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Here’s a great resource for apartment investing news – Multi family executive. I came across the following article and pondered what this means to my apartment investing business and the strategies that we employ.  Clearly, the smart money is moving toward apartment assets and builders are not finding ample clients in the multi-family segment.

How does the small apartment investor compete when the market is heating up with the big guns coming to play in our relatively small sandbox?  Read on and I will discuss my thoughts below and why I know our apartment investing strategies keep us relatively insulated from the roller coaster that could be ahead with the upcoming apartment supply infusion. Michal

Will Building Boom End the Party for Apt. Investors?

by Randyl Drummer, Multifamily Executive

Wave of New Construction Affecting Everything From Rent Concessions to Cap Rates to Where Investors Place Capital

Apartment developers and investors likely can look forward to enjoying another year or two of high occupancy and pricing power in a strengthening economy. But the music may stop by 2015 when the full brunt from the growing wave of new supply is expected to be felt across U.S. markets.

For now, the good times continue to roll. Multifamily pricing continued to post the strongest results of all product types during the first quarter, though there are signs of a deceleration in apartment fundamentals, mainly as a result of growing new supply, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI).

The multifamily index gain of 0.8% in the first quarter was the best of the four major property types – but a notable decline from its quarterly average of 3.2% over the last two years, according to the CCRSI.

The apartment sector’s impressive performance has been driven in part by stronger fundamentals and in part by the free and easy activity of lenders, especially Fannie Mae and Freddie Mac lenders, the government-sponsored enterprises (GSEs) that have provided cheap debt for investors.

Much of that readily available financing has been used to buy multifamily property. But increasingly developors have jumped at the opportunity to build, especially with the diminished demand for new office and retail space.

“Construction is getting back to normal levels and it’s changing the way some markets are behaving,” said Erica Champion, senior real estate economist with CoStar’s Property and Portfolio Research (PPR). “A full recovery is on the books, and after tumbling for nine successive quarters, we expect vacancies to pivot north over the coming year, thanks to the supply wave that’s quickly turned into a tsunami.”

The elevating levels of new construction are accompanied by more risks, according to Mark Hickey, who joined Champion and Director of U.S. Research, Multifamily Luis Mejia to present the First-Quarter 2013 Multifamily Review and Outlook to clients recently.

“As there are more properties to bid on due to new supply and fewer bidders in the market as the REITs become less active buyers, that will cause downward pressure on pricing,” noted Hickey.

The current national vacancy rate of 5.9% is 230 basis points below the peak rate and 60 bps below the average rate since 2000. Rents are higher than in the heyday before the housing bust. In the first quarter, rents were 3.6% above their pre-recession high point.

Demand has been very strong for the last three years, with demand outstripping supply by a factor of three in 2010 and 2011, and new leasing activity bested inventory additions by a factor of two, Champion added.

Echo boomers entering adulthood are driving above average household formation, and CoStar expects demand will be above average for the coming year — but not enough to keep vacancies from rising.

But the dent will only be a minor ding. Most of those new units will probably lease up at a pretty decent clip if job growth meets expectations.

New apartment supply has ramped up quickly and will reach normal historical levels this year for the first time since 2009, when multifamily starts were at their lowest annual level for at least 30 years. The rapid healing of fundamentals in 2010 caught the attention of developers, with starts rising in 2011.

The supply spigot is now open across the country. In the first quarter, more than half the 54 largest metros received more than 1,000 new units over the past four quarters as developers flocked to energy, tech and government focused metros least scathed by the recession, including Texas markets, Seattle, Denver, Raleigh-Durham and Washington, D.C, where employment barely fell due to federal spending.

“Over the coming year, CoStar expects multifamily starts will come in at about 300,000 for the U.S. Our supply forecast [for the 54 largest U.S. metros] will come in at about 160,000 units, about 40% above the average annual supply additions since 2000 and the biggest year for construction deliveries in over a decade,” Champion said.

But how will all of these new projects affect the investment sales markets, where public REITs emerged from the recession stronger than ever and have been major net buyers since 2012 after pulling back in 2009 to deleverage, sell underperforming assets and repair their balance sheets?

Over past three years, the top REITS have grown at 28%, double the annual rate of the S&P 500, making it easy to raise capital to buy properties. Equity raises moved to a high in 2012 with the purchase of the Lehman Bros. Archstone portfolio by Equity Residential and AvalonBay Communities. At some point, however, the REITs are going to stop the capital raises as new supply causes rent growth to dwindle and REIT revenue growth slows, Hickey and Champion noted.

Most public REITs have been focused primarily on higher-end assets in primary markets, but some REITs may begin focusing on more affordable apartment products such as micro housing units, Mejia said.

Those companies may be able to remain and raise capital and not necessarily have to sell their assets as high-end, primary market projects, which might not be attractive to investors, given the continued high prices and predicted slowdown in rents, Mejia said.

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I know that I have stated often that a key part of our apartment investing strategy is to work hard at playing where the big boys don’t. Notice that this article revolves around the 54 major markets that they are following.  Remember that most of the major news focuses on REIT activity, and most of the building for REITs is for A class assets in major metro areas.  These are not our markets, nor our competition.

What does that mean to a small investor who wants to run a well occupied community for the next ten years and not worry about nicer competition moving in right next door? 

If you said, “move to smaller markets or outlying areas” – you go to the head of the class. 

Where have we been buying and/or looking lately?

The answers are quite a few places, such as suburban areas where new construction would not make sense; or smaller markets that have had steady growth (but not a boom); as well as secondary and tertiary markets that support multi-family communities, but do not require A class buildings.

This is another reason that why I invest where I do…  

I have noticed that other than Atlanta there are really no huge cities in the South east.  There are tons of 50,000 to 100,000 cities but very few MAJOR METRO AREAS.  For this reason you just don’t see the pressure on building that you see in the more populated parts of the country.   For instance, I love the city of Greenville, SC.  If you went there you would swear you were in a city of 250,000 to 500,000 people, it even has an Apple Store!  I was shocked to see that the population of Greenville is only 61,782.  Birmingham, which most people equate with Atlanta, only has a population of 230,130. 

There are at least ten other cities like this throughout the South that offer opportunities to smaller investors but are still too small to attract the larger institutions and therefore are not going to be as affected by the phenomenon outlined in this article as cities such as Dallas, Seattle, Boston etc.

Knowing your markets and submarkets well is a key to making a wise purchase that will continue to ring the money bell for five to ten years.  This something that you need to get a strong feeling before you analyze your first or next apartment purchase. Happy to help you with this and more… Coach Michal

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Successful apartment investors know where to be and how to find the great deals… even in today’s hot market. Learn from the pro, live this Wednesday, exactly what you need to do to find your first (or next) highly discounted apartment deal, including how to fund the deal using little (or none) of your own money. Michal Ballard is busy buying apartments across the country right now, but agreed to join me on Wednesday night and share his insights with Foreclosures.com clients only this Wednesday.

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