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If You’re Waiting For Your Apartment Building To Return to 2007 Pricing…
November 25, 2009 by Neil · 6 Comments
Prices of commercial real estate have, on average, returned to levels seen seven years ago, according to an index compiled by Moody’s Investors Service. Based on the index, prices for commercial real estate were 37% lower now than in September 2008, and 42.9% below the peak measured in October 2007 (Hat tip: WSJ). If you don’t discount for inflation, and assume prices will start going up at a rate of 5% per annum, that means you would have to wait 11 1/2 years to return to 2007 pricing. When owners say that they are waiting for prices to return, and fixate on the inflated offers they could have taken back in 2007, they wait at their peril.
I dont think values will come back in a linear way. At some point there will be a snap back. Maybe not to 2007 numbers for a while. But this is not a normal market to base normal inflationary increases on.
Bob,
Fair point. What other metric might you recommend?
Thanks for posting.
Neil
I am talking specifically of multifamiliy. I believe that when employment gets back to normal levels that effective rental rates will move back to a similar multiple of house income. In my market, supply is up do to a shadow supply of inventory caused by a combination of speculation and investor buying. The speculator supply has been shrinking as the banks foreclose and renters are moved out, while the investor supply remains high, because of the great buys that were available earlier in the year for cash buyers. That said, the overall of for purchase supply has shrunk dramatically and many of these investors are selling off as the prices start to pick up. There has been very little new construction in the past few years and with the lack of funding available, I believe there will be little in the near future. So on the supply side, I believe we will be getting tight in the near future.
What is require for the rents to have more than a normal increase will be a return to employment numbers that would be more in line with historic norms. I believe that there has been and will continue to be a lot of pent up demand being created during that time. There has been a great deal of doubling and tripling up of potential rents, either living with family or renting with others.
In addition, due to tough financial times, average household credit scores are declining, which will have the effect on newly formed households having to wait to purchase based on tougher underwriting criteria on home loans.
So my belief is that with supply being fixed, and actually shrinking and pent up demand continuing to build, there will be a great need for rentals when these people are working again. With a fixed supply and a rush of supply, I believe there will be a snap back in effective rental rates during that time. I dont think we will get back to where we were anytime soon, but I do believe it will get to rates that would be based on similar ratios in comparison in average income. Once we flatten out at that number, we will likely see annual increases based on inflation.
Sorry for the long blog. Home sick and have a lot of time to sit here and type.
Bob
Bob,
More power to you, and please get better soon.
I’m nowhere near as optimistic as you about a “snap back.” We have about 20 months of housing inventory that still needs to be digested. I do not see this getting absorbed into the system anytime soon. I referenced the doubling and tripling up in an earlier post. I do think 2011 and 2012 augur a bloodbath for multifamily and residential properties, as the banks will no longer be able to extend and pretend the high number of defaults. If my crystal ball were completely reliable or accurate, I probably would not be blogging.
Happy Thanksgiving.
Neil
I agree with on the bank side. They are lending and extending now, but there will be too many at that point. That is going to apply to retail and office as well, which I see as being in a worse position.
I agree with you on the crystal ball. I dont know when employment will return or what is going to happen in housing. I do believe that it will eventually swing back to equalibrium, but logic would tell me that it will at some point. I think it is tied tightly to employment.
We also had over 20 months supply here last year. We have had 2 record quarters of home sales and dramatically reduced prices. We track the homestead tax to differentiate between end users and investors. The good news is that we had a majority of end users who saw this as the chance of a lifetime to buy at half of reproduction. This is good news for the supply. My guess is rents will start going up in 2011, right when the banks are getting flooded with these properties. Great opportunity for well healed investors to pick up some good deals.
Happy Thanksgiving.
Bob