Multifamily Midwest

Multifamily market becoming a crowded house

It’s not too late to jump into the red hot multifamily market, but it is turning out to be a rather crowded house, agreed a panel of experts at REIA’s Multifamily Housing seminar in Chicago.

It’s not too late to jump into the red hot multifamily market, but it is turning out to be a rather crowded house, agreed a panel of experts at REIA’s Multifamily Housing seminar in Chicago.

“Money is as plentiful as I have ever seen it, but it is tough out there,” said Greg Mutz, CEO of AMLI Residential. “There is a lot of money chasing not a lot of deals.”

As the single family and condo markets languish in a downturn of historic proportions, the apartment market is flourishing, as displaced homeowners move back into rentals, and, current residents prefer to stay put rather than invest in an unstable housing sector.  With occupancy projected to be at high levels for the foreseeable future, rent growth has been solid.

Rent growth varies by city, but the national trend is positive, with Axiometrics Inc. reporting an average annual effective rent growth of 4.96 percent in the first quarter of 2011, up slightly from 4.50 percent in the fourth quarter of 2010. It has been a very attractive market for buyers.

“You would have to be an idiot to screw this up in the next 12 months,” said Mutz. “Occupancy is high and rents are going up. I don’t see any real speed bumps for the next two years. You are not going to make huge money on deals, but it is steady.”

In very popular markets, like southern California and Washington D.C., core properties are trading at a sub-4 cap rate, said Mutz.

The costal markets have been very attractive for potential owners, but it has also experienced the most price fluctuation.

“The market is definitely overheated right now,” said Jeffrey Katz of Trilogy Real Estate Group. “Pricing is very aggressive.”

Trilogy is a rather new firm. It owns three properties at this time and has found it difficult to enter certain markets.

Katz mentioned that the firm has always targeted Portland, Ore. as a desirable location, but that the recent influx of capital has made it very difficult to compete.

Two years ago the firm bid on a property in Portland and lost out. The same property recently came on the market again and the price per unit had increased 30 percent from two years ago, he said.

Matt Schoenfeldt of Holiday Fenoglio Fowler said that it is a “great time” time to be leveraging real estate. Fannie Mae and Freddie Mac have been the dominant, if only, source of financing the last few years, but now, life companies are back and “very aggressive” as well as CMBS financing.

“Multifamily in general is undervalued in terms of long-term value,” said Dori Nolan of Capri Capital. “Lenders feel safe at 70-75 percent leverage.”

Construction deliveries are currently at very low levels, but, there will be more rental product put on the market in the next three-to-four years. It may temper the market a bit in the mid-term, but AMLI’s Mutz still believes that the long-term outlook is solid.

“The U.S. is over-housed,” said Mutz. “We misallocated capital in a terrible way. I think the market will continue to shift to more rentals. Long-term, this is not a bad place to be.”