Fannie Mae and Freddie Mac still have
housing blood on their hands from the 2008 financial crash. However, the giant
GSEs, placed in government conservatorship in September 2008, have now,
virtually all by themselves, created another bubble, this time in the
multifamily rental market.
Fannie and Freddie made 53% of all
apartment loans in 2016, that’s down from their combined 68% market share in
2012. So, their conservator, The Federal Housing Finance Agency (FHFA),
recently eased the GSE’s lending caps so they can crank out, even more, loans.
Mary Salmonsen writes for multifamilyexecutive.com, “Currently, Fannie
and Freddie are particularly dominant in garden apartments [and] in student
housing, with 62% and 61% shares, respectively. The two remain the largest
mid-/high-rise lenders but hold only 35% of the market.”
In a recent press release, Fannie Mae
crowed, “Fannie Mae (FNMA/OTC) provided $55.3 billion in financing and
supported 724,000 units of multifamily housing in 2016 – the highest volume in
the history of its Delegated Underwriting and Servicing (DUS®) program.”
Cheap interest rates make for low Cap
(capitalization) rates and nationwide, “Mid-/high-rise cap rates declined to
4.8%, and garden apartment cap rates to 5.6%, both historic lows,” writes
Salmonsen. So, developers can build, lease up and flip projects at
sky-high valuations.
Real estate profits are irresistible to
developers and according to real estate firm Marcus & Millichap, Apartment builders
“will bring 371,000 units to the market in 2017,” with project rents expected
to rise 3.8% and vacancy by year-end to be 4%.
With Clark County Nevada being number three
in the nation for in-migration with 46,375 people moving into the Las Vegas area
between July 1, 2015, and July 1, 2016–127 a day– apartment
builders are frantically putting up units and apartment buyers are bidding
out-of-this-world prices for units. “Overall in Southern Nevada, investors paid
an average of $110,111 per unit for apartment complexes this year by the third
quarter, up 53 percent from 2015, according to brokerage firm Colliers
International,” the R-J’s Eli Segall wrote late last year.
Segall listed some big ticket purchases
such as, “Domain, at Coronado Center Drive and Eastern Avenue, which sold for
$58.2 million, or around $189,000 per unit; The Wyatt, on Buffalo Drive just
south of the 215 Beltway, which traded for $57.3 million, or about $185,900 per
unit; and South Blvd, just east of Las Vegas Boulevard near Cactus Avenue,
which sold for $53.6 million, or $167,500 per unit.”
Of course, every real estate developer
figures he or she can sprinkle their magic dust on a project and make the rents
go up. “Landlords are betting they can push rents higher in Las Vegas, whose
rates trail that of other cities,” Segall reports. “They’ll probably be able to
if jobs and wages keep climbing, and if many people, especially younger adults,
stay as renters and don’t buy a place soon.”
However, Merrill Lynch, has a different point of view,
believing millennials will move out of their apartments and buy homes. “Going
forward, we expect a reversal driven by millennials in the housing trends that
have dominated the marketplace for the last 10 years, including the rise in the
rental rate and decline in the homeownership rate.”
But for now, here in Las Vegas, guys like Scott McClave, senior principal of acquisitions
and finance at The Bascom Group, see nothing but clear sailing. When asked if
the market was overheated, he replied: “If you look at the job and population
growth, Las Vegas is still not quite building enough to meet that demand.”
Are rents getting too high? “Today, the
average income-to-rent ratio is about 4:1, so it’s pretty easy overall for
people to afford rents here. You look at an extreme market like New York or
L.A., that ratio is more like 2:1,” McClave said.
When asked if apartment construction will
continue, the truth came out. After saying everyone, remembers the crash, and
new development is “measured,” McClave admitted, “But a builder will never pass
on a construction loan. I understand the mentality. The mindset is always, ‘My
building will be better, my building will out-lease everyone else’s.’ I don’t
fault people for that.”
McClave’s company, Bascom, combined with
Los Angeles-based Oaktree to pay $38.17 million for the 110-unit luxury
complex, or $347,000 per unit, and almost 4 acres of adjacent land for
$830,000, reportedly the most expensive apartment building sale ever in the Las
Vegas area, as measured by price per unit.
The two companies again teamed up last year to buy 15 apartment
complexes, a commercial center and about 20 acres of land for $630 million from
Houston-based Camden Property Trust. That sale was said to be the most
lucrative Las Vegas apartment deal in memory.
Crazy valuations combined with convenient
rationalizations; it all has a familiar ring to it. Who knows how long it will
last? We only know how it will end.
Doug French [send him mail] writes from Las Vegas and is
the author of three books; Early Speculative Bubbles and Increases in the
Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and
Fall of the Home-Ownership Myth. He is the former president of the Ludwig von
Mises Institute in Auburn, Alabama.
Previous article by Douglas French: The Stench Inside The Fed
