I recently had a conversation with an investor and in so many words, he asked me when I thought “winter is coming.” His story was like many I have heard before; he sold most of his properties over the last two years and is sitting on a pile of cash. Not a bad problem to have if you ask me, but his frustration is that he can’t find opportunities that meet his investment criteria anymore, and it’s been years of scouring deals. So, I made note of our conversation and added him to my growing list of investors who are waiting on the sidelines until the market enters a new season of less competition and more supply.
During a November 2019 Yardi Matrix Multifamily webinar, I heard several interesting points on topics that could potentially lead to upward pressure on cap rates: income crash dried up capital in the market, oversupply and interest rate hikes.
As of today, projections continue to be we are likely to remain in a low-interest-rate environment. Additionally, there is still an abundance of capital available, supply continues to be absorbed in DFW, and job growth remains robust, none of which is conducive to a higher cap rate environment.
To gain additional insight, I asked for thoughts from Doug Ressler, director of business intelligence for Yardi, on what we may or may not see in those categories in the near future. Here’s what Ressler had to say.
Income crash (for DFW only)
“We still view the Dallas market on an upward trajectory. Why? Two reasons: jobs and the resultant population growth. There are jobs here, and thousands of people are still moving to the Dallas area looking to find jobs. The Bureau of Labor Statistics says 102,500 new jobs were created here in 2018. That helped cut the local unemployment rate to 3.3 percent— (yes, lower than the 3.9 percent national average). However, there are now 3.7 million people in this area going to work every day.
Dried up capital in the market
As of Q2 2019, it is evident that CRE demand has not diminished investor appetite for multifamily properties, and despite some hesitancy earlier in 2019, originations continue to be strong even in New York and California. Many investors are pursuing a value-add strategy, bringing properties from the 1990s up to 2020 standards.
According to the Mortgage Bankers Association, multifamily origination volume increased 12 percent during the first half of 2019 from the same period in 2018, and we have seen no sign of it slowing. In fact, to better take advantage of investor interest, Capital One has opened new offices in Seattle, Dallas, Tampa, and Phoenix, and expanded our presence in Chicago, Boston, and other cities.
Economic growth and population continue to move South and West to intellectual capital nodes within tech hub markets such as Dallas and Austin.
North Dallas is one of the Top 15 Tech Hubs in the nation. The North Dallas Tech Hub is delivering in excess of the 10-Year Average (see Figure 2.0 and Figure 3.0).
*Intellectual capital nodes include areas of employment-related to high-tech, intellectual and academic fields as well as a start-up or VC funding.
Oversupply (for DFW only)
Dallas is leading the National markets which have absorbed a Large Number of Deliveries, Despite Heavy Supply Pipelines (see figure 4.0).
The Fed’s interest rate cut is unlikely to boost commercial real estate values, based on various CRE sources. The Federal Reserve recently cut its key interest rate by a quarter percentage point. This was primarily done to ensure the U.S. economy against downside risks from weak global growth and trade policy uncertainty.
The U.S. economy remains healthy as indicated by low unemployment, wage gains, consumer sentiment, and recent GDP growth. But trade uncertainty, corporate earnings, a manufacturing slowdown, and issues with Brexit and Europe prompted the Federal Reserve to act now in order to sustain economic expansion.
It is evident at this point, the interest rate cut will have little to no effect on the momentum of the commercial real estate industry. Reduction in rates does not imply or stimulate investor demand if the demand is not already there. Fannie Mae and Freddie Mac hit their $35 billion annual caps before the end of the year. In August, for instance, Fannie Mae reported that 56 percent of its new business volume of $34.1 billion for the first half of 2019 counted toward the cap.
Local issues such as rent control in California and New York City are also impacting the multifamily market. This will be combined with the relative attractiveness of U.S. real estate; lower hedging costs should support more international capital flows into U.S. property markets. As a result, there may be some incremental cap rate compression in some markets and property types as lower interest rates reduce upward pressure on cap rates.
We believe that strong fundamentals will continue to sustain growth in the multifamily market. Precluding an economic crisis that might affect demand, the outlook remains solid for multifamily over the next 12 to 24 months.”
About the author:
Esther Cho is an Associate Director with Greystone | Investment Sales Group in Dallas, TX. If you want to learn more about our Off-Market Opportunities, Multi-Family Listings, Land Sale Listings, Property Valuations, Debt Platform, or meet for coffee to exchange value-add ideas, contact our office:
Greystone Investment Sales Group
6320 LBJ Freeway, Suite 228, Dallas, TX, 75240