I’ve been right about multifamily since 2011. A certain cadre of analysts I love to hate on have been wrong for the same timeframe.
I’m not going to get into a detailed breakdown of the argument or the recent numbers that came out. But I will give you a very brief, very definitive explanation for why I am and will remain in a winning position, invested in the likes of AEC and MAA, and that will do.
Multifamily occupancy is at 95%+. Multifamily occupancy has remained at 95%+ for years. Multifamily occupancy will continue to remain at 95%+ for years yet to come.
Very much to the contrary of what certain professional analysts would like you to believe, this was not “obvious, mainstream knowledge” which “everyone totally saw coming”. Moreover, it certainly is not “irrelevant” or “priced in”.
Apartment occupancy through the 80’s was averaging in the mid 80% range. In the 90’s (interestingly enough) it expanded to the low 90% range. It was not until the boom (and subsequent bust years) of the 2000 bubble era that this present level of 95% was even challenged. Perhaps companies were caught underbuilding inventory. Perhaps they just got good and filling space. I don’t know.
As the housing market took off in those early 2000 years, that occupancy level began to subside and many analysts began calling for a return to the 80’s (in occupancy terms, by way of a deathspiral in demand for apartments). In tow with this expectation, multifamily CEO’s began repositioning their businesses for less renters, less lease space. Apartment demand was dead, we were told.
Except that it wasn’t. In an effort to absorb the shock from fewer renters year over year, multifamily new development was virtually nonexistent for half a decade. Yet, as you all know, the actual result was very much the opposite. A colossal failure of housing ensued, and demand for multifamily apartments has risen dramatically.
Every new building that gets brought online is hitting 95% occupancy virtually overnight. The demand is so hot, companies like AEC and MAA can’t build fast enough.
I want you to take a minute to look at AEC’s acquisition and development budget. Look at MAA’s next.
This is, as one might say, “kind of a big deal.”
These companies are cheap; they don’t have much premium baked in. You can pick them up and pocket 5% dividends for years, while you wait for their stock price to go on a nice little 30-40% run, no problem. Look back, find you’ve averaged 10% annually, call it a decade.
Sure, eventually the cycle will run it’s course and the stocks will take a hit on overdevelopment. But how much money do I stand to make in the meantime?
If you enjoy the content at iBankCoin, please follow us on Twitter
You’ve have been right on everything this year.
Almost – NRP is still down and CCJ continues to jerk me around
So the MSM wasn’t intentionally deceiving the public with the bs they spouted the last 5 years at least
Cain,
Out of curiosity, do you have background in RE? I don’t necessarily disagree with your sentiment, but I’m curious if you are seeing something based upon past experience?
I have not looked into the companies listed above, but in my own research; Class A Multifamily properties in prime gateway markets are trading in the 4% Cap range. Thus far, Landlords have been able to successfully pass on rent increases, but Median wage data (stagnant) indicates that this is not sustainable, all things held constant.
I would guess that the above listed companies hold high quality properties and are likely somewhere between 4%-7% market cap rate. Do these companies really deserve an additional premium?
4%-7% is awfully low historically speaking, and I would venture to guess that a lot of the recent Cap rate compression is the result of cheap, short term financing. What happens to the value of these properties if rates increase ? Negative RE refi cycles can be nasty if an operator isn’t conservatively leveraged.
I don’t know the answers to any of this, but I do think about these questions/ risks often. You seem very bullish on multifamily and I always try to understand the reasoning of market participants. Thanks.
Good evening.
I do not have a background in real estate.
Your estimation of the Cap seems accurate.
I’m not that worried about a rate increase at this point in time. I think we have years of this.