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2016
Multi-Family
Forecast
One Banker’s Perspective
Tom Traficanti
Executive Vice President
Chief Credit Officer
Heritage Bank of Nevada
[email protected]
Only “surviving” locally-owned
community bank.
Now with 7 branches in northern
Nevada!
All loans are made to local residents and
local properties.
Interest rates
2009 – Fed begins unprecedented experiment in monetary policy – the experiment is still in progress
2015 – Europe , Japan and other central banks continue quantitative easing
YIELD CURVE SHOWS INTEREST RATES TO STAY LOW
(YIELD CURVE 2/11/16)
How low
can interest
rates go?
Negative interest rates
in Europe and Japan.
From ZIRP to NIRP
(Zero Interest Rate Policy to Negative
Interest Rate Policy
)
Are negative interest
rates coming to bank
near you?
Forecast of Interest Rates in U.S.
Fed wants to “normalize” short term rates and be proactive
Credit markets signal no more rate increases in 2016
FED SEES ECONOMY ON PATH TO “FULL EMPLOYMENT”
...AND SERVICE INFLATION APPROACHING 3%
National Economy is growing slowly
(that’s not necessarily bad for Nevada)
Labor moves west and slower growth reduces likelihood of interest rate increase
Dismal prospects for Midwest and commodity dependent states
Housing Trends – Pent up demand and
demographics ripe for more households
MILLENNIAL AND RETIREES SEEK BETTER
HOUSING ALTERNATIVES
IMPROVED ECONOMY AND CONFIDENCE LEADS
TO MORE HOUSEHOLD FORMATION
Local Economy
Employment and Housing growth rates look like 2006
Is it another housing bubble or is it sustainable?
LOCAL EMPLOYMENT – JOB CREATION HAS COME
FROM EXISTING EMPLOYERS – LEISURE,
HOSPITALITY, HEALTH CARE AND CONSTRUCTION
HOUSING MARKET – DEMAND EXCEEDS SUPPLY
LOCAL “MOVE UP” BUYERS FINALLY HAVE EQUITY IN CURRENT HOME
Local growth forecast called “explosive”
Population growth 65,000 by 2019 (16,000 per year)
6,000+ New Households per Year
MOST OF GROWTH TO DATE HAS BEEN “HISTORIC EMPLOYMENT”
EPIC (ECONOMIC PLANNING INDICATOR COMMITTEE)
COMPLETED 2 VOLUME, 183 PAGE REGIONAL GROWTH STUDY.
Wages and affordability
Real wage gains primarily to top 30% and educated
Existing home prices near maximum for median family income
CONSTRAINTS ARE EVEN LOWER WHEN STUDENT LOAN, AUTO
LOAN AND OTHER CONSUMER DEBT ARE CONSIDERED
Mortgage Loans – Rates drop below 4%
Still hard to get for less than “A” qualifiers
Subprime is gone and mortgage regulation increases – More households renting
Supply of new homes constrained
Builders still limit spec construction – credit for A&D loans limited
Little inventory of available lots and new homes
Cost of finished SFR lots exceed $80,000 - Majority of new homes exceed $300,000
Forecast: Demand for homes will continue to
exceed supply
New home production not likely to exceed 2,000 units per year
Multifamily Rents and (No)Vacancy
Overall apartment rents increase 9% in 2015
Overall vacancy remains below 3%
“Affordable” rents increase to over $700/Mo (23% increase in last 2 years)
Supply of new apartments
Construction cost exceeding $100,000 per unit
New apartment rents starting at $1,200
Possible 6,591 new units but only 3,500 likely to be completed by the end of 2017
Multifamily and CRE Valuation
Local developers and local bankers struggle with new valuation model for northern Nevada
Out of state Investors are changing their perception of Reno and face bleak investment alternatives,
especially in major metro markets (bay area)
RENO HAS HISTORICALLY FOLLOWED A “TERTIARY” MARKET CAP RATE
Forecast
2016-2017
Shortage of housing units will continue.
Rental rates increase will continue to increase, but increases
will moderate slightly due to affordability.
Vacancy will remain extremely low.
Values will continue to increase at a high pace, due to higher
projected NOI, further decline cap rates and strong investor
demand for multifamily in northern Nevada.
Increase in households consolidating into existing housing
units, due to affordability.
Availability of loans for apartments will continue to improve
Short term interest rates will increase slightly (.25-.5%), if at all
Longer term interest rates will stay flat and remain relatively
low for term financing
WATCH
National economy continues
to weaken and enters or nears
a recession.
Labor and other operating
costs increase substantially for
local businesses, resulting in
contraction of current
employment.
Cost of housing and lack of
infrastructure (roads, schools)
become significant growth
deterrent.