Market Volatility and Interest Rates
Moorpark, California | April 3, 2023
Recent activity in the financial markets has been alarming for most investors and investment managers. The Federal Reserve continues to raise interest rates, concerns for banks and asset values have caused a crisis of capital and equity, and the shifting demand for office space has (and will continue to) cause a shift in asset values and contribute to some high-profile defaults and foreclosures. And these traumatic financial events are on the heels of a years-long pandemic and related business disruptions.
Recent articles in the Wall Street Journal and other business publications have highlighted challenges to landlords and real estate assets. We believe the coverage has categorized all real estate assets in a similar light, which, as usual, is not the whole story. The external influences mentioned above may not affect one real estate investment nearly as much as others; therefore, here at Aii and affiliates, we would like to share our view of the current market volatility, our outlook, and the effect on our portfolio:
- We expect that the US economy is currently in a recession or will be in the next 12-18 months. We are optimistic that the recovery following the recession will be robust, due to a strong labor market fueling consumer spending, an easing of supply chain disruptions, and a continuance of the trend to bring manufacturing back home.
- Recent reports of deteriorating rents and values for some real estate assets should have been qualified as to office product, as well as those in tertiary or suburban markets, and older properties. The Aii portfolio includes apartments built in 1980's or newer and urban infill locations, as well as self-storage, and value add retail. Our properties have steady demand, increasing rents, and property values that have held up in the current environment.
- Rising interest rates have been a challenge to some investment managers. At Aii, we have preferred fixed rate financing for our apartments, self-storage, and stabilized rental income properties. Only one asset in our current portfolio has a floating rate bridge loan. That asset is experiencing higher revenue from new leasing and property renovations, which is offsetting the increase in interest costs. We expect short-term interest rates to subside over the coming 12 months, and this property will be refinanced into a fixed rate loan.
- Inflation and economic recovery are tailwinds for the Aii portfolio, with properties in high- demand locations poised to participate in higher rental rates and the increased demand a recovery will provide.
- Market volatility and disruption will also stress some assets, especially those with excessive debt and those that are poorly maintained and managed. This will create a buying opportunity. That said, our new acquisitions will continue to include newer assets in fully built urban environments, with a clear path to increased income and increased value creation. In underwriting, we will adjust for the current market interest rates, supply and demand for each sub-market, and impact on values by market volatility.
- At Aii, we recognize that this part of the real estate cycle provides us a great opportunity in our core competency: self-managed, well located, value-add real estate. These conditions create opportunities that can lock in higher yielding rental returns and long-term profit potential.
About Apartment Income Investors
Founded in 1994, Apartment Income Investors (Aii) has a proven track record of buying underperforming Class B multifamily and commercial properties and implementing renovation and repositioning strategies to improve operations and substantially increase the value of each property. This strategy has proven successful through several real estate cycles with above-average returns to investors. The company's goal is to transform homes, lives and communities while delivering superior investment returns.
For more information, please visit www.aiiproperties.com or contact Michael Chesser at 805.604.2644 | mchesser@aiiproperties.com.
