where are we in the real estate cycle?

Where Are We in the Real Estate Cycle?by Ivan Kaufman

ARBOR.COM • 1.800.ARBOR.10

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


Business and Real Estate Cycles


• 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


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


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


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


• 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


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