When the Outlook Is Hazy, Experience Matters
Over the past few months, I have been visiting with a considerable number of borrowers around the country. Everywhere I go—whether it’s the conference we hosted in Boston, client meetings in Dallas and Los Angeles, or the Urban Land Institute meeting in Denver—I encounter two camps of borrowers. There are those who think valuations are crazy, and those who believe we have three to five years of robust NOI growth to justify continuing higher valuations.
Reality is probably somewhere in between. I don’t think the markets are as overheated as some believe because demand will continue to outstrip supply in most markets, demographics continue to be favorable, lenders have been appropriate on credit, and at least for now there is a bias to rent after the housing bubble.
Some mixed views also came from Dr. Peter Linneman who spoke at the ULI Denver Multifamily Council luncheon. He offered a mixture of optimism and caution. He echoed some of the points I’ve been making and also believes that we may be poised for a dramatic GDP growth spurt when we return to post-recession norms. That said, he was uncertain about the political environment, global volatility, and a potential rebound in homeownership as the gap between renting and owning narrows in many markets. He also cautioned that we may have hit the floor on cap rate compression given that REIT cap rates, a 12-18 month leading indicator for the market overall, are increasing slightly. His advice is to take a cautious stance, advising owners to borrow less than they have in the past and lock in the historically low interest rates.
Because lenders have been mostly constrained thus far, it has been easy to follow this advice. In 2013, however, the lending landscape may become much more competitive, which could encourage a more speculative approach to the multifamily market. While it is true that the agencies have recently tightened their guidelines, CMBS pricing is narrowing, banks are getting more aggressive, and the new allocations for life companies will start with the new year.
To summarize, there are many mixed views, with optimism and caution co-existing. It’s at moments like this when you really need an experienced partner to help you navigate. It is still a good time to acquire, and we will make sure you get the certainty and competitiveness you need to make your deals happen. And as for refinancing, at the risk of sounding like a broken record, I urge owners to look at their portfolios and lock in some of these very low interest rates and also take a look at HUD. We are here for you.