Clear Skies for Multifamily Investors—For Now

Photo by Bradford Rogne Photography

As we enter the second half of 2018, unemployment is down to a 50-year low, and the economy is projected to be cruising at just under 3 percent by year-end, a milestone many thought impossible. 

In response to strengthening fundamentals, interest rates ticked up another 25 basis points in June, marking the second time this year that the Fed has raised its fed fund rate. There will likely be two more rate hikes this year, and at least two anticipated in 2019.

While these increases are starting to cause upward pressure on cap rates, apartment values have held relatively steady since tighter occupancy levels are simultaneously causing upward pressure on rental rates. The average effective rent in LA County for the second quarter of 2018 is $1,789, according to Costar, a 4 percent year-over-year increase. The average occupancy rate is 96 percent for the quarter, up from 94.5 percent the year prior. So for opportunistic buyers out there, we don’t expect to see any significant drops in values just yet. 

A caveat to such a robust economy at this stage in the game is that any future rate hikes run the risk of an inverse Treasury yield curve. This is when long term debt becomes cheaper than short-term debt, an indication often considered a harbinger of storm clouds on the horizon. The last time this happened was in 2007.

Despite this administration’s “America First” policy, what happens abroad matters in today’s global economy. European banks have amassed a considerable amount of toxic debt, and the rise of populist movements there are causing instability in Eurozone capital markets. Furthermore, a trade war with Europe, China and elsewhere could exacerbate inflation and isolate the U.S., as other world powers may see this as an opportunity to form new strategic alliances.

By April of next year, the full weight of the new tax plan, higher interest rates and increased tariffs will become evident. While lower taxes may provide more disposable income for some, caps on mortgage interest and property tax deductions, rates in the mid-5s and rising inflation will mean diminished purchasing power for many would-be home buyers.

Could this finally represent the end of the housing market’s bull run? 

Probably a little too early to tell, but for what it’s worth, I recently put my own property on the market. As the old adage goes, better to sell a year early than a day late. 

While skies remain sunny here in California for now, pressure systems are slowly forming over the Atlantic and Pacific. Let’s hope they peter out before gaining any real momentum.

Mark Ventre is a senior vice president with Stepp Commercial. Since 2007, Ventre has focused on providing solutions for owners, buyers and sellers multifamily properties and development sites in the Greater Los Angeles area. Ventre has sold over 2,250 apartment units and 85 acres of entitled and unentitled land, representing nearly $1B in value.