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Multifamily Excerpts from Marcus and Millichap Conference

While these points may be brief, we feel they offer some insight into the current state of the multifamily marketplace:

At this time we now have 13mm more jobs than we had at the peak of 2007 which will add to overall economic stability. This equates to 9 years of adding jobs which is a record. This year will see a slowdown in job growth but it is partly driven by the labor shortage. Now there are 1.2mm more jobs than people looking for work - finding qualified personnel is very hard. (see chart below) People are employed and making $. Exports are expected to slow down/taper as much of the world goes into slowdown, along with the current trade challenges. It is likely that Trump will signal trade agreements with China etc to come into play over the next 12 months to coincide with reelection.

10 year UST will come down further. The Fed tried to curb inflation starting over a year ago, which was poorly timed and unnecessary, basicaly in our opinion it was a waste of policy efforts.

Overall lending has tightened over last few years which has reduced risk of over leverage and over development. Capital is available, just need to be creative with sources. Market rate properties have seen a paring down of agency lending recently.

Treasury rates are volatile - any good news makes rates jump quickly…of course they always move slower to the downside as the markets more quickly reflect the positive economics in this stage of the economic news cycle.

There are clearly pockets of overdevelopment risk in some select tier 1 markets. Workforce housing vacancy rates remain low, however, and are expected to remain there due to lack of development in that space.

Apartment Notes

Buyer demand remains strong in this current environemtn with little competition for higher yielding opportunities with similar risk profile.

1.635mm new households will be formed in 2019. 1.2MM units to be provided in multifamily space. The focus wil be on the Class A space and will meet that demand but not workforce housing. 50% of supply is in top 10 metros so most production is concentrated. There actually is supply reduction in many B&C workforce markets as those class of properties are taken down/redeveloped. This will lead to pressure on rents - stay away from locations where rent control can be expanded/implemented. Look at State of California as potential canary in the coal mine. Of course don't understand that rent control does not lead to any more supply. In US, Class C vacancy went from 7% to upper 3%. Working class families are earning more as they often now have 2 wage earners so can pay more rent - apartments should provide more services, improve those properties.

Lot of investors looking into self storage and triple net lease products if can’t find decent priced multifamily. Or move to tier 2 and 3 cities away from coasts to get higher cap rate.

Inverted yield curve is not indicative of recession in this case due to strength of economy, jobs, etc and inversion or close to it is being driven by trade issues not fundamental US economy. An all out trade war might lead to inflation but Trump doesn’t want that with election looming. 10 year is already headed higher - once again, the markets are looking for good news.

CRE spreads are at fairly wide levels when compared to historical. Look at cash flow and ROE when compared to alternatives and CRE is very attractive. Apartments are lowest yield due to lower risks when compared to Retail, Industrial, Office, Hospitality etc. Multifamily risk is much less than those other CRE sectors .

Distress housing / poor multifamily market conditions are unlikely due to sound underwriting; low interest rates = an opportunity; diversify across markets and sector/property types; timing the market is not a winning formula and never works - instead have solid strategy; Strong buyer demand for re-positioned assets.

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