From a buyer’s perspective, the market for MFU Apartments remains frothy as ever. After cooling down a touch following Trump’s presidential victory and the resulting rise in interest rates, MFU Apartment activity has again rocketed higher. We are still seeing many offers per property, 20-30 day closes, and all cash offers. Additionally, we are now seeing lower quality properties trade at low cap-rates, as higher quality properties do, which leads us to believe that if the low quality junk is trading at top dollar we might as well buy higher quality stuff. Tertiary market cap-rates have also compressed almost to the point of major markets, which again leads us to believe that if the lower quality markets are trading for top dollar we might as well buy higher quality markets. We are seeing late 1990s or early 2000s built properties in attractive markets trade at a level which produces almost ZERO cash-on-cash yield, with upside at these prices being almost entirely dependent on future appreciation. While we want to buy more MFU Apartment properties, we are concerned about deploying capital at these valuations and would need to find something considered a ‘diamond in the rough’ to get over these many yield-challenging hurdles.

Interesting data and graphics on MFU Apartment Market. ARA Newmark recently published very interesting data on the broader MFU Apartment market. One main takeaway is that increasing new supply of MFU Apartments is causing occupancy rates to fall, concessions to rise, and will likely slow or stop the rise of rent growth. This could lead to a cooling of the cycle, though cheap money likely means MFU Apartment demand will remain among both renters and institutional money managers as long as interest rates remain low. Note, this is not our research work, and we tip our cap to the fine work seen here from ARA Newmark, Real Capital Analytics, and Axiometrics (the source of all of these graphs):

From a buyer’s perspective, the Hotels & Hospitality market is relatively more attractive than the MFU Apartments market. We hear time and again from institutional buyers and investors that they are not buying Hotels at this point in the economic cycle. In fact, we hear this so much that we think it is somewhat safer to buy Hotels at this point than it is to buy MFU Apartments. Yes, we understand there is a large supply of new, ground-up construction Hotels that will come to market in 2H17 and 2018, and that this will impact occupancy and ADR (nightly rate) trends. And we are seeing this in the MFU Apartment space too! But, given these trends we are focusing our Hospitality efforts on high population/employment growth markets, and sub-markets that are seeing limited new supply…we are not buying in New York City, Miami, or sub-markets that are seeing rapid supply growth. It is also worth noting that ADR and Occupancy levels are at all-time highs, so even if national trends pull back modestly as new supply is digested, overall trends will still remain very attractive.

Financing more difficult to get in Hotels, a ‘self-protecting’ mechanism. We also observe that equity and mortgage financing for ground-up new construction hotels is much more difficult to obtain now than one or two years ago, and so the market is somewhat ‘self-correcting’ or ‘self-protecting’ against additional large supply increases at this point. Finally, we note that cap-rates are still significantly higher for Hotels versus MFU Apartments, even adjusting for the greater equity needed to finance hotel projects at this time. We are seeing Hotels trade at 10-12 caps for medium quality, while MFU Apartment projects are trading for 6-7-caps or so. Higher quality Hotels are trading for 8-10 caps, while higher quality MFU Apartments are trading for 5-6 caps. Net, we think there are still capital yield and appreciation opportunities to be found in Hotels more broadly versus what we see in MFU Apartments.