What Next?
When cap rates do eventually go up, the leverage buyers will probably return, since they’ll be able to make deals pencil out again. But that probably won’t be happening anytime soon.
“You have a window before prices get adjusted downward where all-cash guys control the market, especially on the high quality [Class] A properties,” Kaplan explains. “For the A market, it will probably stay open for the rest of the year. For the [Class] B market, you will see [price] revisions in the third and fourth quarter as the B owners realize if they don’t sell now, they might get stuck with a property.”
Others, such as Naughton, predict this part of the cycle will last even longer–perhaps a year or two.
If that happens, it won’t be any easier to find top-of-the-line product, pushing buyers who can’t compete toward less and less attractive properties.
“I think the added liquidity in the market at the institutional level will change the landscape in the immediate future,” Kaplan says. “The ‘core’ and ‘core-plus’ product is so highly sought after by the institutions that the private groups and even some smaller institutions will be forced to compete on the less ‘sexy’ product. This much liquidity in a market isn’t good because it forces people to overpay for real estate to get their money allocated.”
Where to Find Bargains Today
As interest rates rise, it’s becoming harder for the leverage buyer to find a bargain. Here are three places to look:
1 The Midwest: With many major REITs focusing on coastal, high-barrier-to-entry markets, the Midwest has opened up for smaller, leverage buyers. “In the Midwest, those cap rates are up and will be inching up more,” predicts Mark Wallis, who has monitored the market as senior executive vice president of United Dominion Realty Trust, a REIT headquartered in Richmond, Va.
2 Formerly Hot Condo Markets: “Some apartments in Southern California are seeing as much as a 10 percent reduction,” says David Baird, national director of multifamily for Sperry Van Ness, a broker based in Irvine, Calif. “Additionally, Florida markets are seeing a reduction as well.”
3 Class C Assets: Whenever there’s a price correction in apartments, people often say Class C assets are first to suffer, according to Wallis. But he says that isn’t happening yet. “You’re still seeing guys rehab good Cs,” he says.
