Current State of Multifamily Market – 3Q2018

We love following real estate industry news and believe it or not, we love reading 10Ks and earnings transcripts in our spare time. It is a great way to get a good sense of what is happening in the multifamily arena and helps answer some questions we get asked frequently by our investors. In this post, we provide excerpts from the earnings transcripts of three publicly traded multifamily REITs: Camden Property Trust (“Camden”), Mid-America Apartment Communities (“MAA”) and UDR Apartments (“UDR”). Enjoy!

STATE OF THE MARKET

­UDR
“…the underlying macroeconomic backdrop for the apartment industry remains positive. This when combined with solid fundamentals will continue to support future growth. As such, we expect the apartments will remain a consistent short-term and long-term performer in a very volatile global economic landscape”.

Camden
“…But overall, as you just kind of think about the drivers in our business, if you look at employment growth and supply, there’s really not a huge difference between the outlook of what’s happening in 2018 and what the outlook is for 2019, job growth comes down a little bit across our platform, new completion stay relatively flat, but the change in the ratio of new jobs to completions doesn’t really move that much, we’re a little bit above five times for 2018 that drops to a little bit below five times for 2019. So overall just looking at the macro data and not drilling down to each individual market which is the whole purpose of our budget process, you would just look at the macro data and say 2019 this should look a lot like 2018 maybe some slight improvements. So we’ll have to see how it plays out…”

“…The thing that’s interesting when you think about the 10-year treasuries obviously has gone up from the beginning of the year and people think about why haven’t cap rates gone up as fast as the 10-year. And therefore thinking that prices have to come down and cap rates have to go up. But there is a massive wall of capital today that continues to flow into real estate and multifamily specifically sort of the darlings are multifamily and industrial with Amazon effect with industrial.

We had a board meeting this week and we had HFF come in and update our board on current market conditions and they had a slide that showed $182 billion of unfunded real estate capital that needed to find a home and when you start thinking about apartments, when you think about cap rates, the 10-year is probably the last thing that influences cap rates, the first thing is liquidity and that’s how much money is in the market trades and deals, the second is market fundamentals or operating fundamentals, supply and demand, the third is inflation expectations, and the fourth is 10-years. And when you look at the relationship of cap rates today, we have massive liquidity, we have pretty decent supply fundamentals and demand fundamentals and if the Fed is raising rates because they’re worried about the economy getting overheated and inflation coming back will have multifamily plus defensive assets from that perspective, because you can really mark pretty much 8% to 10% of our leases to market every single month.

So it’s a very sought after asset class unless there’s going to be a massive change in liquidity or operating fundamentals or expectations or inflation, I don’t see cap rates to anything but stand really sticky and prices doing nothing but going up because cash flows are increasing”.

MAA
“…I think that we are starting to see maybe some really early indication that things are starting to fray a little bit. The deal volume — as I mentioned, the deal volume is really high right now. And we are hearing more about deals not trading that have been under contract previously. The challenge of course is there’s still a lot of very strong buyers waiting in the wings and waiting around the hoop just to jump on any of these deals. We used to be able to hang around the hoop with a lot of other people around us and now there are a lot of people around us so.

But I do think, as I’m sure, there’s just — I hear just huge numbers of capital — private capital on the sidelines that are specifically earmarked to deploy in multifamily real estate. So I think that the deals flow and the opportunities I think are starting to pick up, but the buyer pool is still pretty, pretty aggressive. But we are hearing and seeing more deals fall apart a little early indication on that. So I’m optimistic that next year, we may see the tide turned just a little bit”.

DEMAND
Camden
“…I feel pretty good about our business long-term or mid-term; you can’t go out more than 2020 or 2021. But if you think about the business, the fundamentals of the business, we’re not getting disintermediated by Amazon, we’re not — we don’t have issues like that single family homes still are hard to get, the average near median price of home is up, incomes are not as high are not growing as much and you have interest rates popping up, so it’s made that homeownership more difficult even though from a demographic perspective we know that it’s not so much the money as it is the demographic position of people.

They’re waiting longer to have to have kids and get married and form households that would create demand for homes. So with that said, I think our business is going to be reasonably good for the next two or three or four years and barring any major calamity or recession or whatever, I think also that the pressure on merchant builders and development continues to be — to be there and I think that ultimately that you will see a peak in the supply and then the supply sort of coming down in 2020, 2021, 2022 unless we have — let’s just 3.5% GDP continues and job growth continues and we have more legs up. So I feel pretty good about our business”

MAA
“…And I would tell you that when you think about the demand side of the equation being a function of not only just the economy and job growth but also the other factors surrounding demographics and changes in society and sort of single-family housing affordability and all those other factors. Those factors I think are going to continue to be favorable toward rental housing broadly and apartment housing specifically.

So I think at this point, we don’t see any real reason to expect that the demand side of the equation is going to pullback at all. And I think that as I say the one variable that’s really hard to handicap right now is when those the next recession hit and to what degree this job growth get affected by that and how does it affect demand. No reason to see that coming anytime soon, but it’s something we think about…”

SUPPLY
UDR
“…I don’t have an algorithm. I do have 30-plus years of doing this. And what I would tell you is striking for me is the amount of data that’s available on starts and financing and that transparency has made the market more efficient and more responsive. And so the eras in the 1970s and 1980s where we would overbuild a market and then suffer through occupancy drops of 15%, 20% seem to be something of the past. And the market’s much more responsive, anticipatory, if you will, towards supply equation. So I don’t see it’s derailing us. And even if you look at this last couple of years where supply peaked up few markets, to be very seldom ever went negative on rents. So, I don’t see the same dynamic threat that it has been in the past. And you know we’ll just keep diligently gin in for opportunities”.

Camden
“…Well the supply challenged markets that we have right now the three weakest markets that we operate in are Austin, Dallas, and Charlotte, and if you look out at the supply numbers for 2019 there is very little relief coming in any of those three markets, Dallas gets a little bit better, Austin actually gets a little bit worse on supply, and Charlotte is about the same. So I think you can look for us to continue to be swimming upstream on those three markets just because of the headwinds of supply.”
Sunsail Capital note: almost all of the supply is concentrated in Class A product. Class B and C are too expensive to build.

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