Will Apartment/Multifamily Pricing Go Higher?

[Ivan Barratt]

Hey BP universe and my fellow syndicators.  Excited to hear thoughts both for and against.

What happens to apartment cap rates (B/B+/A- Workforce; NOT luxury) when these assets come out of the "Covid-Recession" relatively unscathed (Theory: Most people given enough stimulus money and unemployment checks will pay for food,water,shelter first) and interest rates are zero?  Further; there will be 6 trillion in printed money; much of it hunting for safe yield.

Could this current stage be the "bear trap" before the actual big bubble referenced in the chart below?

[Brian Burke]

Depends on what you mean by "comes out of the COVID-Recession." If that means once people get back to work in a few days/weeks/months, I think cap rates will be forced to inflate (and already have) due to the likelihood of future lasting economic slowdown resulting in anemic or absent (or even negative) rent growth, potentially higher bad debt, concessions, and vacancy coupled with lending constraints such as higher DSCR requirements, reserve requirements, lower LTVs, absence of bridge lenders, etc.

But if you mean once the economy starts to come back, whenever that is, cap rates are likely to revert back to the low levels we saw in January if rent growth returns, vacancy reduces, concessions burn off and go away, and bad debt normalizes.  

Cap rates are simply a function of measuring the value of a stream of income.  A growing income stream is worth more than a flat or shrinking income stream.  Thus, when income is growing (rent growth), cap rates go down.  When income is flat or shrinking (no rent growth, increasing economic vacancy) cap rates go up.  An additional influence is the cost and structure of the debt that can be used to leverage the purchase of that income stream, as that dictates how much of that income stream owners can keep, and how much cash they have to bring to the table to acquire it.  It all comes down to return on investment at the end of the day.