SkySights (August 2022): Our view of the US real estate market: ignore FUD, focus on demand vs supply
August 3, 2022
Our view of the US real estate market: ignore FUD, focus on demand vs supply
Latest research cites US short 4.3m units of housing
With the US likely in recession, we are bombarded with incessant headlines – lots of clickbait – about real estate crash, interest rate rise, inflation, cap rate compression – daily doom and gloom.
At Skytian, we focus on facts and keep investing in great cash-flowing assets, like workforce multifamily apartment buildings in strongest growth submarkets. We find ways to force appreciation on top of natural organic growth. We do not overpay. As the assets cash flow, we are not forced to sell if cap rates are compressed. We raise rents with inflation and view higher inflation as a friend eroding long-term debt, increasing equity.
We are neither economists nor experts, yet writing helps us to think and sharing to hear your feedback. Do you agree with the 5 reasons why we think the wind is behind the wings of the US multifamily asset class?
1. “Simply put, we do not have enough housing,”
said Bob Pinnegar, CEO of the National Apt Association; over the years, we have seen reports citing US needs 2-4m more units of housing, particularly workforce housing. Last week, Co-star cited two reputable reports that stated we now need 4.3m more units to meet demand;
2. CA, FL, TX
3 states account for 40% of that supply gap, and Skytian has actively been investing and continue to invest latter 2 states which are also most business and tax friendly;
3. Demand > Supply
Costar says total apt inventory stands at 18.4m today expected to go to 20.1m in 5 years or 320,000 units per year, which would US will get to that extra 4.3m units needed by 2035, assuming demand stays constant;
4. Immigration Matters
immigration has been a big driver of growth in the US and slowed due to pandemic and Trump policies. We believe for economic reasons and tight labor, it’d be difficult for US in longer term to keep tight immigration policies if natural population growth stalls;
5. Demand Shifts
mega-demographic trends to move to Sunbelt states to continue driven by affordability, digital nomads, work-from-home most benefiting states like TX and FL.
To avoid clouded goggles, we have searched for contrarian views on demand>supply. It has not been easy as most reports do cite the great demand supply gap, but Ivy Zelman, CEO of Zelman & Associates, a respected investment bank that researches housing has called that into question in a recent report. She notes that generational demographic trends such as millennials saying no to marriage in record numbers (hence less families needing less homes) is huge damper on demand and lead to housing crisis. We understand her point on demographic shifts but do not agree that this would lead to a crisis. Rather we agree with Rob Hahn of 7DS Associates that the demand for housing will now be expressed more through rental vs ownership. This includes institutional buyers and gains for multifamily owners serving the growing number of renters.
Zelman also cites higher interest rates as a threat, but again, here we agree with Hahn that capital will continue to flow into real estate and especially cashflow assets with fixed long-term debt like multifamily as much as a hedge for “dollar devaluation rather than home price appreciation and it is driven by investors who are seeking a safe haven for the money.”
To learn more please reference this Co-star article and Rob Hahn’s article on Zelman.
Thus, we still believe multifamily is a “Holy Grail” asset class and despite the worse months of the pandemic and current macro environment, our portfolio holds well. Here we share the reasons why:
We practice what we preach.
In the past 18 months alone, Skytian has acquired as a General Partner 6 great multifamily assets in the Tampa area (under contract for a 7th) and 3 in NJ and passively invested in 6 other assets in TX and other growth markets.
We continue to actively underwrite and hunt for great deals for our own capital and our investor partners, adjusting for pricing and cashflows as needed but keeping to strict strategy of cashflow assets with value-add in the top long-term growth markets. Critically, we do not overpay.