One Year Ago

Lehman Brothers went out of business and the world seemed to stop turning for a few moments. There was common opinion that the financial markets and anything related would continue a free fall that had started only months earlier. The Dow Jones Average had a nearly 45 degree angle of descent going. It was not pretty and it was darned hard to find anyone who thought it was.

There were a few bold souls though who started buying again, figuring that good companies were not just good in good times but also in not-so-good times. Companies like Proctor & Gamble, Walmart, and Chevron, to name a few. These are not sexy new start-up companies or high-tech about to unveil the new new thing but stalwart companies that were trading at a pretty good price, especially compared to the not-too-distant highs from not that many months earlier. What had changed? Had the companies become over-levered or outmoded? No, they simply were caught on the same discount ride down that the entire market was on. If you bought last March you are pretty happy today. Your reward for defying common wisdom is a return of somewhere around 50%. Not too shabby.

So where are we with Apartment investing? We have had at least a year of negative news, rent declines, vacancy increases, locally watched the demise of WaMu, and several real estate kingpins got into debt trouble. The surrender of Stuyvesant in New York to the lenders is likely the largest apartment investment default in history, over $5 Billion. Does this mean apartments are done? About as much as Proctor & Gamble is.

It has been a very long time since an investor could buy an apartment building in any decent area in Seattle and get positive leverage. With debt rates around 6 and CAP rates near the same level it is one of the best times in the past 20 years to buy apartment buildings again. The same view that an investor would have for Johnson & Johnson, except that in apartment investing you get to use debt, is the approach I think is wise for apartment investing today: buy high quality locations and buildings and they will perform well over time. They will not go up like a rocket but neither will they fall like an over-leveraged investment house like Lehman Brothers or WaMu.

If you could have March 2009 all over again what would you buy? I think we are at that same moment for Apartment investing today. We won’t know for sure for many months and the common wisdom is that it is better to wait to see what happens. By then common wisdom will have worked against you again.