Commercial Investment Real Estate November/December 2018 | Page 30

Multifamily Project Completions 495,580 500,000 400,000 300,000 310,181 319,936 2016 2017 246,418 212,313 200,000 100,000 0 2014 2015 2018* Source: Yardi Matrix *Projected/projects in the pipeline disconnect is causing stagnation in the market, says Chris Cervelli, CCIM, president of Cervelli Real Estate & Prop- erty Management in North Bergen, N.J. “Properties are starting to sit around a little bit longer,” he says. Investors are not oblivious to headwinds such as rising interest rates, slowing rent growth, and a still-active development cycle. In addition, the trade wars and tariffs are making some investors nervous. “Everybody feels like the music is stopping, and no one wants to be left holding that bag when it does,” he says. The flip side is the abundant debt and equity in the market, and many investors and lenders like the risk-adjusted returns on multifamily units relative to investment alternatives. “There is still a tremendous amount of equity — both institutional and private equity — that loves the multifamily space,” Shopoff says. “If good product comes on the market, there are multiple buyers for it.” Interest rates have moved higher, but rates are still relatively low. People can still buy a property at a 5 percent cap rate, put debt on it at 4.5 per- cent, and have positive leverage and rent growth, plus some tax shelter and inflation protection, he says. “I don’t think there’s any shortage of buyers today. That shine could come off at some point, but we don’t see it,” he adds. Beth Mattson-Teig is a business writer based in Minneapolis. INVESTING IN TODAY’S MULTIFAMILY MARKET by Barry Saywitz Investors are facing many challenges in the multifamily market. With the housing market on an upward slope, home prices rising, and interest rates ticking up, homeownership is more difficult to achieve. In addition, baby boomers are selling their homes for retirement money without purchasing new ones, and millennials prefer renting. The resulting rental market demand continues to push multifamily rents to an all-time high. This increase in rents drives values for multifamily properties, making them an extremely desirable investment vehicle. The limited number of quality properties for sale and significant amount of available capital means that buyers are chasing every deal. The average sale time of a property has decreased dramatically, and the terms of the transaction and the time frames for the buyer to perform have increased. It’s a seller’s market — and the buyer assumes several risks. Financing a property with a cap rate lower than the interest rate is difficult, unless there is significant upside in rents. Smart investors need to evaluate whether they should raise rents nominally, which would avoid pushback from existing tenants, or raise rents significantly, which means investing capital and remodeling the property. When a buyer remodels or raises rents, it adds downtime from turnover, which must be accounted for in the overall return. While investors who acquired properties in the last 28 November | December 2018 few years locked in extremely low interest rates, these rates are on the rise. As a result, mortgages will increase in the coming years when these loans roll from fixed rate to adjustable or reset at the future rate. If rents do not increase at the same pace, investors will see diminished returns. Many experts believe that we are in the ninth inning of this nine-inning real estate cycle. Those currently investing may be overpaying and in serious danger of a market adjustment or interest rate increase, both of which would negatively affect the overall return and value of the property. Money still can be made in the multifamily market. Many properties have significant upside in rents, and there are ample opportunities for the savvy and careful investor. But those who believe they are going to buy property and sell in a few years to make a profit need to be wary of interest rates and rent growth. In addition, if the market should flatten or turn, these investors and property owners will be in significant trouble. Investors with a sound investment strategy will be successful in both the short term and the long term. Barry Saywitz is president of The Saywitz Co., a national commercial real estate brokerage, investment, consulting, and management company in Newport Beach, Calif. Contact him at [email protected]. COMMERCIAL INVESTMENT REAL ESTATE