Hornstein Fetter March 2018 Market Insight
In the Trenches with Eric Veith
by Eric Veith
When is the party going to end? That’s one of the most common questions we get from clients and other brokers. Denver’s run in real estate values has been unprecedented and we are in the midst of one of the longest economic expansions in US history. Experience has taught us all that this can’t go on forever.
Our crystal ball isn’t any clearer than yours, but we tend to think the end of the cycle will be ushered in by changes in the lending market. Attractive loans are much harder to come by these days, due chiefly to a pull back by many of the local and regional lenders that helped fund the economic recovery. Add rising interest rates to the mix, and investors are finding it hard to hit their return targets.
There have been some exceptions to this trend, with a small handful of lenders still able to offer the kinds of leverage and terms that investors have come to expect in recent years. But what will happen when those lenders decide to pull back as well? In our opinion, the apartment market will have a difficult time sustaining further growth.
One of the ways we see Buyers and their lenders using more and more to bridge value and leverage gaps is interest-only debt. We’ve most commonly seen this with agency debt like the Freddie Mac Small Balance program. Indeed, the lower payments have allowed many Buyers to make sense of Sellers’ asking prices. But, how long can that model be sustained? Like all things in our business, it’s all tied to rent growth. Rent growth has slowed, but is continuing at a more modest pace than before.
We have no indication of an imminent retreat by institutional debt and other competitive lenders, but it’s our bet that such a retreat will usher in the end of the current cycle. The million dollar question for us is if and when this pull back will occur.
The ongoing availability of affordable debt is good news for both buyers and sellers, but the window is closing for both sides to take advantage of the opportunities afforded by this current lending market. As a result, our current recommendation is that our clients look now for opportunities to re-leverage their equity and rebalance their portfolio in preparation for the next downward trend. There is definitely still time to capitalize on unprecedented real estate value growth. But if and when the remaining lenders begin their retreat, it will be too late.