LOS ANGELES-Industry observers, for the most part, don’t see multifamily cap rate increasing. Most expect them to stay where they are or keep dropping, according to a recent Jones Lang LaSalle/RealShare Apartments Outlook 2012 Survey.
Most respondents, at 39%, said cap rates will stay put next year. About 21% say cap rates will drop by 50 basis points, and another 15% predict a basis-point drop of more than 50. Only 15% expect cap rates to rise.
“I think cap rates are going to stay the same in 2012, for two reasons: one is the economy -- it’s going to basically stay the same next year and interest rates are the lowest we’ve ever seen and I just don’t see that changing soon, “ said Paul Belden, president and principal, WLA Investments.
While many investors predict that cap rates will fall, many won’t stay around as buyers if they drop very much more. Half of all respondents said that if cap rates fall between 5% and 6%, they will no longer invest in multifamily. About 26% said if they fall between 4% and 5% they are out of the bid, while only 14% said they will stick around below 4%.
“The first part of this year, supply and demand was very geared toward demand, without much supply. Properties that came to market got bid up and very aggressively priced. Folks saw that pricing, and now it’s flipped—there’s now more supply on the market so you’re not quite seeing the same pricing parameters,” said Faron Thompson, a JLL managing director. “Moving into 2012, it will be an interesting dynamic to see how that balances out… there’s plenty of transactions to go around and lending will be very flush in 2012.”
During the recession, there has been a great shift in Americans deciding to rent instead of owning a house. And most respondents, 44%, said it will remain this way until 2015 or later. Another 32% said we will start to see a shift in 2013, while only 15% claimed that there will be a boost in homeownership next year.
“We’ve seen a decline in home ownership from its peak of 69%, moving down to about 64%, and we’ve added about four million new renters to the rental market. That will plateau and as soon as there’s absorption in the home ownership market, we’ll start to see people buying new homes again,” said Bob Hart, President of KW Multifamily Management Group. “Right now, the supply of new homes is at an all time low. There are only about 300,000 new homes to buy in the whole country right now, so it’s going to take awhile for people to gain more confidence and then we’ll start to see them return.”
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