A Normal Market? - By Doug Imber, Essex Realty Group
February 26, 2013 10:46 AM
A Normal Market?
By Doug Imber, President, Essex Realty Group, Inc.
Following four years of thundering condominium boom, followed by another four years of gut-wrenching financial crisis, are we finally experiencing a normal and healthy apartment market? I suppose that depends on what we mean when we say normal. And since markets continually evolve, our perception of what seems normal also changes. However, to answer this question, sometimes it’s easier to define a thing by what it isn’t than by what it is.
From my perspective, normal is not the roller coaster ride of the past decade. It is not characterized by a predominantly seller’s market that was fueled by too-easy credit. Conversely, normal is not a redominantly distressed buyer’s market created by a national de-leveraging that painfully impacted
the disciplined investor as well as the big risk takers.
During my 25 years in Chicago’s apartment industry, I have witnessed the market pendulum swing to a number of extremes and at a variety of speeds. There have been wars, attacks, elections, recessions, tax reforms, tax increases, tax decreases, booms and busts. But there has also been a space and speed somewhere in-between the extremes where the market seems healthy and balanced. In my view, that’s where we are right now.
Chicago’s apartment investors currently have a functioning marketplace characterized by an active number of buyers, sellers, and lenders using a more reasonable underwriting criteria and business discipline. Certainly, there are always those hopeful buyers who remain frustrated that the next acquisition is just out of their reach because other buyers are more aggressive. That’s normal.
Similarly, although low interest rates and high rent growth have fueled a strong recovery in prices, there are always those sellers who believe heir properties should sell for more than the offers they received. That’s normal too.
Certainly, in every market there are risks. As the economy recovers and interest rates regress upwards towards the mean, will rent growth keep pace? With occupancy rates above 95%, and a 3% rent increase sounding too conservative, how will a new supply of units impact the market? Will a lowering of Illinois’ credit rating and an enormous unfunded pension liability adversely affect business growth, new household formation, and rent growth? These are not small questions. But there are always macro-economic
concerns that affect our perception of risk and returns. All perfectly normal.
From 2008-2011, nearly 90% of Essex’ transactions were distressed sales comprised of foreclosures, short sales, or note sales. In 2012, Essex’ sales volume increased, but the amount of our distress sales decreased to approximately 50% of our transactions. We’re on the back side of the distress mountain.
Apartments have historically rewarded Chicago’s long-term investors. Buyers today have the ability to lock long-term, fixed-rate financing at record-low rates. Combined with the strongest rental market most of us have ever seen, there seems no better time to make strategic acquisitions. And for similar reasons, sellers can achieve historically low capitalization rates and reposition their portfolios, something that just a few years ago seemed unlikely or unrealistic. In fact, for several years I forgot what the words Tax Deferred Exchange meant, since too many of the properties sold had no gain. But today, there is a renewed vibrancy in completing trades.
And if suggesting that it is a good time to either buy OR sell sounds a little like broker-speak, well, consider the source. That’s definitely a sign that things are back to normal!!