Investors who picked up vacant / distressed multifamily back in 2009-2010 have either sold for a monster profit after cleaning and stabilizing, or still own those assets and are set to break the bank. Since 2009, the average Class-C rental rate has climbed an average of 8% per year with its biggest jump in 2014 when rates spiked 13%. This means that since 2009, the average apartment that was renting for $600 per month is now renting at an average of $840 today. Another strong indication is that even sellers who purchased as recently as 2012-2013 are becoming sellers to capitalize on suppressed Capitalization Rates, sky high rental rates, and other investors who have 1031 Exchange money to spend a premium on.
Rental rates are spiking due to a high amount of demand and low amount of inventory. Currently, nearly 1,250 rental units are under construction in Lee County. Channelside, a 225 unit Class A Apartment complex in South Fort Myers is currently 9% pre-leased. The first phase of new units won’t even be ready until May at the very earliest. This is due to pent-up demand and tenants who remain on waiting lists in Fort Myers, where the occupancy rate is a nation’s best 97.5%
So, what happens from here? Do we continue to assume rental rates will continue to climb? Capitalization Rates are already so suppressed that it is making even the most desperate investors to spend money a bit leary on buying Class C at under a 7% Cap Rate. The thing is, at the moment, they still are and cap rates will continue to suppress into the beginning of 2016. Largely due to an opinion that the market will experience a softening next year, I am advising my multifamily owners to entertain selling. Values are at rediculous highs right now and even if you leave a little money on the table, it will give you an opportunity to get out before everyone else starts to get out and sell. Take the profits and invest into something like Industrial, where the market for Industrial product is eerily similar to what multifamily was 2 years ago. (This could be very good for those interested in Industrial).
Historically, institution grade Class A/B multifamily has had Cap Rate values about 200 basis points above infill multifamily sites. That gap has narrowed to under 100 basis points based off of a recent appraisal. Infill multifamily development can be a great investment where pro forma stabilized Cap Rates are hitting in the mid 7’s in A-locations. Similar assets in A-locations are trading for an average of 6.45% cap rates based on a recent appraisal on a 28 unit townhome rental community on McGregor Boulevard in South Fort Myers that I was hired as a development consultant on.
My opinion is for multifamily owners to analyze their property’s value and look into trading up. I feel there is an 18 month window to do so before a potential softening. It would not be wise to wait until the last minute.
Give me a call if you would like to discuss the market or would like a complimentary Opinion of Value supported by current data.