Great News ... Maybe?

Last week the local paper had an article on the front page headlined “Apartments are red hot despite cool real-estate market”. I read it twice and think what it should have said is “lenders like apartments so developers will build them since they can’t borrow money to build anything else”.

I am a salesman so I am nearly always optimistic by nature as that is a job requirement, for sure. Developers are far beyond salesmen due to the relationship between enthusiasm/optimism and debt. The good news for developers is that lenders currently favor apartments. I suspect apartments are now in favor not because apartments have suddenly become scarce in supply but rather because they have exhibited the lowest default rates on lender debt. I am pretty sure lenders cannot make decent money without lending it out so here we go (again). My usual optimism is overcome with concern today that this is too soon. I have yet to talk with an apartment building owner who is enjoying rent increases, the usual harbinger of the time to build more. Moreover, I find most owners are still suffering above a 5% vacancy loss, yet another yardstick for the need to create new supply.

The issue driving the “red hot” apartments is really simply that lenders need to make loans and apartment loans look the least risky. So far.

For all my clients/friends who currently own apartments lets all hope together that we don’t experience a massive over-supply of apartments that simply cannibalize the existing tenants we all currently are fighting over.

In the meantime I suppose everyone should borrow all they can while these apartments remain in favor with the lenders. This would work well except that apartment investors are very cautious, risk-adverse types who won’t go over-leverage their portfolios so if a lender wants to make money they better lend to whoever will borrow it, hence the new development coming to your neighborhood soon.

I am optimistic that there will be a great new supply of renters though: the construction workers building the apartments. Of more interest to me is that if I have been an apartment investor for a very long time and want to retire I know that it is far easier to get a great price for a product selling upside than a product that looks like it may decline. The perception of upside, at least, is here today.