
It’s safe to say this market cycle has defied expectations.
For the past three years, we here at MFE have pondered the length and breadth of this upturn (the ubiquitous “which inning are we in” question), and let’s just say that, during those three years, reports of this upturn’s death have been greatly exaggerated.
But the “innings” question grows more urgent with each passing day in the early weeks of 2016: How much more life is left? How much more juice can we squeeze from the fruit?
My guess is, we hit the peak in the late autumn/early winter and are starting to plateau. In fact, at the MFE Conference in October, during our CEO panel, I asked the question: “If this market cycle were a mountain, where are we: near the top, at the top, or over the peak?”
The panelists offered mostly glad tidings, with some saying we’re getting close to the top with Class A acquisitions and development, but the consensus was that operations were still in the foothills.
Of course, nobody ever wants to call the top—whose interests would it serve? Certainly not the sellers or brokers out there. Certainly not the REIT CEOs.
So, having received mostly rosy assessments, I went out on a limb and said, “Since nobody wants to call the top, I’m going to do it: Right here, at 5 p.m., Oct. 7, right now; this is the top.”
The panelists chuckled, and, of course, I was kidding—but most jokes contain an aspect of truth, and this joke has some serious implications for those still aggressively underwriting their next deal. (It should be noted that one panelist who had to cancel, Ed Pettinella from Home Properties, was busy closing a $7.6 billion deal to sell his firm.)
About two weeks after that panel session, Equity Residential sold a quarter of its apartment portfolio, for $5.4 billion, to Starwood Capital Group. A week later, Starwood was involved in another gigantic sale, a $1.9 billion deal to acquire Landmark Apartment Trust’s 24,000-unit portfolio. And in early December, Greystar joined the fray, selling a 32-property portfolio to Blackstone, for $2 billion.
Now, if we’re not at the top on the transactional side of the industry, then why are so many chips being cashed? The risk premium, after all, is still healthy, and fundamentals like rent growth and occupancy don’t appear to be endangered species.
But for many industry veterans, this is a familiar play, a classic tragedy as we enter the denouement: private equity searching for safe, stable investments and paying a premium for getting in late to the game.
When distress was all the rage back in 2009, the phrase everybody used was “catch a falling knife”; i.e., the price will keep falling, but the trick is to catch it just as it’s about to hit the ground.
So, too, on the upside, we have the “catch a rising star” syndrome, where buyers are scooping up assets in anticipation of unbridled appreciation, like trying to catch a helium balloon before it floats up out of sight.
That kind of optimism is a beautiful thing. But in business, beauty isn’t necessarily truth, and if you squeeze a balloon hard enough—or even if you just let it rise and disappear into the atmosphere—well, something's got to give … .