Buy, Sell or Hold: Timing the Market in 2017

An expert from Marcus & Millichap discusses timing in a fluctuating market cycle.

Paper Fortune TellerWhether you are buying, selling or holding your apartment portfolio, the outlook is positive for the, smaller apartment owner. The pipeline of renters will continue increase exponentially through 2025, as 10,000 Millennials turn 25 every day. Now is the perfect time to take a hard look at your portfolio.

As a general rule of thumb, buy when the market goes down and sell as the market goes up, in the interim take advantage of opportunities to lock in long term debt and hunker down when financing is readily available on attractive terms. The prudent investor is deliberate—trading up to better performing assets and trading out of the distracting, management intensive, stepping stones.

millennial population

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Is It the Right Time to Buy?

Capitalization rates have continued to compress over the last six months, interest rates are still hovering near all-time lows and in many markets yields remain very attractive. The marketplace is strong. Great deals abound; however, competition is also a reality for those rare finds. The spread between interest and cap rates create a marketplace where great leverage returns are achievable for years to come. Buyers in the winner circle are asset-driven, forward-thinking investors—committed to finding the deals with value-add potential. Value-add prospects include becoming more green or energy-efficient, making modest capital improvements and repositioning the property to attract a higher-quality renter pool. At a recent closing I found that a buyer designated select units for Air Bnb rentals, based on location and amenities. Now is the time to buy.

Is It the Right Time to Sell?

In the last eight years, the market has experienced healthy rent growth year over year. As market dynamics begin to shift, apartments may be approaching optimal performance levels. Property values flatten and decline in direct proportion to net operating income and increasing interest rates. Apartment owners would be wise to consider (a) trading out the outlier assets and (b) consolidating resources for better economies of scale. Per unit and per square foot pricing has eclipsed 2006 peaks by more than 15 percent in most non-core markets. Unfortunately, with headwinds coming at apartment owners in the form of tax reform, inflationary pressures and rising interest rates indicate that this run up may be short lived. Competition in core markets with high investor demand is pushing even the cautious investors out of their comfort zones to chase yield. This creates opportunity for smaller sellers’ secondary, tertiary and non-core markets.

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Click on chart to enlarge.

Average Cap rates for properties nationwide closed out 2016 at 5.2 percent—the lowest since 1990—creating a great opportunity for sellers. In fact over that same period cap rates have been as high 9.7 percent and averaged 7.6 percent. It is likely that these positives for sellers may begin to shift in a different direction in the near future.

Is it Time to Hold?

This is the ideal time to lock in some great rates for the next five, seven or 10 years. Rates are still very attractive, lenders are offering long-term financing and frankly they are competing for your business.

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Click on chart to enlarge.

 

I recently received a loan quote from a reputable lender on a $2M property with non-recourse debt, 10 year term, 30-year amortization fixed at 4.33 percent at 75 percent LTV, also had interest only for the first 36 months. With rates poised to rise and attractive leverage options available, owners are encouraged look at your current mortgage terms and determine whether there are any beneficial adjustments that can be made. With the current cap rate to interest rate spread being higher than the long term historical average. The spread should be able to withstand nominal interest rate increases and a limited amount additional of cap rate compression.

Conclusion

Tony Headshot lean forwardRarely do you see this phenomenon in the real estate cycle where there is a perfect storm of sorts and the market achieves this sort of equilibrium. With millennials continuing to feed the pipeline at the tune of more than 20 million through 2025, the outlook remains positive for the savvy apartment investor. Where ever you are in the continuum, it is apparent that apartment owners should be executing. The short answer is: Whether apartment investors buy, sell, hold, or refi, the time is now!

Anthony Hardy is a senior associate at Marcus & Millichap with 20 years of experience helping clients create and preserve wealth through the timely acquisition and disposition of multifamily properties.

Charts supplied Marcus Millichap research department: Sales data includes transactions valued at $1 million and greater unless otherwise noted.

Sources: Marcus & Millichap Research Services; BLS; CoStar Group, Inc.; Federal Reserve; Freddie Mac; MBAA; Moody’s Analytics; MPF Research; NAR; Real Capital Analytics; The Conference Board; and U.S. Census Bureau.