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Where Are We in the Real Estate Cycle?by Ivan Kaufman
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Ivan Kaufman’s Real Estate Market Overview
• The real estate market will inevitably progress through cycle after cycle.
• The market is currently in the midst of its second longest expansion. This follows the longest historical expansion that led into the Great Recession.
• There is a sentiment now that we’re in an asset bubble and that there is going to be a correction. It’s just a matter of when and how deep.
Key Takeaways – Market Cycle
Ivan Kaufman’s Real Estate Market Overview
Business and Real Estate Cycles
Ivan Kaufman’s Real Estate Market Overview
• The Moody’s/Real Capital Analytics Commercial Property Price Index has been slowing and, in January, showed prices come off their peaks.
• Many lenders are no longer underwriting rent growth.
• Rent growth has far outpaced wage growth and there has to be a catch-up period.
Key Takeaways – Property Prices
Ivan Kaufman’s Real Estate Market Overview
Moody’s/RCA Commercial Property Price IndexUnited States, Based on Repeat Sales Transaction Pairs $2.5 Million and Larger, December 2000 = 100
Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-1580.0
120.0
160.0
200.0
240.0
280.0
All Property Apartment
Source: Arbor, Real Capital Analytics
Ivan Kaufman’s Real Estate Market Overview
U.S. Recession19651967
19691971
19731975
19771979
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20092011
20132015
60.0%
62.0%
64.0%
66.0%
68.0%
70.0%
Homeownership Rate (%)
Source: Arbor, U.S. Census Bureau
Historical Homeownership Rate Key Takeaway— Homeownership is at the lowest levels in decades, so there has been a decrease in vacancy and increase in rents, without there being an increase in wages.
United States, Not Seasonally Adjusted
Ivan Kaufman’s Real Estate Market Overview
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200
50,000
100,000
150,000
200,000
250,000
Completions (Units) Completions Forecast (Units)
Completions Key Takeaway—Multifamily starts for 2016 are tremendous, which will be an issue for rent growth.
United States, Multifamily
Source: Arbor, Reis
Ivan Kaufman’s Real Estate Market Overview
• Cap rates and interest rates have a significant relationship. There has been huge cap rate compression and that’s a direct result of historically low interest rates as well as other factors.
• Expect to see cap rate expansion for the first time in a while because of the slowing of foreign capital flows, a slowing of rent growth and an increase in debt costs.
Key Takeaways – Cap Rates
Ivan Kaufman’s Real Estate Market Overview
Cap Rate vs. TreasurysUnited States, Multifamily, 12-Month Rolling Average
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Cap Rate (%) 10-Year Treasury (%) Spread (%)
Source: Arbor, Real Capital Analytics, Federal Reserve