It’s Like Deja Vu All Over Again

It’s Like Deja Vu All Over Again

By: Nicholas A. Dunlap


RIP Yogi 1925-2015

I’m sorry, have we met?

Wait a minute –  I am certain that I have been here before.

It’s deja vu all over again!  Or as the late Yankee great Yogi Berra put it: “it’s like deja vu all over again”.  But I’m not referring to a person or place, instead I am talking about the market.  Yes, the low rate, rising rents, rising occupancy and subsequent descent of cap rates that has multifamily investors paying record prices per unit, per square foot and per room.  But how? It’s illogical.  None of it seems to make sense…Of course it does! Rents will simply continue to rise and offset the high prices and diminishing returns faced by investors interested in entering into or already competing in the multifamily space.

But that won’t happen and it isn’t happening.  While big research houses tout 7% to 11% rent growth amongst larger A and B properties, a blend of A, B, C property types and all sizes is more in the 3% to 5% range, down from the previous year of 7% to 9%.  In OC for example, home values are down from previous highs by as much as 10%.  Homeownership is down nationally around  53% and OC is even lower (around 48%).  So sure, we should  sustained growth in rental rates and occupancy this time around, but no more radical increases.  Instead, expect 2% to 5% depending on product type for 2016.  Remember how steep the fall was from the previous peaks? Well, I’ve never been a fan of cliff diving and that about sums up the fall.  It was abrupt, it was sudden and it was ugly.  And today’s rents are still below those peaks in many markets.

So just like the “No taxation without representation” slogan from the 1700’s, today’s investors have their own motto: “No justification without speculation.” In order to make most of these deals pencils, investors are forced to project, speculate or my personal favorite – “bet” on rising rates.  And well, we all know the difference between investing and gambling.

Remember, it’s tough to make predictions – especially about the future!