Marcel Arsenault, like the investors in the popular “Big Short” movie based on the book of the same name by Michael Lewis, correctly predicted the housing collapse and Great Recession, and profited handsomely from betting against the housing industry.
Arsenault, chairman and CEO of Louisville-based Real Capital Solutions, today is investing hundreds of millions of dollars into home building. He also has a long history of successfully investing in everything from apartments to Class C office and industrial properties.
Arsenault’s latest prediction, based on his data-intensive research, is that the country has a good chance of falling into another recession in 2019.
He made this prediction to an audience of about 550 apartment and other real estate leaders during a panel discussion at the 2016 Multifamily Development & Investment Conference on March 17.
The conference, at the Inverness Hotel and Conference Center, was sponsored by the Colorado Real Estate Journal.
Cary Bruteig, owner of Apartment Appraisers & Consultants, who also was a sponsor, kicked off the event with an overview and historical look at the apartment market by just about every conceivable metric.
Looking at cycles, risks and population growth beginning in 1980 and projected through 2020, Bruteig had this to say: “Regardless of what happens, Denver will continue to grow and things will be good enough.”
Going forward, he said he is a bit concerned about employment growth for the region and the state, as it has been slowing.
Arsenault was on the “Market Forecast: Where Are We in the Apartment Cycle?” panel with Mike Zoellner, CEO of Denver-based RedPeak Properties and Andrew Miller, managing principal of locally based Miller Frishman Group.
“Apartments are clearly being overbuilt. There is no question of that.”
“Apartments are clearly being overbuilt. There is no question of that,” Arsenault said following Bruteig’s presentation.
“It’s like a train wreck in slow motion,” Arsenault said.
He said the good news for the Denver-area apartment market is that homebuilders are not constructing as many homes to meet housing demand.
“That’s the great reprieve,” Arsenault said.
But it won’t last, he said.
What he described as a “negative trifecta” of overbuilding, renters converting to homeowners and a recession are in the works in the coming years.
“The good news is that it will take a while,” Arsenault said.
His best estimate is that the recession will hit in 2019, although it could be a bit earlier or a bit later, he said.
However, the later the recession comes, the more severe it will be, he warned.
Zoellner said that the markets have mispriced risk.
Because interest rates have been artificially low for so many years, institutional lenders and investors have seen apartments as an alternative to bonds, according to Zoellner.
Those in the apartment market, however, have never considered the multifamily industry as a low-risk enterprise, he pointed out.
He said he thinks the Denver-area apartment market is at the bottom of the 9th inning, with a lot of headwinds.
Miller said there is a huge need for affordable housing in the Denver area. However, he said that won’t happen until construction defect reform takes place at the state level.
With rising labor and land costs, it is increasingly expensive to build apartments in the metro area, which means developers need higher rents to justify construction.
Miller, who noted he has weathered multiple recessions over the years, said Denver apartment prices are so expensive that he isn’t competing with others to buy them.
Jeff Hawks, a vice chairman at ARA Newmark, who moderated the panel, said that ultimate Frisbee is a better metaphor of the apartment market than baseball.
That’s because while most baby boomers know nothing of the sport, many millennials understand the rules and how you score ultimate Frisbee.
“The millennials will tell us” when the current apartment boom ends and what will happen next, according to Hawks.
Macro-millennial trends, however, provide for a bullish long-term for the apartment industry, he argued.
He said there are 300,000 millennials who are still living at home and that dwarfs the apartments available by a huge factor.
And it wasn’t all doom and gloom at the conference.
Tim McEntee, director of Wood Partners, spoke on the development panel, the final panel of the conference.
He joked that after listening to Arsenault and Zoellner, he is not “boarding up the windows,” in preparation for the coming “tsunami. I saw a few friends looking at the balcony to jump off.”
In fact, many of the panel members remained extremely bullish.
That was especially the case with the value investors on the investment panel.
Norm Radow, CEO of the RADCO Cos.,
said Denver is in the “epicenter” of apartment demand being driven by millennials.
He noted his company bought a Class C apartment community with a mansard roof in Thornton.
Average monthly rents initially were at $725 and were raised to $966 in a year.
“That’s a 33 percent increase,” Radow noted.
The rents, he added, are headed toward $1,200, but that is still far below the $2,000 or more that new Class A communities need to charge.
Whether in Denver, Atlanta or some other fast-growing market, he said if he can buy a fixer-upper and charge hundreds of dollars less per month in rent than a nearby, new Class A community, “We will win every time.”