I recall being in a meeting with an institutional investor in the summer of 2010. This investor was absolutely convinced that multifamily assets were at their peak and that values would surely decrease over the next year or so. This was based on their predictions that 1) interest rates were going to rise dramatically, 2) the availability of Fannie Mae and Freddie Mac debt was going to be significantly reduced, 3) there was going to be significant cap-rate expansion in the near term, and 4) that revenue growth would never be able to overcome the anticipated expansion in cap rates. Their basic feeling was, “Get out now.”
All of us in the business now realize that the predictions this institutional investor was acting upon are “predictions gone wrong.” The current rate on the 10-year T-bill is 1.25 percent lower than the summer of 2010 (1.25 percentage points, or something like 30 percent). Fannie Mae and Freddie Mac provided $44.7 billion in multifamily debt financing in 2011, versus $31.9 billion in 2010. Multifamily cap rates have compressed since 2010, and multifamily properties have generated strong effective rent growth in that period.
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