We recently sat down with Mark Caplan, WPM Real Estate Management’s Chairman – who is also an investor in multifamily real estate and is a large client of the firm – and asked him to put on his “customer” hat for a brief discussion about his perspective as a client about the multifamily real estate market for 2018.
WPM: How would you describe the multifamily real estate investment market today?
Multifamily real estate continues to be perceived as a desired property type. With significant amounts of capital pursuing limited transactions, low capitalization rates (5-6%) have resulted in higher sales prices for all properties both old and new. This has caused more money to shift towards development, particularly for more expensive rental units. As the supply of higher-end multifamily continues to increase, potentially faster than demand, the operating environment has become challenging for lower price points as well.
WPM: How has this market changed over time?
A lot of forces are at work. First off, the real estate industry – like the rest of the world – is becoming increasingly data-driven. There’s much more information available today regarding property performance. That’s critical because investors perceive access to more data as leading to less risk. The more you know about something, generally the more you’re willing to pay for it, because you’ve eliminated some risk by possessing additional context.
Real estate is also increasingly considered and compared to other asset classes (stocks, commodities, etc.). The hierarchy of perceived risk has changed. This has resulted in more money flowing into real estate, further driving down returns.
WPM: Where do you think the multifamily real estate market it is headed in 2018?
Overall, I think it will remain comparable to where it was in 2017, absent something unpredictable and catastrophic. Perhaps there will be some hesitation on new projects as investors wait to see if what has been created is absorbed. Remember, residential units to be realized in 2018 were conceived in 2015/2016. Real estate doesn’t turn quickly, and projects conceived in 2018 won’t deliver until 2020. With more supply coming into market in 2018, and fewer new deals done, 2020 may see less of a supply/demand imbalance.
WPM: What do you perceive the biggest opportunities to be in 2018?
I think the areas that are most variable and challenging are office and retail – how people work and how they shop. If you feel confident in your perspective and are willing to invest, you have the potential to be really right or really wrong. I have a good sense of where people sleep and where they want to live, but work and shopping are changing quickly. Because real estate is less permanent, these types of investments are challenging, but they also represent opportunity.
WPM: What do you think will have the biggest impact on investors/owners in 2018?
At a macro level, the national and local economy are the two biggest external factors. I think the third is consumer preferences or residential preferences. We’re living through a time where people want to live in cities. But as millennials get older, and schooling and open space become more important, it could cause the suburbs to be more attractive. Transportation-oriented development has become more prevalent, the need for a car less so. Changing demographics of renters and the makeup of the student population at U.S. colleges and universities may also have an impact.
WPM: How do you think the Baltimore market stacks up against neighboring markets (DC/VA/PA)?
Politics and real estate are local. I don’t see individuals generally choosing between neighboring cities from just a rental perspective. That being said, look at Marc Train ridership between Baltimore and Washington. From a fundamental economic basis, Baltimore is compelling in that we have great transportation, higher education and a lower cost of living. But Baltimore has perceptual and real challenges right now because of crime. Baltimore could use a good year.