The Current State of Multi-Family And Where We Go From Here

Psychological trauma is a very real phenomenon. Even in the investing world. A 2013 survey titled — “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress” — found that 93% of financial advisors experienced PTSD after the 2008 financial crisis and another 40% of planners reported severe symptoms. When events such as the Great Recession are still so vividly recallable, it’s impossible for it not to play a role in investment decision-making, especially in real estate.

In the decade since the global financial crisis, real estate markets have thrived from favorable demographics, job growth, a growing economy, strong property fundamentals, rising property values and low interest rates. Because of these factors, lending has also reached a record high.

However, in 2018 we have seen the first signs of slowing loan origination, paired with rising interest rates and indications that we are indeed late in the cycle. Commercial and multifamily loan originations fell 3 percent from the second quarter of 2017 and 7 percent from third quarter of last year. The drop off in lending in the third quarter was driven by a 30 percent decline in hotel loans, a 28 percent decrease in retail loans and a 17 percent dip in office loans. On the other hand, multifamily originations in the third quarter rose by 13 percent.

Multi-family value-add is shaping up to be best positioned to succeed at this point in the cycle. Multi-family vacancy is still relatively low and is the lowest comparison to other sectors, such as office, retail, and industrial. Also, value-add opportunities continue to take advantage of under-managed properties.

 

We agree that we are in the later stages of a ten year bounce back for the real estate market. There is also no denying the price appreciation and lending increase we have seen during that period. However, one must keep in mind that interest rates are still extremely low and banks are using much more rigor in evaluating loans than earlier this decade. Cycles are normal and we are confident that by prudently investment in multi-family value-add real estate, there are still plenty of opportunities and any fear of a Great Recession repeat in unwarranted.