Chad Tredway: What trends are you seeing in commercial real estate that are impacting investments?
Al Brooks: I think one trend is the current housing environment—it’s just so fundamentally different today than it was in the past. When I grew up, the idea was you bought a house as soon as possible. Today, the cost of housing on a for-sale basis has never been higher in all of our markets. And it’s not just New York, Los Angeles and San Francisco—it’s now the norm pretty much everywhere
So, what does that mean? Prices on homes may be up, but people still need a roof. They need someplace to live, and that’s a wonderful situation for apartment owners.
George Ross: Exactly. People aren’t buying homes like they used to. Not only are they expensive, but the younger generations have indicated that it’s not what they’re looking for.
Interestingly, some people are saying that the multifamily market in New York City is too flush with apartment units. The inventory coming online this year and next totals about 17,000. Instead of rental rates increasing, they’re giving four, six or eight weeks’ concession, which really means it’s a net lease.
Al Brooks: Yes, but this is a tale of two different stories, of two different property types. George is absolutely correct about the higher-end properties. Anything newer, you’re going to see more concessions.
But, if you’re talking about a rent-controlled building in a good location, which may have been subsidized by regulation, you’re not going to see concessions like that. The price is already below market, and the demand for it will stay strong.
Left to right: Chad Tredway, George Ross, Al Brooks
George Ross: You’re exactly right about the difference there. And when the economy gets a little tougher, tenants are going to stay put, so those building are going to wind up with high occupancy and good cash flow through the cycle. Even if rental rates were to drop by 10% or 15%, it doesn’t really matter: The cash flow will be strong enough that you'll still have a very viable asset.
Hover over sections of the graph to show additional information. Click on a borough to show or hide its data.
Al Brooks: Everybody makes the assumption that people don’t generate wealth on rent-regulated units. It’s the people that don’t understand rent regulation that don’t turn a profit. Frankly, regulation in all the major markets across the country is only becoming more complex. So, if people work to understand regulation in their market, they can make a lot of money. That’s why at the end of the day we have to have local underwriters and local appraisers who understand their markets thoroughly.
Chad Tredway: What do investors and owners need to know to be successful throughout the cycle?
George Ross: We saw two very, very—that’s ‘very’ twice—strong years of growth in 2015 and 2016. But that growth can’t last forever. Our goal is to make sure our clients are in a position to succeed all the way through the cycle. So, as we near a potential downturn, it’s important investors and owners know what trends to watch for, so they can stay ahead and be smart about what they’re investing in. Ask questions like: Is this going to positively affect my bottom line in the long term?
Here’s a big thing to keep in mind: technology and efficiency.
Chad Tredway: Absolutely, technology is key. We’ve made huge investments in technology to give our clients what they need faster, more reliably and at a better price point. Can you talk about why it’s so critical for our clients, too?
George Ross: It's critical because it's an investment that's going to put you in a position to succeed long term. I don’t care whether you have an apartment with 10 units or 500 units, if you don’t know your cost of lighting, your cost of heating and your peak times—you’re throwing money down the sewer.
Al Brooks: That’s a great point. There are so many things that I’m not sure every small, or even larger, owner knows about. Take, for example, something like keyless entry, which is a huge draw for prospective tenants. Our clients who put in this technology no longer have to re-key the doors every time they get a new tenant. It might seem small, but it adds up, and frankly those are all dollars being wasted. Things like that set you a part from the competition.
Chad Tredway: Another big topic right now is interest rates. What can borrowers do to prepare for rising rates?
Al Brooks: Don’t overleverage. Owners should be thinking 200 to 300 basis points higher. That’s not a lot. Historically, that’s still extremely low.
Hover over sections of the graph to show additional information. Click on a category to show or hide its data.
The 30-Yr average for the 10-Yr Treasury is 5.21%
Source: The Federal Reserve
George Ross: Exactly. Rates do have to go up—I just don’t know exactly when, and, admittedly, I’ve been wrong a few times about when it will happen. But, it’s important to note, if rates go up, it means that the economy has a little insulation, some solid growth and higher levels of employment.
I want to highlight something we’ve been saying for a while now: if 100, 200 or 300 basis points in interest rate makes or breaks the deal, you shouldn’t be doing the deal. It’s that simple.
|Q1 '17||Q2 '17||Q3 '17||Q4 '17|
Source: J.P. Morgan Markets; as of January 6, 2017
Chad Tredway: You know, we always say we’re the bank that makes sure our clients are successful through the cycle, and I think that mindset is what brings it home: Be strategic, make investments that pay off long term and do not overleverage.
Be strategic, make investments that pay off long term and
do not overleverage.
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