Well, I am going to say – not that far from where we were a year ago…as in No Value Change.
{Cough, Cough} No, those are not coughs from COVID, nor are they recreational coughs (required disclosure given today is 4-20) Only boring old seasonal allergies.
Just like diagnosing a cough as allergies lacks sensational luster, saying a property has no value change from a year ago is also considered boring. We can say values COULD be down 32% from a Year Previous- and probably make the news because they like that stuff, but it’s just not the most probable at this time.
And here’s why there is No Value Change for apartments in this instance.
I am currently looking at a property in an area of high demand with high barriers to entry. The annualized Asking Rent Growth in the immediate area was reported at 5.3% per year over the past five years, and over 10% average rent growth in the past year. Demand to buy properties in this area also followed these trends.
That was all pre-COVID.
Given the historical 5%+ annual rent growth average and 10% growth over the past year, even with up to a 50-basis point cap rate increase, the most likely value change is…wait for it…No Value Change. Of course, no value change is less than the 5-8% value increase that would have been expected a couple months ago.
As you can see in the following Value Sensitivity Matrix outline, the value impact in this area is calculated with a 42% expense percentage and 5.5% average cap rate.
Before the recent job losses Florida was at a 2.8% unemployment rate, while Texas and the US overall was at 3.5%. There were essentially more jobs than people to fill them. After the surge of temporary furloughed workers subsides, it is likely that both states hover around 6% unemployment by late summer.With the economy in this market opening partially in the next week, and likely mostly to fully open in the next six weeks, stimulus funding from a variety of sources should moderate permanent job losses.
We have spoken to brokers from markets in Florida and North Texas regarding what buyers are looking at.
Three important factors were the basis of almost every conversation:
- Investor Return. Higher equity requirements WILL negatively affect pricing if LTV’s decrease disproportionately to interest rates and terms (interest-only periods). As of now, it is unclear if the large Escrows required by Fannie/Freddie will have any impact since they reduce or are eliminated over the first couple years of ownership.
- Opportunity Buyers. Many brokers are working with buyers that have patiently waited for a time to purchase a property without “best and final, then final-final pricing.” These buyers are willing to close at within 5% of pre-COVID pricing.
- Uncertainty. A common phrase about what is happening- Uncertainty. How did Ozzy Osbourne not get COVID in 1982? With every passing day, more data becomes available and clarity becomes apparent. The job loss multiplier continues to grow but is offset by stimulus intervention.
I look forward to feedback and clarity as we safely go back to work. For now, as of 4-20, this is a snapshot of one market, and one property type. Every property and market are different. Please let me know what you think, and if you would like us to analyze your property or market area.
