Is it Time to Buy Multifamily?

[JW Najarian]

Is it time to buy Multifamily?

	Sep 12	vs. 3 mo. prior	Y-O-Y
-State	$136,198.84	+1.5%	+1.5%
-Metro	$160,418.43	+0.4%	+3.4%
-County	$158,648.78	-0.4%	+2.4%
-City	$218,777.50	+0.3%	+10.3%

I was always taught not to buy while the trend is going down or flat. It is always best to buy while the numbers trend upwards after the low. This graph would indicate that this is the time to invest in Multifamily. Office, Retail and Warehouse trends are still reported in a downtrend in Los Angeles by Loopnet.

I am using Glendale as a the city, but because the numbers change so much by location I am speaking more to the county and state trends in this case.

 

So is it time to buy? (At least in California?)

This graph says yes, but it is never as easy as that. Median Sale price is also trending up, and inventory is very low.

 

 

While demand is increasing not only in California, but also nationally. The days on market have also decreased to 108 days which is only a slight decrease year over year, but they are at a new low for the last three years.

So what all this indicates is that the time to buy might be now, but the competition for low inventory will raise prices quickly and we may have an issue with finding good deals and this could indicated that a bubble could be produced.

Another issue is the housing market. With competition for renters growing between houses and apartments, could good deals go sour?

 

These graphs are for parts of Southern California, but they seem to look very similar in other markets.

 

I would like to hear your thoughts.

 

Thanks to Loopnet for their great reports.

[Suzette West]

JW, I would agree that smaller investors will have a tougher time in this market competing against the larger national multifamily firms that are flush with cash; especially now that they are showing more interest in acquiring assets in sub and tertiary markets. Until recently, they have avoided these markets and kept their investments concentrated in core markets. Smaller investors that can pool their resources and step into the market ready with cash will have a better chance of succeeding. I would be glad to do an interview; please send me a message to discuss.

[JW Najarian]

Suzette, thank you for clearing that up. So taking into account that markets change drastically according to location, would you say that generally the numbers show that in some areas it is now a good time to invest? Since having a large amount of capital is what is needed by investors to get loans, would you also say that the smaller investor may or may not have what it takes to compete in the marketplace and that only larger investors will reap benefits at this time?  We should do a full interview of this subject if you are game?

[Suzette West]

Hi JW,

In terms of shadow inventory, I am referring to national statistics because it is an indicator of general direction. Of course, the exact measure of shadow inventory would vary by market and by neighborhood. On Jan 3rd, Multi Housing News cited economists at Corelogic saying "residential shadow inventory as of October 2012 fell to 2.3 million units, which it calculates represents a supply of seven months. That inventory level is a 12.3 percent drop from October 2011, when shadow inventory stood at 2.6 million units" (Source: http://www.multihousingnews.com/news/economy-watch-markets-excited-... ).

It would seem logical to assume that--as smaller multifamily investors are squeezed out of the market due to increased competition--that they would naturally turn back to acquiring single-family rentals. If this were to happen, then it would be reasonable to assume that such a trend would cause an increase in competition for renters in the single-family sector.

[JW Najarian]

Thanks Suzette, great info, but I would ask, for the area we are discussing, is the shadow inventory going to homeowners or investors?

Could there be competition for renters from investment properties?

[Suzette West]

Hi JW,

I believe your assumptions are correct in that multifamily is a hot trend, and that such demand is causing stiff competition in the marketplace. Many investors are now starting to entertain multifamily opportunities in secondary and tertiary markets, because the competition in core markets is driving cap rates down to seriously unappealing levels--some areas as low as 4 to 4.5% (in Seattle). The trend seems to be national as a recent article in the December issue of CIRE magazine states that in the first half of 2012 (1h 2012), "secondary markets posted a 38 percent year-over-year increase in multifamily transaction volume, followed by  tertiary markets at 23 percent, according to Real Capital Analytics. Major metros saw only a 9 percent increase during that period" (p. 27 CIRE Magazine, Dec 2012). The successful investors in this climate will be those who are in a strong cash position, and who can act quickly. With shadow inventory declining in the single-family / residential sector, this could possibly be the saving grace that keeps the growth of the multifamily sector in check. Time will surely tell.