Where are we in the cycle?

VodkaRedBull's picture
Rank: Gorilla | 509

Is now a good time to invest in residential real estate in major markets? (SF, LA, NYC, Chicago, etc.) If and when interest rates rise, how will it impact housing prices and rents? REITS and PE shops seem to be investing right now, are they at risk? How many more good years are ahead before a stagnation / bust?

Looking for the well informed opinions of the WSO RE Forum.

Comments (15)

Sep 8, 2016

I've made a post like this 2x this year? Been meaning to put one up...thanks for doing that. You mean residential as in 1-4 unit deals? Or MF deals?

The easy money has been made in for sale housing. The money to be made moving forward in most markets (especially in the major markets) appears to be risky. Appreciation still exists but it's laced between bigger deals dropping their prices. The middle market is holding up the high-end. It starts at the top and works it's way down. Buyers, while still buying at the peak are seeing cracks in the armor in markets like SF and NYC. Not long before it flows down stream.

Income property. My clients are refinancing and pulling out big dollars and sitting on it. We see opportunities in the next 18 - 24mo. San Diego coastal apartments are sub 4 caps. We need to raise rates, not cause the economy is rocking, but simply because we need to get back to reality. If this happens there will be deals. Not tomorrow. But soon. Rents don't seem to be slowing down though.

Some weird signals out there in my opinion. I have no clue how Wall St. is hanging on to these valuations.

Edit - Just looked and SF rents from 1990 - 1999. The economy was doing just fine if not well most of the decade, yet for sale housing was garbage and rents still rose. It happens. Rates were high then too. I was doing deals in the 8's and low 9's back then, lol.

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Sep 9, 2016

Returns aside...

How can an asset appreciate? increased rents, lower caps, cheaper debt (appreciates assets in a roundabout way)

In my opinion, rents keep going up and up while wages stay stagnant and inflation keeps growing. In other words, people take a pay cut every year (wages flat, inflation up) while rents keep increasing. This is not sustainable.

Cap rates are already very low. How low can they go? who knows... but when you see low 3-caps on the reg, you start to wonder.

Interest rates are very low. Everyone says the fed has to raise rates, but they don't... what's more is they can lower them. However, I dont think this is likely. A random unsupported guess from my gut is rates stay this low for at least another 6 months. beyond that who knows.

Based on the above, my question is, where will appreciation come from?

Sep 13, 2016

60% chance increase by YE. Most believe 2-3 hikes by YE 2017.

Sep 9, 2016

MF certainly seems like it is in extra innings. I like single family in some markets. In areas I cover there hasnt been much supply growth since 08. I feel like we are may be in the 5th or 6th inning there.

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Sep 9, 2016

In for sale housing I would keep an eye on continued slowing in luxury product. Then see how it rolls down hill. Additionally, in 2007, when prices were at an all time high, no deals were getting done, lol. My friends in resi were already starving. So, look for low sales volume or declining volume trends with high prices in your 500k to 800k California homes and similar markets.

Sep 13, 2016
PacNumber:

In for sale housing I would keep an eye on continued slowing in luxury product. Then see how it rolls down hill. Additionally, in 2007, when prices were at an all time high, no deals were getting done, lol. My friends in resi were already starving. So, look for low sales volume or declining volume trends with high prices in your 500k to 800k California homes and similar markets.

Also notice that there are some key regulatory hurdles where government's "hunt for cash" is extending to real estate. They are already aggressively going after capital with seizures, reporting laws, cash controls, and border restrictions. Now they have realized that big money is attempting to move money off the markets by putting money into cash real estate purchases and are moving to clamp down on this activity...which directly hurts one of the main things driving luxury real estate.

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Sep 13, 2016

I haven't heard of this yet.

Sep 12, 2016

Guys, clearly the first inning.

The following statements are generalizations.

Equity [gateway]
Things in NYC are slowly grinding to a halt on the commercial side. Luxury sales are out the window. Office supply coming to market seems retarded (excuse my language). Multifamily will always get absorbed but prices will become efficient as concessions fail to drive sustained occupancy. Retail outlook is shitty i.e. real growth is nowhere to be found. Love NYC industrial but still fuggin expensive just like everything. End of the day it's all about your basis - not a profound statement. A Manhattan 5 cap is not a good basis. If you are mandated to deploy then deploy away but do it in strong secondary markets with a compelling story and business plan.

Debt [smart]
Different than the last go around. Lower leverage, tighter covenants, banks already backing out of the equation. I will say it is a lovely time to deploy creative, discretionary and smart debt capital. I love debt. Debt is life. Life is confusing. Debt is..confusing? No. It's fucking lovely. Equity will get the brunt of any (likely) devaluations in the near-midterm. Stupid equity, that is. Kid who's 6'8 and super strong in 4th grade equity. Kanye equity. But who is that equity anyways.

Get creative. Learn. Go out and meet people. Slow times are times to better yourself. Don't get impatient. Be one with the earth. Be one with the bricks. Don't fret over the deal you lost because that deal will most likely look stupid as shit in 3 years. Or maybe it won't? Maybe rates go negative/stay low for the next 5 years and your 3 cap is looking fucking tight, bro. That's the sick joke about it all. You can't control what inning it is, so control what you can by making thorough asset level and business plan decisions that fall within your risk/return appetite.

My guess - we need a catalyst (not a profound statement). It's not going to be a CRE debt disaster like last time. Shock causing capital to dry up will come form something else. I can speculate, but your guess is as good as mine. Actually, your guess is probably a lot worse than mine.

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Best Response
Sep 12, 2016

Are you drunk?

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Sep 13, 2016

wasn't sure if that was alcohol or NZT speaking

Sep 19, 2016

I was in high school during the 2008 downturn and was largely clueless as to what was going on. To me, it feels like 2008 hit out of nowhere and nobody saw it coming, but I wasn't even slightly in tune with the market back then. In 2005/2006, were people talking about a coming downturn like they are now? It seems like everyone and their mother thinks another one is around the corner and I'm questioning how everyone can really be so "smart".

Sep 21, 2016
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