BY NATALIE DOLCE
What will it take for the seemingly indefatigable multifamily asset class to lose steam? Slowing rent growth? Apparently not as many, if not
most, markets have experienced a deceleration in rent
growth. Too much supply? Again, that would be no.
While the volume of apartment development may seem
overwhelming on a macro basis it still falls short of
Instead, what investors in this space are more fearful
of is the interest rate environment, with a whopping
70% of respondents to a Real Capital Markets survey
declaring that the prospect of further increases is having, and will have in the future, an impact on acquisition strategies.
Vic Clark, senior managing director for Hunt Real
Estate Capital, notes that interest rates have moved up
about 60 basis points over the past year. “In the past 12 to
18 months, lending agencies have found ways to reduce
pricing and keep rates low despite interest rate hikes,” he
says. “So far, cap rates have held firm, but another 60-basis-
point rate increase will be difficult to absorb.”
As it happens, the multifamily sector will probably
navigate that issue as well. Its fundamentals are too
strong to ignore.
“Things seem to be picking up,” observes Tina
Lichens, chief operating officer, Real Capital Markets.
According to company data, multifamily sales volume
for the US was $69.8 billion for the first half of 2018, a
7.7% year-over-year increase. Furthermore, more than
half of the investors surveyed in July now consider themselves net buyers, while another 26% want to remain in a
holding pattern. Just 16% consider themselves net sellers. “The challenge for many investors is finding quality
assets at reasonable prices,” Lichens says.
A STEP UP FROM ELEMENTARY
That said, it is equally clear that multifamily’s math is
no longer so simple.
Investment pricing, for example, is seeing signifi-
cant swings from market to market. “There is a vast
spread in pricing,” says David Schwartz, CEO, chair-
man and co-founder of Waterton. In New York, for
example, he says that it is challenging for owners to
sell property because they won’t like where the assets
will trade. “Expense growth is outpacing rent growth
and there is a supply issue.”
And even that old standby for the market—the
value add play—is becoming harder to pencil in.
“Today, buyers are more selective in the upgrades and
improvements they make to a new acquisition and are
less likely to complete a total rehab,” says John
Sebree, first vice president and national director of
Marcus & Millichap’s National Multi Housing
Group. ”Most look to reposition a property by improv-
ing common areas (clubhouse, landscaping, signage)
and interiors (kitchen countertops, flooring, fix-
tures) with the intent to upgrade a B-quality asset to
an A- quality asset.”
Developers have their own issues as well even as
demand for new product remains unabated. All of the
activity is straining labor markets and supply chains,
pushing up construction costs, which are further com-
pounded by the price of steel and aluminum tariffs,
according to Tara Hovey, president and COO of Optima
Inc., a family-owned real estate firm that achieves total
quality control by serving as architect, developer, gen-
eral contractor, and property manager or sales broker
for its multifamily rental and for-sale projects in the
Chicago area and Arizona.
The apartment asset class is having a numbers problem with
deals and development getting harder to pencil in. Still, the
fundamentals are strong enough to withstand these issues.