What good times these recent years have been for the apartment business! Rising rents, lower occupancy, persistently low interest rates, and caps rates like we've never seen before. How long can it last?
Without a doubt, we are seeing some markets where a tidal wave of over-supply is about to crash onto the market, and particularly in the Class "A" segment. As this supply comes online in the next 3-12 months vacancy rates will decline in these markets, and inevitably effective rents will decline as well, though this final effect may take a year or two before it takes hold. Those who are caught out of phase with the cycle, which is to say those who are under recourse construction financing, may find they unexpectedly may need to bring more equity to the table to refinance into their permanent loan after completion of lease-up.
On the other hand, there are still some great opportunities in markets that may have been overlooked during this apartment construction boom-- markets that have great employment growth, solid demographics and wise political leadership. Secondary markets? Tertiary markets? These description may send vaguely negative, but for the savvy developer/investor, these places are where the opportunities exist. Great opportunities.
Does it take more work? More digging? Absolutely.
Creativity and hard work are always rewarded.