Markerr attended the National Multifamily Housing Committee (NMHC) Annual Meeting on Jan. 18-20 in Orlando, Fl. The main topics of conversations centered around cap rates, rent growth, and strategies for the coming year:
Cap Rates: There was no clear consensus on where cap rates are headed for 2022 after the extreme cap rate compression seen in 2021. Some believe that with the recent 10-year yield bump, cap rates will follow suit. Others noted that the Fed’s telegraphed interest rate will lead to higher debt costs and lower aggregate demand. The main counterpoint is lack of yield in other alternative investments. Even with a lower return (5-6% unlevered IRR targets), there is no alternative and LPs still want their partners to put dollars to work. Anecdotally, everyone is planning on being a net buyer in 2022.
Rent Growth: The main reason that companies are planning on being net buyers in 2022 is continued high expectations for rent growth. Market rent growth moved up so quickly in 2021 that apartment turnover fell, leaving a sizable loss to lease gap at most properties even after the massive increases seen in 2021. The earlier in the year that companies can buy, the more of the re-lease-up risk they can absorb and help to increase the going in cap rate (nominal cap rate based on t+1 NOI with property tax adjustments).
One commonly discussed strategy was trading out of B/C-quality assets into A-quality assets. The older buildings with deferred maintenance are being sold to aggressive value-add buyers at similar cap rates to recent builds. This strategy helps to mitigate 1) capex spend and 2) bad debt problems, all with minimal to zero dilution on the trade. On the receiving side of the coin, there are still a number of value-add buyers that continue to do well with their strategy by getting massive ROI on their improvements.
Another strategy is to shift dollars from acquisition to development. Most companies are doing this in a bid to get more yield relative to acquisitions. Markerr’s view is that the best time to develop is at the beginning of an economic cycle. Most investors lose money over a full economic cycle since they reinvest profits and those profits grow towards the end of a cycle. Since investments at the end of a cycle typically see rents reset lower, profit margins decline or go negative.
Another hot topic is the build-to-rent (BTR) business, which provides new investment opportunities that meet consumer demand in the wake of record-breaking home price appreciation. Most of Markerr’s top picks for SFR investment are in the Sunbelt, with Phoenix leading the way.