Market Update July 2019

Rewind just 7 to 8 months as the calendar turned to 2019, and economic forecasts were downright bleak:

“Rising Interest Rates”  “Shrinking GDP”
“Overheated Markets”   “Turbulence Ahead”

However as we head into the second half of the year the current bull market – that is undeniably long in the tooth – chugs along for most sectors of the economy. Unemployment remains historically low (below 4%)  and GDP forecasts have now been adjusted upwards for the year to a healthy 3-4% range. 

In real estate, fears of rising rates have been unfounded as the Fed abandoned plans to raise short terms rates, and longer term Treasuries have fallen substantially. The 10-Year Treasury sits at 2.04%, a ~120 bp decrease from its last high of 3.24% back in October 2018. 

Fixed-rate loan pricing for stabilized properties has largely come down with the drop in Treasuries as spreads have remained fairly constant, with some exceptions. Fannie Mae and Freddie Mac remain competitive with pricing for conventional loans in strong markets closing below 4% recently. Small balance loans, those in weaker markets, and  deals with soft prepayment options may be seen in the mid-4%’s at this time. 

On the value-add side, capital remains highly competitive for balance sheet bridge lending and CLOs. Spreads of 200-300 bps over LIBOR (4.3% – 5.3% currently) are available for non-recourse loans, with the sweet spot being light to moderate value-add for experienced sponsors with loans over ~$5MM.

In the multifamily sector, rent growth nationally rebounded strongly in the second quarter to nearly 2.5% annualized growth after a slower start to the year, according to Yardi Matrix Q2 National Report. This continued momentum is grounded in favorable fundamentals, with the US economy adding another 172,000 jobs per month on average so far in 2019. Renter households were at an all-time high (43.8MM) following the close of Q1-2019, as demand has kept pace with robust supply growth in most markets.

According to Yardi Matrix, “while fast-growing South and West Markets remain atop the rent growth rankings, the only two metros to fall below 2.5% growth over the last 12 months were Miami (2.2%) and Houston (0.8%).”

While this continued growth – and the availability of capital – certainly bolsters the multifamily sector as an asset class, it does not make finding attractive deals easier. The influx of capital into the sector continues to propel asset prices ever higher, and forces sponsors to keenly examine the realistic potential of value-add strategies as we head later into the economy’s expansion. Sellers continue to expect buyers to largely pay for upside in the purchase price, as opposed to pricing based off in-place operations. Sponsors must know their markets intimately, target deals that require creativity, and avail themselves of optimal financing products to make sound investments.

In this environment, often the best deal may be the recapitalization of an asset that has been improved, versus selling that asset and competing for another. With historically low long-term rates and cash-out financing made possible from improved values and cash flow, the deal we already know may be the best one for ourselves and our investors.