News and Releases
March 01, 2011
Virtú Investments Apartment Market Outlook Q1 2011
Shopping Small for Outsized Returns
It has been close to 18 months since our last apartment market outlook. Looking back, our call of the bottom of the real estate cycle in August of ‘09 almost seems obvious as hindsight’s view has a way of making the bold look banal. Today, the optimism in real estate, particularly the multi-family sector, is palpable. At the annual National Multi-Family Housing Conference in Palm Springs in January, the entire spectrum of real estate professionals supporting the industry were bullish on the operational recovery of apartments and the expansion of both debt and equity to support an increase in transactional volume. In this letter, we will recap the recovery with an eye on highlighting today’s potential pitfalls and opportunities in the investment cycle for the apartment asset class.
2010 – The Recovery
Although 2009 saw the stock market recover substantially, it wasn’t until 2010 that Commercial Real Estate (CRE) started to find its footing. Historically, Commercial Real Estate does lag in the stock market, so this delayed recovery wasn’t altogether unexpected, and played out much as we anticipated. Probably the most notable aspect of the real estate recovery has been the extent to which capital flows have decisively returned to the multifamily sector. Debt today is readily available to buyers, though at lower leverage levels and only to the most qualified borrowers. Freddie Mac and Fannie Mae maintained the ability to fund multi-family transactions even through the worst of the capital crisis, and are still active today. The debt market is further buoyed by the return of other historical participants such as life insurance companies, regional banks, and, to the chagrin of many industry insiders, commercial mortgage backed securities (CMBS), albeit all at much lower volumes and with more conservative underwriting than we saw at the top of the cycle. Equity is also chasing the asset class, as institutions, REIT’s and well-funded industry survivors looked to capitalize on the expectations of favorable operating fundamentals that began in early 2010, and look to continue for several years. The limited supply of new apartment units built over the last few years, in conjunction with a modest uptick in the economy that brought much needed stability and confidence to renters, began to lift occupancies and firm rents in most markets around the country.
Our existing portfolio endured the downturn quite well, and across the board, property stabilization in late 2009 served as a strong indicator that a broader market recovery was on its way. This strength was a signal to us that it was time to begin easing in with new acquisitions after a long absence. We bought four properties in 2010, and in most cases are exceeding our performance expectations…