Altus Insight - May, 2014
The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor
Date: May 31, 2014
FR: Forrest Jinks
Before jumping into the content of this month’s article, Altus and I are excited to welcome Joel Kinman to the Altus Equity team. Joel is headquartered in Seattle and will be heading up Altus Northwest, Altus’ expansion into the Seattle and Western Oregon areas. Joel most recently was a Senior Project Manager with PCL Construction where he had lead responsibility for such projects as the Keola La'I Condominium High Rise on Oahu, the Ritz Carlton, Kapalua Bay Timeshare Condominium on Maui and the new Air Traffic Control Tower at Kona International Airport in Hawaii. Joel began his construction career at age 15 when he was hired to clean up construction sites in his hometown. During his time at Oregon State University, where he obtained his degree in Construction Engineering Management, Joel worked for a General Contractor and was involved in all aspects of residential remodeling. Joel is currently working a flip project in the Broadview area of Seattle and we have a second property in contract in Tukwila, which borders Seattle. If you have any interest in diversifying out of California real estate please let us know so we can include you in future opportunities.
On to the matter at hand…
For dear me, why abandon a belief merely because it ceases to be true? Cling to it long enough, and not a doubt it will turn true again, for so it goes. Most of the changes we see in life is due to truths being in and out of favor.
While Mr. Frost most certainly wrote the above quote with his tongue firmly planted in his cheek, there is more truth in his statement than we as humans normally like to admit. Life is comprised of cycles, some shorter in duration, some much longer, but nearly everything follows a cycle of some sort or another. The list of examples is endless…in the 1970’s the big environmental scare was global cooling, governments go through cycles of increased and decreased regulation, home ownership percentages go up and down, bell bottoms go in and out of style (but never into my closet)…the list goes on.
There can be no denying that the involvement of the central banks has eliminated the regularity of macro-economic cycles and much is still to be discovered as pros and cons of such manipulation. Even in the best of situations trying to understand and predict large macro economic cycles is very difficult due to the impossibly large amount of inputs. Add in the market manipulation and such an exercise because virtually useless or pure speculation.
This is not necessarily the case with economic cycles of less macro size. The smaller or more particular the cycle the fewer the inputs that affect that cycle and the easier it is to understand the cyclical pattern, realizing however, that major macro-economic storms will affect even smaller and more insulated economic cycles.
Prior to the late 2000’s real estate was considered to be a “local” investment. What happened in New York didn’t affect real estate prices in Seattle, and what happened in Boise didn’t affect real estate prices in Dallas. The crash that lead to the Great Recession turned that line of thinking on its head as nearly every market in the US turned steeply downward. Suddenly talking heads were using overbuilding in Reno as a reason for a drop in prices in the Silicon Valley. Many people, yours truly included, became a lot more focused on understanding macro events. This is not without reason since large macro events are completely uncontrollable and as previously mentioned, are much more difficult to predict with any consistent accuracy. However, understanding the POSSIBLE outcomes allows an investor to structure their investment in an effort to insulate themselves from the myriad of possible macro-economic effects.
But within the vast array of macro-economic possibilities a funny thing happened. Business cycles started occurring again within the normal bounds of business cycles. Geographies…towns, counties, states, etc…started diverging in the economic directions, whether due to regulatory and tax policies or demographics, or both. It is within these more particular cycles that opportunity can be found.
Please remember that above all else Altus is a value investor. To invest (bet) on momentum is speculation (and possibly game theory), likewise to make an investment on growth is also speculation, but to a far smaller degree. However, as a value investor it makes more sense to invest in a value investment in the upswing of a cycle than it does to invest in that same investment in the downswing of a cycle. Likewise, selling an investment at the top of a cycle is generally more profitable than selling that same investment, even with identical income numbers, at the bottom of a cycle.
When looking at a more micro view of an economy certain inputs generally lead to growth while other inputs generally lead to contraction. Those inputs can be different depending on the product being sold. Within a particular micro-economy different products can be at different points in their respective cycles depending on the individual inputs for that particular product. As readers will know from reading previous Altus Insights, Altus believes that demographic trends (also a cycle) point to increases in renters over the next several years. With this in mind we are particularly keen on investment opportunities in multi-family buildings. With multi-family buildings as our “product” there are several indicators we can use to forecast increasing demand. For instance, decreasing unemployment, increasing growth in business start ups, and increasing growth in household formation means there will likely be an increase of people/families looking for housing. Conversely, a large amount of apartment starts indicate a pending increase in housing availability.
According to David Lindahl, thought to be the largest independent apartment owner in the country, every market goes through 4 distinct stages within each full cycle. He breaks the four stages into Buyers Market Phase 1, Buyers Market Phase 2, Sellers Market Phase 1, and Sellers Market Phase 2.
Buyers Market 1 is just above the inflection point of a market turning to the positive.
Buyers Market 2 is where investors start to see the potential and start piling into a particular market.
Sellers Market 1 is near the top and close to the inflection point where the market growth turns negative.
Sellers Market 2 is when a market is in on the way down and it is very difficult, even for the best value investor to make investments that perform well from a price perspective in the short run.
In a perfect world investors should invest in markets that are in Buyers Market 1 and sell just before Sellers Market 1, always choosing to err on the side of selling too early than selling too late. Like the indicators of a market getting ready to strengthen there are also indicators as to when a market may begin to weaken. Lindahl’s market cycles are illustrated here.
It is important to remember that not all cycles are created equal. Some micro economies are cycling with a general upward trend. This could be a market that was not hit as hard by the Great Recession and that recovered more rapidly.
Others, like Detroit, have cycles but are trending the other direction.
All of this information begs the question, “What markets does Altus think are in the favorable part of the cycle?” California is no longer in the 1st inning but is still in a favorable upswing. Outside of California, and by no means a comprehensive list, we are looking into Reno, Las Vegas, the suburbs of Seattle, Boise, Salt Lake City, Oklahoma City, and Tulsa. We are currently busy working on the several great opportunities we have tied up within Northern California but have already started the process of building our networks and teams in the aforementioned areas with the hopes of making our first multi-family investment in one of those areas within the next few months.
As previously mentioned, Altus looks at all investment through the lens of value and this is not something we are willing to compromise. However, with California further along the recovery cycle than other markets it makes sense to continue to focus on value opportunities, but in those markets that have a greater likelihood of growth.
Altus Equity Group, LP