Washington Real Estate Investment Trust (NYSE:WRE) Q3 2020 Earnings Conference Call - Final Transcript
Oct 30, 2020 • 11:00 am ET
Thank you. [Operator Instructions] Our first question is from Blaine Heck with Wells Fargo. Please proceed.
Thanks, good morning. So, Paul, I think last quarter or maybe the quarter before, when I asked about the investment sales market, you talked about how the transaction side of things is still relatively slow. Are you seeing any signs of an increase in transactional volume and if so, is there enough to kind of figure out what the effect on pricing has been both in multifamily and office?
Paul T. McDermott
Well, let's start with multifamily, Blaine. I would bifurcate the markets between obviously urban and suburban, and I'll start with DC proper. Occupancy obviously there has been some deceleration downtown but the big challenge really has been [indecipherable]. It's still hurting downtown investment sales, and it's really, probably for those who wanted to close by year end, it's probably really become the Achilles' heel to that execution.
I would say in suburban markets and multifamily that seems to be the hottest product right now particularly in Northern Virginia. I would say our observation and let's go back to the end of the fourth quarter of 2019 where we thought it was a very hot market. We definitely saw tremendous activity and some cap rate compression probably in January and February of this year and then obviously in March, there was a static period, but I would say that it is back with a vengeance right now. Thanks to agency lending.
We have seen some cap rate compression. I think the cap rates right now, I don't like to put all my eggs in the cap rate basket just because, are they based on actual occupancy, actual collections, tax adjusted or are you T12a, T12 and T3 and T1, but we've definitely seen underwriting, I'd say probably since Labor Day probably become more aggressive, and I'm really looking at that kind of year two growth assumption in the multifamily space where I think when we talked in the second quarter, some folks still probably had zero to negative growth and that growth rate now is translated to probably between, just on the underwriting feedback we've got between 1% and 3%.
Just in terms of capital, I think as we talked about the Odyssey index, the core funds are kind of gone. But we're definitely seeing Section 1031 activity with cash flows -- cash flows with good collections, value added Core Plus money. I mean, debt is the real kind of supercharger here, you know folks are really looking in the multifamily space for what I'd say 6% unlevered IRRs, 11% to 12% levered and that's predicated on just over 2% debt, but it's clearly all about levered yields in the multifamily space.
Office obviously a bit of a different story, Blaine. I'll start in the suburbs. The activity that we're seeing out there is really from the Core Plus capital, looking for longer-dated walls and/or shorter dates with the retention story. That capital is probably solving for