2008 sub-prime mortgage crisis and multi-family & apartment

[Soo Park]

Hello,

Does anyone here remember how the multi-family and small apartrment building prices were affected by the sub-prime mortgage crisis in 2008? Was the impact relatively minor or huge? I understand that the affects were probably varied depending on the locality. Thanks.

[Joseph Gozlan]

Bare with me on this one, it came out a little longer than I expected :-)

A little while ago I had a chance to talk with someone that works for one of the leading software companies that provides Property Management Software for multifamily properties.

They have reports and industry trends they pull and he was part of that group back in 2007-2010

According to him the rents took a very negligible dip in the overall picture however many markets actually saw an increase in rents and occupancy rates. 

All the people that lost their homes to foreclosures in 2008 had to go somewhere. Many of them moved into apartments. Many apartment renters had to put their dreams of buying a house a side for a while and stay renters.

Why does all this it matter to your question about multifamily properties values? 

If the rents are stable and the occupancy rates increase there is no reason why the NOI will be effected.

Because multifamily properties are valued by NOI and Cap Rate in this way:

Value = NOI / Cap Rate

So based on all the above the prices of multifamily properties should have been stable or increasing right?

Well, here is the rub. In 2008 and all they way to about 2011 capital was HARD to get. Banks just overreacted and clinched the fists protecting their capital. In a scenario like this if you had cash or an already established substuntial line of credit you ruled the market. It was a buyers market and this caused the cap rates to expand. 

I know an investor that bought a 60 units property in Dallas back in 2009 for $9K per door. He recently sold it for over $60K per door.

To sum it up, a financial crisis the size of 2007-2008 can cause the capital sources to dry up and cap rates to expand thus dropping the values of multifamily properties. 

I really do hope we will never hit this bottom again...