Commercial Investment Real Estate November/December 2017 | Page 31
afford to live in a $2,500-per-month unit? “That
question hasn’t been answered yet, but it certainly
will be with the projects that are set to deliver over
the course of this year and into 2018,” Lance says.
Each new project seems to be setting a new high
watermark for rent, but people are looking at the
market more cautiously to see if concessions start to
be introduced and rents level off, he adds.
Apartment Rental
Rate Change
Actual
CCIM.COM
5.3%
5.1% 5.0%
4.8%
4.2%
Proceed with Caution
Properties on the high end are going to feel the
brunt of the softening, because that is where most
of the new supply has been focused. However, that
softening will cause rents to come down, which
will create a trickle-down effect and create more
pressure on the broader market, Cervelli notes.
“We are seeing softening, but it is not as public
as it really should be,” he says. “There are cracks
in the foundation that aren’t really showing.” For
example, projects are starting to offer concessions,
such as several months of free rent, to speed lease-
up, he adds.
Other cracks are emerging in investment sales in
some areas of the country. Apartment sales dropped
17 percent during the first half of the year com-
pared to the same period in 2016, according to Real
Capital Analytics. People are taking some risks right
now. Buyers may be relying too much on underwrit-
ing, with low expenses, low interest rates, and high
rents, according to Cervelli.
“I think if you’re doing that, you’re going into that
with all of the headwinds and nothing behind you,”
Cervelli says.
The growing supply is just one of several potential
market risks giving investors pause. “There is still
plenty of capital in the market,” Lance says.
However, there seems to be more temperance from
the investment community that they are not willing
to overpay for assets, which is keeping sales activity
in check. As asset appreciation has slowed, investors
also are being more cautious in how they are deploy-
ing capital, he says.
However, people still love the value-added deals.
Buyers want to buy Class B properties in Class A
locations, where they can invest in upgrades that
will bring it to an A-, but there is demand all across
the board, Gremillion says.
“Multifamily has been one of the best-performing
products for the past eight to 10 years,” he says. That
being said, many owners who may be considering
a sale are asking themselves what they are going to
do with the money, which may be stopping people
from selling, he adds.
Forecast
20-Year Avg. (2.6%)
4.5%
3.9%
3.3%
2.5%
2.5%
2.1% 2.2%
0.3%
2005
2006
2007
2008
2009 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-1.3%
-6.5%
Sources: 1997-2016, CBRE; 2017-2019, ULI Consensus Forecast.
Note: The previous ULI Consensus Forecast (released in April 2017) projected 2.0%,
2.0% and 2.0% respectively, for 2017, 2018, and 2019.
Markets such as Los Angeles continue to see high
investor demand for assets, with cap rates that have
dipped below 4 percent, according to Carz. Some
owners are taking advantage of that market pric-
ing to sell assets and reinvest in other areas of the
country that offer higher yields.
“I see a lot of people sitting back and thinking
creatively about how they are going to make their
next investment move,” she says.
Even with a few warning signs emerging, it may
be business as usual in many metros around the
country. Unless there is a major geopolitical event,
the multifamily market probably is going to trudge
along at much the same pace for the next 12 months,
according to Cervelli.
Interest rates are going to move higher slowly.
There will be some softening in the market that will
take sellers at least six months to catch up. However,
there could be a 10- to 15-percent reduction in val-
ues, and the market could get hot again, he says.
Beth Mattson-Teig is a business writer in
Minneapolis.
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