How can potential over-supply in Class-A apartments impact the performance of Class-B and Class-C product?
If you ask most folks, particularly those scooping up value-add "B" and "C" product, it can't. But what if they're wrong? When something is perceived as impossible "just because," it's generally a good opportunity to explore the other side of that notion. Since the paradigm-shifting pendulum swing of 2008, it's hard to discount extreme scenarios. One that I discussed several times, including today (at the birthday party of my friend's 6-year old son) is the impact of luxury product on blue-collar housing and my answer has been fairly steadfast.
Is it likely? Perhaps, not. Is it possible, of course it is. Anyone that calls almost anything impossible these days, is someone that has to be heard, but with a healthy amount of skepticism. In the age of narrow artificial intelligence (expanding wider every day) and little robots vacuuming our floors... with even one of the greatest minds of our generation believing there's a reasonable argument that we're living inside a video game... it's important to at least consider all scenarios. But I digress.
The argument for spill from A to B is simple. Growing demand + economic drivers + static or declining supply = rent growth (think some time in 2007 to the vicinity of 2014... a credit, construction and overall supply freeze). Now, I'm no MIT grad, so let's not poke holes in my formulas here, but what's the other side of that math? Perhaps it looks something like this: Static (or growing) demand + static income + exponential supply increase = ???. Would it be rent compression? Perhaps. Concessions? Probably. At what point does that spill over and start plucking tenants out of 10-20 unit class-B buildings, to live in ultra-luxury complexes with posh lobbies, 24-7 concierge, swimming pools, and shitzu spas?
Now, I'm not being dark or pessimistic, I just want to distill the facts. Large scale explosions (or implosions), are not generally self-contained events. Whether we are talking about Chernobyl or mortgage backed securities... there are usually unforeseen repercussions. Perhaps nothing that big is at play here... but perhaps it is, and something as big as the multifamily (and general commercial real estate market in America) is that big and is sensitive to things like economic drivers, supply, demand and interest rates (which do remain low). I guess if this is a case for anything, it's a case for non-recourse multifamily debt.