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Are NJ Multifamily Prices Getting Crazy
I think a decent rule of thumb for knowing multi-family prices are getting out of control is when all the brokers start underwriting “management fees” and “repairs and maintenance” down to 3% to squeeze out as much NOI as possible in order to try and dress up a potentially brutal cap rate. Now we’ve all been guilty of it or have seen it, but it doesn’t make it any less silly and investors aren’t stupid. The bigger issue at hand is selling the story of “rent growth”, even in the face of most towns/cities in NJ (and perhaps nationally as well) having stringent rent control laws. And that’s the point I want to focus on right now.
Don’t get me wrong, there are plenty of neglected buildings with rents well below market, and if you have the patience and you’re willing to eat the low cap early on, there’s definitely upside potential at the end of that rainbow (I’m taking 4+ unit properties and obviously the garden style buildings which are all the craze). However, it’s the properties that have very little rent discount to market and are selling at low caps which are the ones I’d actually be most weary of and these are some of the reasons why:
For starters, rent growth throughout the recovery has been growing at an insanely hot pace in NJ (and most places nationally for that matter as well), which wouldn’t necessarily be a bad thing, as long as wages have been able to somewhat keep pace with these increases…but they haven’t…at all… So the thing that worries me here is that familiar old sage which is referred to as the “rule of equilibrium”. Simply put, in theory, the rule of equilibrium in real estate means that prices should rise and fall at a similar rate of wages in order to support the property valuations, and when they do not eventually there will be a correction to bring them back together. Wage growth nationally, and this is despite low headline unemployment numbers (I could write a novel on this stat and just might), unfortunately have been completely stagnant throughout this recovery. Basically, what this means is that while rents have been growing exponentially, the income of those people paying those rents hasn't increased nearly enough to keep pace. Now, if we choose to use the rule of equilibrium here you have to ask yourself which side of the scale is more likely to adjust? Is it rents which have grown year after year at 5%+ or are wages going to accelerate to catch up with them - despite the (fundamentally flawed) September employment numbers saying the US currently has the lowest unemployment claims in 43 years…even in the face of 2 catastrophically devastating hurricanes destroying multiple States lately.
Am I saying shy away from investing in multi-family assets? Absolutely not! As a matter of fact, with Fed policy, and all global Central Banks for that matter controlling monetary policy (we sold our souls to the devil in 2008) they’re practically pushing investors into risk based assets. So with the tax advantages and leverage of real estate, plus it having a built in hedge on inflation, plus the 10YR treasury currently yielding 2.37%, and so on you’d be really foolish not to at least explore the asset class. What I am saying though is just be selective of the deals you’re legging yourself into, the reality of today is worth more than the potential promises of tomorrow.
On a side note, I love studying the macro economy and how it relates to real estate, so that will mostly be the things I write about. Whether it's multi-family, single-family, or hell even the Capital Markets (I was a fixed income trader for 15 years prior to this) that's just what I'm passionate about and truthfully have fun writing on. Unfortunately, I kind of suck with technology though, but I promise I’m trying really hard. Eventually I’d love to put a comment section in so I can get some feedback and learn from readers as well, but in the interim please feel free to email me – I’m really friendly – no joke.
All the best,
Bill comes from a Financial Services background having spent 15 years on Wall Street, where he built and managed an institutional fixed income trading desk that catered to some of the largest hedge fu....
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