Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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CCIM.COM November | December 2017 29 afford to live in a $2,500-per-month unit? "That question hasn't been answered yet, but it certainly will be with the projects that are set to deliver over the course of this year and into 2018," Lance says. Each new project seems to be setting a new high watermark for rent, but people are looking at the market more cautiously to see if concessions start to be introduced and rents level off, he adds. Proceed with Caution Properties on the high end are going to feel the brunt of the softening, because that is where most of the new supply has been focused. However, that softening will cause rents to come down, which will create a trickle-down effect and create more pressure on the broader market, Cervelli notes. "We are seeing softening, but it is not as public as it really should be," he says. "There are cracks in the foundation that aren't really showing." For example, projects are starting to offer concessions, such as several months of free rent, to speed lease- up, he adds. Other cracks are emerging in investment sales in some areas of the country. Apartment sales dropped 17 percent during the first half of the year com- pared to the same period in 2016, according to Real Capital Analytics. People are taking some risks right now. Buyers may be relying too much on underwrit- ing, with low expenses, low interest rates, and high rents, according to Cervelli. "I think if you're doing that, you're going into that with all of the headwinds and nothing behind you," Cervelli says. The growing supply is just one of several potential market risks giving investors pause. "There is still plenty of capital in the market," Lance says. However, there seems to be more temperance from the investment community that they are not willing to overpay for assets, which is keeping sales activity in check. As asset appreciation has slowed, investors also are being more cautious in how they are deploy- ing capital, he says. However, people still love the value-added deals. Buyers want to buy Class B properties in Class A locations, where they can invest in upgrades that will bring it to an A-, but there is demand all across the board, Gremillion says. "Multifamily has been one of the best-performing products for the past eight to 10 years," he says. That being said, many owners who may be considering a sale are asking themselves what they are going to do with the money, which may be stopping people from selling, he adds. Markets such as Los Angeles continue to see high investor demand for assets, with cap rates that have dipped below 4 percent, according to Carz. Some owners are taking advantage of that market pric- ing to sell assets and reinvest in other areas of the country that offer higher yields. "I see a lot of people sitting back and thinking creatively about how they are going to make their next investment move," she says. Even with a few warning signs emerging, it may be business as usual in many metros around the country. Unless there is a major geopolitical event, the multifamily market probably is going to trudge along at much the same pace for the next 12 months, according to Cervelli. Interest rates are going to move higher slowly. There will be some softening in the market that will take sellers at least six months to catch up. However, there could be a 10- to 15-percent reduction in val- ues, and the market could get hot again, he says. Beth Mattson-Teig is a business writer in Minneapolis. 4.8% 4.2% 2.5% 5.1% 5.0% 3.9% 3.3% 5.3% 4.5% 0.3% 2.5% 2.1% 2.2% -1.3% Actual Forecast 20-Year Avg. (2.6%) 2005 2006 2007 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2008 -6.5% Apartment Rental Rate Change Sources: 1997-2016, CBRE; 2017-2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 2.0%, 2.0% and 2.0% respectively, for 2017, 2018, and 2019.