We heard, albeit from a source who may suffer from single-family bias, an interesting piece of hearsay about one of the markets many multifamily observers see as a bit frothy right now, the Washington, D.C. metro.
The tidbit itself is not insignificant. However, the way it latches on to an 800-lb. gorilla-in-the-room issue makes it huge.
First, though, it's important to know the provenance of the remark, so that one can be clear it came from someone who has a stake in putting out the information the way he did. That said, the likelihood he would have deliberately put out false information would hardly do his credibility any good, so there's likely to be something to it. It came from a big time D.C.-metro real estate player who's actively in development among both single- and multifamily builder-developers, plus light commercial. He was speaking to an audience of single-family home builders.
What he said was this: Prudential and Northwestern Mutual suddenly have gone dark on equity investment in multifamily in the D.C. metro. Why? Because, this fellow says, of the sense that the D.C. market has become excessively frothy and overbuilt.
True? There's probably a fair way to describe at least part of what he's saying as correct. We're working on confirming the statement, its possible qualifications and caveats, and its ramifications with the two companies.
Prudential unequivocally denies the statement, noting it has "has three multifamily projects currently under construction in D.C. and has three other multifamily projects on which they're looking to make commitments."
The axe-to-grind element of the statement is this: if people in the audience—home builders—are to believe what he's saying, it would excite their interest to move on acquiring more lots in a land-constrained arena. And if multifamily projects were suddenly going to get red-lighted because of being unable to get equity investment due to the perception that the market is overbuilt, well then, it's time to move aggressively for those finished and improved single-family lots.
In other words, per this particular source, if you're following the money, the multifamily money's moving on away from the D.C. metro, right now, and it's likely that single-family builders and developers may take that as their cue to start locking in what they can deliver to the market in 2013, 2014, and beyond.
Now, let's tie this bit together with what's happening on a more broad-scoped basis.
- Equity that may have been looking for yield in hot-markets in multifamily projects may be pried loose from those projects amid a growing hunch that at least some of their markets have too much on line or coming on line.
- That could improve equity investment options for home builders seeking acquisitions, construction, and development money to jumpstart operations that have been languishing in a capital-constrained landscape (save for the public home builders who're drawing from public equity and debt markets).
- If multifamily projects in frothy markets stop getting investment because they're overbuilt, that adds pricing power to multifamily players to charge higher rights for more constrained supply
- That in turn plays into the hands of the for-sale players. Here's an extreme example of where that plot line leads to, when rents start reaching a breakpoint and turn renters into home buyers.
The reason we feel this is a gorilla-in-the-room issue is that residential real estate is a lumpy business, if nothing else. It lives in a land of mismatches, aspirations, pragmatic investments, risks, and rewards. Cycles apparently have taken on velocity. No sooner does multifamily's moment seem to have arrived that people have already begun to call its decline and demise.
At any rate, clearly single family players are hovering around the multifamily juggernaut like hungry vultures, eyeing prey in every potential disillusioned renting resident.
It's what makes housing's wheel go 'round in circles and the only question now is "will it fly high like a bird up in the sky?"
