20 May Where are we in The Real Estate Cycle?
By Eric von Bluecher
CoStar published an article this week entitled “Apartment Construction Hits ‘Peak Year’ as Rents, Occupancies Edge Higher” which triggered two key phrases I look for when tracking the peak of the market: Apartment Construction Peak and Rent Peak. This article is based on a nationwide perspective tracking apartment construction since the 1980s:
“the number of new apartments under construction is at its highest level since the 1980s, and double the annual historical average seen over the last 34 years….With more than 240,000 units expected to deliver across the top 54 U.S. markets this year, CoStar projects 2016 to be the peak year in the current cycle for new apartment construction” – credit Randyle Drummer with CoStar.
The news of peak apartment construction leads me to think about the last phase of the real estate cycle which is Oversupply.
There are four phases of the real estate cycle:
- Recession – bottom of the curve, prices are at the lowest
- Recovery – latter point of recovery phase, may be good time to develop once prices have returned to profitable levels to justify new construction
- Expansion – towards the end of the recovery phase, rents are increasing
- Oversupply – peak of the market, rents are maxed, Cap rates are at their lows, more supply than demand
Ideally I would like to research the same data that CoStar used in their article on national building trends and look at Los Angeles specifically to see how new construction will affect the Los Angeles multifamily market. I’m working on acquiring this data and will update the post accordingly if I can get some solid numbers to report.
In the meantime, so that we can focus today on the real estate cycle on a micro (local) level for Los Angeles multifamily investment real estate, here are a few interesting charts using the following search parameters (Graph Data Courtesy of CoStar):
– Geographic: Greater Los Angeles
– Time Frame: Since 2000
– Asset Type: Multifamily
– Deal size: 5-100 units
The real question is will we be affected by Oversupply here in Los Angeles County? New apartment construction will no doubt effect territories with lower supplies of rentable units where the new construction is a larger percentage, this happens usually in secondary and tertiary markets with less overall supply. Since the amount of apartment buildings that span the Los Angeles market is so vast, the quantity of new apartment buildings here in Los Angeles is a relatively low percentage, which may or may not put pressure on the apartment unit demand from renters and investors enough for oversupply to be a main factor of overall market recession for Los Angeles real estate specifically.
Of course there are many other factors are involved besides new apartment buildings be built: which include: interest rates, cost of rents, depression of cap rates, volatile global real estate and economies, real estate and local economies in United States submarkets, job rates on a national and local level, the upcoming elections etc.
“Rents Still Moving Up – While rental rate growth likely peaked at last year’s 6% spike levels, apartment rents are still projected to increase by a strong 4% in 2016, with landlords still able to aggressively push rates in certain markets, especially in tech-concentrated areas of Portland, the San Francisco Bay Area and Seattle.” – credit Randyle Drummer with CoStar.
Instead of trying to track the market, which is fun yet difficult to do, if you need to sell but are waiting for the highest peak of the market, why be greedy? Look at the three charts above, all three are showing values that are higher than ever, take your profits now and cash out or trade into that high cap rate asset with more depreciation that you’ve been stalling on for the past year. Making no move is usually worse than making a bad move since more often than not, you’ll be in a better position in your new asset than when you started. The majority of the bigger players in this market invest in under performing assets, add their value with professional management and building upgrades, then exchange into the next deal, why shouldn’t you? Call me today to discuss the value of your portfolio and your options for 1031 Exchange trades either locally or nationwide.
Eric specializes in multifamily investments throughout West Los Angeles beach cities: Pacific Palisades, Santa Monica, Venice Beach, Marina del Rey & Playa Vista. Prior to joining Prosser Stevens, Eric managed sales teams for a Fortune 500 company in both California & New York; in addition to founding a successful sporting goods company.
Eric M von Bluecher
Prosser Stevens Real Estate Investments
Santa Monica & Venice Multifamily Specialist