US multifamily rents could ‘explode’ in three years

The US rental apartment sector is expected to ‘bounce’ along the bottom for another 18 months before rents start to grow and in some cases grow substantially. However some multifamily owners should consider selling now if their assets are not in prime shape and in great locations, Caldera Asset Management tells PERE.

The US multifamily market could see an explosion in rents in roughly three years time as surplus rental inventory and condo stock is absorbed, Caldera Asset Management co-founder Mike Kelly told PERE.

However, investors in the sector shouldn’t expect to see a return to rental levels seen prior to the credit crisis, with Kelly warning: “It does depend on the city, of course, but generally 2012 is not going to be a repeat of 2007. Some areas will get substantial increases but it won’t be anything like the bubble we’ve just seen.”

The Greenwood Village, Colorado-based multifamily turnaround executive also said apartment owners had to be “very realistic” about the prospects of their assets going forward – recommending those with properties not in a great shape or location to sell now.

Kelly said the looming gap between commercial real estate debt maturities, including multifamily loans, and available credit over the next few years could result in a flood of properties coming to the market.

“There’s not a lot of product in the market right now, so for some investors it would be best to take advantage of that situation,” he said. “Because when the flood of assets does hit it will be extremely difficult to differentiate products. It’s about getting ahead of the curve.”

Between 2005 and 2007, some multifamily markets “went crazy”, Kelly explained, feeding off cheap debt. However, he said, not all locations are set to “come back” as strongly.

“It was the financing that investors were buying, the apartment was the vehicle to get the financing. For some investors it would be best to sell now and so they don’t have to fight a battle they might ultimately lose,” Kelly added.

Kelly said the equity in many multifamily deals done over the past few years had been “wiped out” with average cap rates in the US raising to 7 percent, against previous averages in the 4 percent to 5 percent range. “People are cash flow investors versus IRR investors and that’s a painful transition.”

He said the next three years would be about rebalancing portfolios and investments. He expected US multifamily rents to “bounce” along the bottom for the next 12 to 18 months, before rents to start to grow steadily. He said some markets would see rents “explode” in roughly three years as existing inventory and condo supply is taken up, and little new product hits the market. But he added: “It will not be like 2007. We might see rent growth of around 3 percent to 4 percent a year, which has historically been very strong.”