancy and lower rental rates so that the property will operate positively while we wait for demand (and inflation) to pick up. During the latter part of the anticipated seven or eight year holding period the property will benefit from increased demand, inflationary pressure on rents as well as the return of growth in the economy and amortization of debt. We will also utilize technology to insure operating costs are kept to a minimum.
Those waiting for 'the bottom' will naturally be paying more for their properties because the confirmation of the bottom is rising prices of course. There is an old saying that the smart money is typically thought to be 'early' and we believe now is the time to be part of that group.
For the statistics and charts we are seeing or to learn more about apartment investments and the multifamily deals we are uncovering please contact us:
Giovanni Isaksen
Ashworth Partners Ltd.
www.ashworthpartners.com
giovanni@ashworthpartners.com
http://ashworthpartners.blogspot.com
Ask me about the DEALIZER income property analysis tool.
From a diverse range of reports starting with the ULI/PricewaterhouseCooper's Emerging Trends in Real Estate 2009, Real Capital's report published mid-Feb to Marcus & Millichap's conference call last week (Feb. 24th) we are seeing a real buyers market develop in multifamily.
First of all multifamily starts are projected to be down at least 30% this year on top of being down 50% in '08, meaning starts are down 85% from two years ago. Balanced against this lack of supply is the fact that Census Bureau projections show the growth in the prime renter segment of the population (20-34 year olds)will accelerate significantly over the next five years forcing rents higher over that period. There will also be a steady if not growing stream of immigrants who tend to long term renters.
Even in the markets that dodged the worst of the mortgage meltdown (remember that the vast majority of the damage was done in only four states: CA, AZ, NV, FL) home prices and mortgage availability are keeping many from buying a home, or from considering home ownership to be a good investment. Net-net, supply down and demand about to rise. Markets that are poised to benefit from stimulus spending, especially in infrastructure and energy will experience the economic recovery sooner than other locations in the country and multifamily properties in those markets will turn around sooner as well.
Financing while requiring more equity, is still available. The GSEs are full of cash, are actively lending on multifamily and are authorized to continue doing so through the end of 2009. Regional and local banks are also lending on multifamily, albeit at slightly higher rates than the GSEs. There is also foreign capital finding good multifamily values here in the continental US.
With all these positives, why isn't everyone out there acquiring? There are both challenges in the short term and a large group of buyers waiting for 'the bottom' of the market before they wade in. The primary challenge is that vacancies in most markets are rising and rental rates are projected to be flat to down through '09 and maybe into the first part of 2010. This has many buyers afraid of 'overpaying' for properties which puts them in the waiting for the bottom group.
Our strategy is to buy based on higher vacancy and lower rental rates so that the property will operate positively while we wait for demand (and inflation) to pick up. During the latter part of the anticipated seven or eight year holding period the property will benefit from increased demand, inflationary pressure on rents as well as the return of growth in the economy and amortization of debt. We will also utilize technology to insure operating costs are kept to a minimum.
Those waiting for 'the bottom' will naturally be paying more for their properties because the confirmation of the bottom is rising prices of course. There is an old saying that the smart money is typically thought to be 'early' and we believe now is the time to be part of that group.
For the statistics and charts we are seeing or to learn more about apartment investments and the multifamily deals we are uncovering please contact us:
Giovanni Isaksen
Ashworth Partners Ltd.
www.ashworthpartners.com
giovanni@ashworthpartners.com
http://ashworthpartners.blogspot.com
Ask me about the DEALIZER income property analysis tool.
Friday, February 6, 2009
Credit Rate Spreads as Indicators
Vince Farrell of Soleil Securities Group sent me his take on what key credit spreads are indicating about the financial landscape and economic prospects. For a little background, a 'spread' is trader talk for the difference between two financial instruments, in this case the interest rates offered different debt instruments. As with most spreads these have a historical 'normal' range and their trend away from or back towards normal are used to measure optimism or pessimism in hearts and minds of those who create or invest in the referenced instruments.
Vince finds that while most of the credit spreads he follows are wide by historical norms, they are narrowing and the trends are positive for the credit markets and eventually the economy. Here are his comments:
The TED spread - the difference between three-month dollar Libor and the three month Treasury bill - is about 96 basis points today. The normal spread is 50 basis points or so but this is vastly improved from the almost 500 basis points that was touched in September when Lehman failed. This is a measure of fear in the short term money markets and the fear hasn't completely gone but, as I said, is much improved.
The spread between the thirty-year fixed rate mortgage and the 10-year Treasury bond is about 235 basis points. The historic spread is about 170 basis points and this, like the TED, is much better.
The difference between the jumbo mortgage interest rate (30-year mortgages for over $417,000) and the 10-year Treasury is around 400 basis points. This still has a way to go, as the long term average is closer to 250 basis points. This is a loan a bank would make knowing it can't be sold to Fannie or Freddie (too big), can't be securitized (that market isn't there), so it would stay on the banks balance sheet. To me this is a critical mark for judging if the credit markets are truly improving.
The TIPS spread - the difference between the 10-year Treasury and the 10-year Inflation Protected Treasury - is about 110 basis points. That would be read as the expected rate of inflation for the next 10 years. It was close to 0 not long ago and I am greatly relieved the market has backed off that deflation scenario."
You can catch more of Vince's insights and analysis on CNBC where he appears regularly. He is the CIO of Soleil Securities Group who provide research, brokerage, marketing and investment banking services to institutional and corporate clients. www.soleilgroup.com
Giovanni Isaksen
Ashworth Partners Ltd.
www.ashworthpartners.com
Ask me about the DEALIZER income property analysis tool.
Vince finds that while most of the credit spreads he follows are wide by historical norms, they are narrowing and the trends are positive for the credit markets and eventually the economy. Here are his comments:
The TED spread - the difference between three-month dollar Libor and the three month Treasury bill - is about 96 basis points today. The normal spread is 50 basis points or so but this is vastly improved from the almost 500 basis points that was touched in September when Lehman failed. This is a measure of fear in the short term money markets and the fear hasn't completely gone but, as I said, is much improved.
The spread between the thirty-year fixed rate mortgage and the 10-year Treasury bond is about 235 basis points. The historic spread is about 170 basis points and this, like the TED, is much better.
The difference between the jumbo mortgage interest rate (30-year mortgages for over $417,000) and the 10-year Treasury is around 400 basis points. This still has a way to go, as the long term average is closer to 250 basis points. This is a loan a bank would make knowing it can't be sold to Fannie or Freddie (too big), can't be securitized (that market isn't there), so it would stay on the banks balance sheet. To me this is a critical mark for judging if the credit markets are truly improving.
The TIPS spread - the difference between the 10-year Treasury and the 10-year Inflation Protected Treasury - is about 110 basis points. That would be read as the expected rate of inflation for the next 10 years. It was close to 0 not long ago and I am greatly relieved the market has backed off that deflation scenario."
You can catch more of Vince's insights and analysis on CNBC where he appears regularly. He is the CIO of Soleil Securities Group who provide research, brokerage, marketing and investment banking services to institutional and corporate clients. www.soleilgroup.com
Giovanni Isaksen
Ashworth Partners Ltd.
www.ashworthpartners.com
Ask me about the DEALIZER income property analysis tool.
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