Multifamily Getting Frothy - The end is near.

[Joel Owens]

MULTIFAMILY FROTHY

So I have been saying this for years now. The cap rates multifamily is trading at is crazy.

Lot's of sellers pushing the idea of never ending above historical market rent growth and little to no vacancy levels.

The stronger than normal rent growth and little vacancy is a cycle mini bubble that will not last. Buyers over leveraging with short term debt planning on strong rents over the long term to push the property to an acceptable cap rate will be in possible danger of a default.

Now there is the going in cap rate and then the realized cap rate after value add strategies such as cutting property taxes, offloading utilities to the tenant, raising rents in a way under market property. In this way cap can be improved.

I am seeing however lots of sellers and listing brokers where the property for that value has already been extracted. They say then that current market rents are still under by 50 dollars a unit which is more value to the investor. Pro-forma 2% vacancy and rent growth at 4 to 5% each year which is BS long term. Basically they are trying to dangle a little meat in front of the buyer when it really is a bone and nothing else.

If my clients want to buy it multifamily than longer term debt makes sense and the LTV not going to high. Forecast 10% vacancy in the coming years ( under 5 from now ) as new supply outpaces demand and rents soften to rent increases of 0 to 2% a year.

Of course nobody has a crystal ball and can say for sure 100% what will happen. The headwinds are not looking good seeing the metrics as a whole.

In some respects building new all in for a 9 cap might possibility give some security in the market.

For example I would not want to own the quote ( rehabbed ) old apartment buildings in Atlanta built in the 70's etc. at compressed caps. Just build new product in a great dirt location for an all in high cap. When it's done sell in a low cap market for a great spread or hold with long term debt if the cycle changes.