As we near the mid-way point of Q2, we can already begin to see patterns clearly emerging in a variety of areas, including multi-family investment and development changes.
First, over the past 12 to 18 months, many developers have been unable to secure financing and consequently backed down from new projects. There is also an oversupply in some markets such as Downtown Miami, which consequently is exerting downward pressure on rents, and ultimately, on land values.
Conversely, we see emerging submarkets with great potential in Florida and throughout the Southeast. These are areas which are responding well to a higher quality product.
Another positive factor is the market entry of some construction loan funds outside of the traditional banking arena, which are making construction loans of 60 percent up to 75 percent of construction cost. Many traditional banks had backed away from new construction loans in 2016 and into 2017.
There is some cautious optimism about the loosening of some bank restrictions under Basel III, the regulations such as the Dodd-Frank Banking Act and others under the new administration. This would be good news for new development and new construction and other jobs around the country.
I am often asked about the new president and the impact of the administration on Investment Real Estate, both now and into the future.
Whatever one’s political bent, the facts related to the new administration is that if bank regulation is relaxed, bank financing could be more available again for the first time in over a year. I also see an expanding economy creating new jobs, which will have a positive impact on the economy. Cities in which new jobs are being created will also see renters that are ready, willing and able to move into new apartments.
The impact of an expanding economy is that The Fed will tend to raise interest rates. Because its policy is chiefly driven by a fear of inflation, we will certainly see a higher cost to borrowing in 2017. Interestingly, we have still not seen any pressure on valuation cap rates, which have remained low. We may see valuation cap rates rise a bit, but I do not foresee much rise in cap rates because an environment of anticipated inflation makes all real estate, and particularly multi-family apartments, a smart investment as a hedge against inflation.
A concern I have as we move through 2017 is rising construction costs. This will force developers to hyper-focus on their designs, and anticipate costs in order to mitigate against what I view as continuously inevitable increases in the cost of new construction. I personally watch costs like a hawk. It simply does not take too many percentage points of price increases or unexpected expenses to derail a project.
Lastly, I believe that smart investors need to develop or select properties to invest in which have true market differentiations from their competition; Properties which have a specific strategic advantage, something that sets them apart.
One example is in our St. Petersburg project where we are leasing at above our pro-forma rental rates. We are able to do so because we are delivering a high quality product, with beautiful art and attractive living spaces that is by far the most amenity-rich property in the area. Also, we are directly across the street from a new urban super market, which has a high percentage of pre-prepared foods, in a thriving walkable neighborhood.
While clearly many factors impact a development, ensuring that your project is offering something genuinely unique is nothing short of crucial.
These, in a nutshell, summarize my key observations so far during 2017.