Charles Krawitz: The marketplace that I'm involved with is a little bit different than, I think, a lot of the folks around the table, less institutional. The housing that I lend on is very much your bread and butter. It's the stuff that the immigration influx in the U.S. has benefited in many different areas. People flowing out of the single-family marketplace and back into the multifamily marketplace are the people that are occupying the units that I'm lending on, and so those trends have been very, very helpful.

Year over year we saw a 40% increase in our volume, and year-to-date we're running at about 30%. So down a little bit, but still nice, robust numbers.

There certainly seems to be a lot of people out there that are afraid of buying these condos right now and moving into the single-family homes because we potentially have hit the top of the market, and that is benefiting occupancies in the buildings on which we lend.

The one trend that I have seen, is that, it used to be that a 120% debt-service coverage deal 80% loan to value was an aggressive loan. And then all the folks from Southern California started doing 115 debt-service coverages on projected market rents, and that has certainly eaten into our business. And we have responded with offering a mezzanine product to allow us to go to a 107 combined debt-service coverage and be more competitive on leverage.

But overall, properties seem to be trading increasingly at values that reflect the inherent cash flows and not the hope that they're going to be converted into condos.

R. Lee Harris: I'm going to give you somewhat of a Midwestern perspective. I've heard a lot of talk about California and southern Florida and you name it, but I haven't heard anybody talk about the Midwest. So in the last six months we have assumed management and/or receivership involvement in 2500 units of CMBS and agency deals that are going south. In Michigan, Illinois, Iowa, Ohio, Indiana, Kansas we're seeing some B-piece investors getting hammered pretty good on some of these deals.

We're seeing market values versus loan amounts 45% to 55% ratios, which is pretty grim. And we're actually seeing some deals that are coming apart after just two to three years. So you figure out how well the underwriting was on those kind of deals.

Finally, we're seeing increased costs levied by municipalities as user fees. This is becoming an alarming trend. Examples, fire inspection fees, rental license fleas -- fees, occupational license fees, pool license fees, storm water, and the list goes on.

The industry is under siege. And in fact, we've seen situations where these fees are as much collectively as $100 per unit per year. You do the math on an 8% cap rate, much less a 5%, and you've just hit your value of about $1,250 per unit. So it's something that we have to be careful about.

Mel Gamzon: The seniors housing industry has finally gotten its sea legs. It's taken two decades, but the good news is we are here. This is an industry that over the past two decades has gone from infancy through adolescence with lightning speed and with lots of mistakes.

Many of you out here know about the mistakes. There have certainly have been many successes, but there have been a ton of mistakes.

The good news is we are at maturity or close to it. We're now in our 20s, maybe early 30s years of age. We're still making a few mistakes, but the tough times are very much behind us.

A few key statistics for you to consider:

Consumers today are spending in excess of $65 billion a year in the market-rate senior housing industry. It's a lot of money.

Secondly, according to the American Seniors Housing Association, our industry is at a 92% occupancy level. Operating margins are another all-time high.

We also feel that we are on the front end of a new generation of this industry. We now have a significant amount of both debt and equity that is available in this business. It's more patient. Due diligence is more rigorous, and most important, supply and demand in most market places throughout this country are in equilibrium.

So the kind of growth that we're going to see in the next year to two years is going to be moderate growth. It's not going to be excessive. Supply and demand are still in great shape.

Daniel Epstein: I'm sitting around this table, and there's so much euphoria. I mean, we've got one or two builders here, Ron starting off. [They say] there's going a few adjustments going on, but things are really good and cap rates are going to stay low and rents are going up.

I mean, what do I know? We're running about 60,000 units in 20 states. We're in at least 35 or 40 different markets when you add up all the states, maybe more than that. And I, at this point in time, don't see the reason for euphoria.

We own a lot of product in San Diego. And since we're here, I'll relate the story, but I see applicability to the other markets we're in. But people started coming after us offering us crazy prices for three-year-old projects with one-to-one parking, where the amenity was indoor plumbing and a garbage disposal. We didn't even have dishwashers. And well, they had a half decent location, but maybe B, B-minus, and we had kept them up fairly good over the years, and the one-bedrooms were at least 600 square feet.

So they bought them from us at 4 caps, and who am I to deny anyone that wants to buy at a 4 cap? They slapped lipstick on those pigs. They took them to market, and they sold them out. And I thought, Oh, my God! And these were people that hadn't really been in that part of the business before, and so they could then access and go out and line up a lot of equity -- and I won't mention big players around the country -- and they went out and gobbled up everything around town, and we did not stand in their way.

San Diego has led the way, and probably had more condo conversions than any other place in the country, and I think we might learn something from the experience.

Starting in last November before Thanksgiving, things slowed down a little bit, …So projects that had been selling maybe 20 or 30 a month were selling one a week, and that's slowed down. … As of this week, the two largest people in town have let their staffs go. Their equity partners are stepping in to take over the projects, and there is a major overhang on condo conversions in San Diego, and the fun is just going to start.

I think to some extent there's some other markets that have gone crazy on it also, south Florida being one of them. Las Vegas is Disasterville. They have 10,000 units there. Although, on the flip side, the rental market in Las Vegas is probably the best rental market in the country.

And the other thing that I look at that I hear about cap rates [is that] everyone is going to be satisfied with lower yields forever. I don't believe that. I don't think anything is forever. We were buying $300 million a year of product up to three years ago. Then we got to $100 million. Then we got to $50 million, and in the last year we did one deal. We did one $25 million acquisition because I won't be a buyer at a 5 or a 6 cap.

Shashaty: Thank you, folks. Now we're going to kind of keep it real short and move from question to question. A well-respected economist said that real estate, particularly apartments, have been permanently repriced so that these low cap rates really are here to stay. But several people just now have indicated that they don't agree with that, that they think that they can't be sustainable, and that suggests that there's a real correction coming. So who comes down on the side of recalibration who comes down on the side of expecting a correction?

Terwilliger: Well, I think in the short-term, cap rates are going to stay low. I think they'll creep back up maybe 50 to 100 basis points over the next two or three years.

I think it's all about flow of funds and alternative investments, and bonds still don't look very good. The stock market doesn't look very good. The world is awash in savings. And so I think there's going to be continued pressure to invest in real estate. I don't see them going up a lot, but I would acknowledge they'll probably go up some.

Bowen: I think they'll stay fairly steady this year. I think it's fairly simple. If people are looking for yield, they're still finding good yield in real estate, and they'll keep doing it until there's a lot of problems. I think it's fairly simple. As soon as people start losing a lot of money, the yields will go back up both on equity and on debt; and therefore, cap rates go up.

Berman: Global capital flows are what it's all about. We've seen over the last 5 to 10 years the incredible liquidity, not just in the states but worldwide. And it's not just within real estate, it's across stocks, bonds, equity, debt, venture capital, you name it. The key question is: What's happening to alternative investments?

Real estate has been a great place to have money over the last few years. And our parent company, which is a AAA-rated pension investor has done extremely well. They've averaged between 26% and 30% per year returns on their real estate portfolio, and they control over $50 billion worldwide of real estate on the equity side.

But I can tell you, the way they look at it and the way many of the global investors look at it, it's a function of what's happening in other sectors. If interest rates start to rise and bonds become more attractive -- and I don't know too many folks who think that interest rates are sustainable at the historical lows that we've been at for the last few years – almost by definition, cap rates are going to rise. It's all part of where capital is going to flow.

Do I think anything is going to happen immediately, and be any kind of a disaster over the course of the next 6, 12, 18 months? No. But I think the direction is only going to go one way. It's going to be up. It's going to be gradual, unless there's some terrible economic event.

Corbiere: Historically, if you look at the differential between cap rates and Treasuries, in real estate over the last 30 or 40 years, that differential has been a couple of hundred basis points.

Right now cap rates and Treasuries are on top of each other. I don't see Treasuries going down.

Szydlowski: Economist Tony Pearson made a good case for real estate having a paradigm shift due to it being accepted as a very significant asset class by almost all institutional investors and multifamily as the preferred real estate class.

So that gap – that two-point gap between Treasuries and cap rates may have shrunk, but I take a look and I tend to think that long-term rates are going to start moving up. They're going to continue to move up as they have in the last week or so, and I think (ten-year Treasuries) might be hitting 5% soon. So I think we're going to see cap rates moving up slowly.

Krawitz: I agree that the market has transformed over the last five to ten years. There's so much greater transparency and data availability that cap rates are going to be lower than where they have been historically, but obviously, moving in tandem with other alternative investments.

So will cap rates go up? Yes. But at the end of the day, one person's 4% cap rate is another person's 5. A lot of it really has to do how you view the cash flow of that property.

Harris: From an equity investor perspective, I'm concerned more about [what happens] when it's time to exit, where are we going to be? And if the exit is 5, 7, 10 years out, I am concerned that when we have rates as low as we have right now from a cap standpoint, we're talking about much more potential for volatility.

Historically, since 1978 the apartment investment class has hands-down beaten every other real estate asset class in terms of return compared to volatility. I think that's going to go away to a great extent here the longer we see these cap rates down because I don't believe that over seven to 10 years we can sustain cap rates this low, and so there's going to be some long faces down the road.

Gamzon: In the senior housing business, I think the A-class assets are going to continue at these historic low levels in the 6% to low 7% range. I don't think we're getting down into the 5% range at any time soon.

There's practically no supply of high caliber senior housing assets, and the individual properties and portfolios that are available are going for premium values and will continue in that respect over the next 12 to 19 months.

But the B and C caliber properties are more vulnerable, and I agree with the other folks at the table. I think we're looking at 50 to 100 basis points adjustments on those B and C caliber assets over that period.

Epstein: There should be an appropriate risk premium for real estate, and a couple hundred basis points has historically been there.

For sure, in certain markets we are going to have a slow down and a halt in appreciation. Again, we're seeing it in San Diego in our single family. The amount of unsold inventory went up from 8,000 to 14,000 units during the last year. Prices have quit escalating. It went up about 1%. Now they stabilized. They've come down. When these condos have to get moved out and people are going to start off with specials, if that expands, you know, throughout the country and other significant markets that are high profile, like south Florida, Las Vegas, and so forth, that could impact how people view real estate generically. And if that happens, then they're going to go back and want that risk premium.

Bibby: Cap rates have been falling for at least the past 10, 12 years, and the reason is not just the capital flows, but also the elimination of the risk premium. And so what we see mitigating all these wonderful tailwinds in our industry is the return of a risk premium associated with real estate assets, and with multifamily in particular, and also rising interest rates, though not in lock step.

Now, we may be moving up to a new floor, if you will. It's certainly not going to be 9%, but we may have set a new floor where there is a reestablished risk premium and higher interest rates in the market place.

Corbiere: We're all pontificating upon cap rates and moving up 50 basis points or 100 basis points, but if you look at history, if you look at some of the things that have occurred, it's always been a major external event that really hasn't been associated at all with our industry. It's probably going to be something out of the blue that we can't even foresee right now that's going to move those cap rates up a huge amount.

Shashaty: Rental housing owners have watched home prices inflate and watched the bubble inflate, and they've been happy about it because the higher the home prices got, the fewer people could afford to buy, and that, coupled with some increases in mortgage rates, really helped bolster occupancy in the apartment business.

Now the press is reporting that the bubble is bursting. In the markets where you're active, what are you seeing in terms of home prices? Have the increases halted, and is that going to reignite this exodus from apartments into homeownership?

Terwilliger: I think there is a bubble in condos in places where there's been a lot of speculation, and I think that San Diego, Las Vegas, Miami, Washington, D.C., and probably some others. You know, absent of a big shock, I think you're going to not necessarily see prices go down significantly and single-family detached and in condos and other markets. We're selling very well still in the Pacific Northwest and some other areas, but I do think you're going to see a real problem in these areas mostly in condos and particularly where there's been a high concentration of investors.

Bowen: When you're looking at entry-level housing and people making the decision whether they want to buy or rent, I think that a sense that there is not a guaranteed appreciation over a short period of time is very beneficial to the multifamily industry and will keep some people in apartments as opposed to condos or single-family houses.

Berman: What scares me more is the single-family housing finance that we've seen over the last few years. And if you look at the 95% loans that have been going out, and we all know some of those are 100% loans and many of them have those teaser rates, which are going to pop up, they were going to pop up even if rates stayed steady.

And now, with the short end of the curve, you know, continuing to rise, if those -- if those properties stay just as they are or even come down a little bit, and at the same time you've got that pressure that the guy's monthly -- the folk's monthly payments are going up, there's going to be some very difficult decisions going on in households as to whether or not they keep making the payments on those loans.

And we've all seen over the years the amount of debt, the personal debt and all the statistics of, you know, what's happened in this country with credit card debt and every other kind of debt. I think that's where we might start to see some problems.


Read the transcript of the Apartment Leadership Roundtable

Click here to download the national forecast presentation by Hessam Nadji, of Marcus & Millichap (700 KB PowerPoint file).

If you were unable to attend, you can purchase the conference packet for $75. The packet contains information and handouts from the sessions, conference directory and more. Please click here or call 800-989-7255, ext. 304, to place your order.

To learn about the 2007 conference and sign up to receive updates by e-mail.

If you have suggestions for the conference, contact Susan Piel, conference director, at (800) 989-7255 or at