Apartment Values Rise, as Do Rents -2012 looking strong for apts
By DAWN WOTAPKA
Strong growth of rents and occupancy levels of rental apartments have pushed some building values to record levels as Americans shift away from home ownership.
While concerns about the economy are cooling the market for most other types of commercial real estate, apartment rents and occupancies continue to be boosted by demand from millions of people who are victims of foreclosure or are unwilling or unable to buy their own homes.
At the end of the third quarter, 5.6% of the nation’s apartments were vacant, down from 5.9% in the second quarter, and the lowest level since 2006, according to Reis Inc., a real-estate data service.
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Rents are up even in some cities that have been hard hit by high unemployment and the housing crash, like Orlando, Fla., Detroit and Phoenix. Effective rents, which include landlord discounts in some markets, rose to $1,004 a month in the third quarter, up 2.3% from a year earlier, according to Reis. Of the 82 major markets that Reis tracks, only Las Vegas saw rents decline compared with a year earlier.
Forecasters say rent increases could slow or stop if the economy weakens further. But for now, these trends are producing outsized returns for real-estate companies, compared with other commercial-property classes.
Values of apartment buildings in the best locations—with modern amenities like resort-style swimming pools and outdoor movie viewing areas—went into record territory in the third quarter, according to an index compiled by Green Street Advisors. The previous record had been set in the second quarter of 2007.
Investors who bought apartment buildings just a few years ago are selling for big profits. Regency Club, a 372-unit complex in Jackson, N.J., with two swimming pools and tennis courts, sold for $44 million in August, compared with $39.9 million in early 2009, according to Marcus & Millichap.
At the same time, though, the rise in rents is squeezing large swathes of the middle class by increasing living costs just as wage increases are anemic and unemployment high.
Glen Guile, a 40-year-old information technology and marketing employee for an auto-parts company in Raleigh, N.C., says he’s looking on Craigslist, an online classified-ad service, for a roommate because he just heard his $629 rent for a one-bedroom apartment could be increased another $30 to $40 a month. He’s already working a second job at a Costco store. “I don’t get a day off. I work seven days a week,” he said.
But thanks to rising rents and occupancies, some analysts predict that real-estate companies will have the highest growth in property net income this year and next year since 2006.
Associated Estates Realty Corp. kicked off the earnings season for apartment-building companies Monday by reporting a 12.5% year-over-year increase in funds from operations, a common metric used by real-estate companies to measure performance. When looking at apartments owned for a year or more, rents for Associated’s 12,000-unit portfolio were up 4.6% compared with the third quarter of 2010.
“Some people try to make the argument that what’s going on in the job market affects apartment demand,” said Jeffrey Friedman, Associated’s chief executive. “We don’t believe that.”
The apartment sector has been insulated from high unemployment because it continues to inhabit a sweet spot in the economy created by demographic factors and the anemic home sales market. The U.S. is expected to see 1.5 million rental household formations in 2011, a record year, according to Green Street.
The main reason for the rental increase is a faster-than-expected decline in the home ownership rate, according to Green Street. The nation’s rate came in at 66% in the second quarter, down from 66.4% in the first quarter and 66.9% in the second quarter a year ago, according to the Census Bureau.
Some industry watchers say the rate could fall to as low as 60%. Each 1% decline in the home-ownership rate represents the movement of one million households to rentals.
If a current tenant balks about a lease renewal including higher rent, Mr. Friedman says he isn’t overly concerned. “There’s someone coming right behind them who can afford it,” he said.
To be sure, the economics of apartment investments aren’t detached from the concerns about financial problems in Europe and the possibility of a double-dip recession in the U.S. As a result, landlords have started to temper rent growth in some areas, including Denver, Atlanta and the Baltimore area, according to Green Street.
If another recession hits and unemployment rises, millions of renters could likely double up or move home with their parents, putting a crimp in demand. “People just aren’t going to write bigger and bigger rent checks into infinity,” warns Andrew McCulloch a Green Street analyst.
The high rents are also being supported by a lack of new supply. Developers have scrambled to launch new projects, but most of them won’t start hitting the market until late 2012. Roughly 8,200 new apartments hit the market in the third quarter, the second lowest number since Reis began tracking data in 1999.
http://online.wsj.com/article/SB10001424052970203911804576653403871400400.html#printMode
Treasuries Rise as Spreads Narrow The “long rally in treasuries is ending” is a common refrain today as a combination of less fear, more appetite for risk, inflation rumbles, signs of recovery, supply concerns and other factors contribute to investors’ diminished appetite for US debt. Fortunately for borrowers, the renewed appetite for risk is driving spreads downward for the agencies, CMBS and portfolio lenders. Right now we are seeing some sub 200 spreads for CMBS, meaning a full leverage transaction should price at about 5.75% for 10 years. CMBS bonds are rallying, a major pool priced AAA 10 year bonds at approximately Swaps + 100 this week, originators continue to “sharpen their pencils”……Stay tuned……
Treasuries Rise as Spreads Narrow The “long rally in treasuries is ending” is a common refrain today as a combination of less fear, more appetite for risk, inflation rumbles, signs of recovery, supply concerns and other factors contribute to investors’ diminished appetite for US debt. Fortunately for borrowers, the renewed appetite for risk is driving spreads downward for the agencies, CMBS and portfolio lenders. Right now we are seeing some sub 200 spreads for CMBS, meaning a full leverage transaction should price at about 5.75% for 10 years. CMBS bonds are rallying, a major pool priced AAA 10 year bonds at approximately Swaps + 100 this week, originators continue to “sharpen their pencils”……Stay tuned……The “long rally in treasuries is ending” is a common refrain today as a combination of less fear, more appetite for risk, inflation rumbles, signs of recovery, supply concerns and other factors contribute to investors’ diminished appetite for US debt. Fortunately for borrowers, the renewed appetite for risk is driving spreads downward for the agencies, CMBS and portfolio lenders. Right now we are seeing some sub 200 spreads for CMBS, meaning a full leverage transaction should price at about 5.75% for 10 years. CMBS bonds are rallying, a major pool priced AAA 10 year bonds at approximately Swaps + 100 this week, originators continue to “sharpen their pencils”……Stay tuned……
Zero Hour for Net Leases from Net Lease Insider by Net Lease Insider
Zero Hour for Net Leases from Net Lease Insider by Net Lease Insider
It is not a secret that many commercial real estate loans stand on shaky foundations. In-fact it has been recently estimated that a “sizable amount of the additional $700 billion in commercial real estate loans coming due during that time frame are loans that could not get refinanced at existing levels in the current lending environment”. This of course will lead to many foreclosures and create an investment opportunity for CRE buyers. However, for the unfortunate holder of the original asset there may be a potentially huge tax consequence. There may also be a glimmer of hope in the form of a Zero-transaction.
Simply speaking a zero transaction is the acquisition of a property using a highly leveraged loan (loan to value usually 88% plus) with all rental income dedicated towards debt service, thus producing “zero income” for the property owner. One of the vehicle’s applications is to defer tax liabilities incurred in a commercial foreclosure.
The Problem
Though it is not widely known, the foreclosure of a commercial property is often a taxable event. How the IRS computes the tax depends on whether the property was financed with a recourse or non-recourse loan. In the case of a recourse loan, tax liability is calculated by taking the difference between a property’s fair market value and its adjusted basis. The tax liability of a non-recourse loan (which the remainder of this piece will be dealing with) is calculated by taking the difference between a property’s outstanding mortgage balance and the property’s adjusted tax basis.
The “outstanding mortgage balance” is the key element which catches investors off guard.
For example:
Let’s say you bought a property for $5M (your cost basis) which subsequently has been depreciated to an adjusted tax basis of $3M. Let’s also say you refinanced this property during an upsurge in the market and pulled out $8M of equity. If this transaction was foreclosed upon (without any action to defer tax liabilities), you would face a taxable gain of $5M, i.e. the $8M in outstanding mortgage amount minus the $3M in adjusted tax basis.
Thus, investors who think returning the keys to the bank absolves them of all monetary concern involved in a commercial foreclosure are gravely mistaken. The IRS views any money previously pulled from a property via loan refinancing to be taxable gain, even though the property is foreclosed upon.
The Solution
With proper scheduling and use of the 1031 exchange, the situation above can be avoided through the purchase of a “zero income” property. The reason a zero income property can be so beneficial is due to its highly leveraged nature and its ability to defer a taxable gain through a 1031 transaction. A portion of the money an investor would have otherwise paid to the IRS can be used instead to acquire the zero income property through the 1031 exchange.
Here is how our previous example would be impacted by a zero transaction:
Assuming a tax rate of 25% (Federal capital gains rates, Federal recapture rates and state taxes), the $5M in gain would cost $1.25M in taxes. If instead, a zero transaction was pursued, the investor would need to replace the balance of the debt, $8M. By exchanging into a zero income property for approximately 10% of the $8M debt amount replaced ($800,000), there would be a $450,000 savings ($1.25M-$800,000) and the investor would own NNN property with a very high credit tenant.
In order for the transaction to flow smoothly, it will have to be properly organized and scheduled on an individual basis. It should be noted that a zero transaction is not possible without outside assistance of at least a Qualified Intermediary and qualified professional tax and accounting advice. If done properly, this strategy can be an invaluable tool for investors caught in a foreclosure situation.
Source: article received from ABC (Ch 7) News feed Jun 2010
For more information on net-lease investments multi-family investments please contact us. SIG works with custodians to help diversify your retirement portfolio through your self-directed IRA by investing in real estate assets. Please contact Robert E. Lee, MBA,CCIM of SIG Equity Partners, LLC at 800-878-1995 x101 or by email at info@sigequity.com for advice on your next commercial real estate investment or 1031 exchange.
Multifamily real estate good investment during downturn
Multifamily real estate good investment during downturn
My favorite alternative asset class for the next few years would be the current opportunities with multifamily real estate. A common perception about real estate is that it is sensitive to economic downturns, and that’s usually the case with most classes of real estate.
Multifamily real estate, consisting of townhomes, condominiums and luxury apartment complexes, historically has been the exception to the rule. Everyone has to have a place to live, and in good times young people who lived at their parent’s home or in less expensive housing will want to ‘trade up’ to a better lifestyle. During tougher times (like now), a lot of folks who would like to have their own home can’t afford it (or can’t get financing), and thus will usually settle for a nice apartment or townhome. It’s been said that multifamily ‘gets ‘em coming or going,’ and it’s for this reason that we like this investment category.
This classification of real estate has had a rare combination of high returns with lower risk. The following table of information was obtained from the National Council of Real Estate Investment Fiduciaries (NCREIF), and shows the compound annual growth rate of various types of real estate during the past 20 years, from the fourth quarter of 2007. Past performance doesn’t guarantee future results.
Multi-
Period family Industrial Office Retail Hotel
Last 5 Years 13.8% 14.5% 15.4% 17.4% 15.4%
Last 10 Years 12.6% 13.0% 13.2% 13.8% 11.7%
Last 15 Years 13.1% 12.8% 12.2% 11.9% 11.8%
Last 20 Years 10.4% 9.6% 8.0% 9.8% 9.7%
A normal assumption with a higher returning asset is that it has more risk. Multifamily real estate is one of the rare investment categories, in that it has had less risk, as measured by standard deviation, than most other real estate sectors. The following table also was obtained from NCREIF, depicting the standard deviation across real estate asset classes, from the fourth quarter of 2007.
Multi-
Period family Industrial Office Retail Hotel
Last 5 Years 4.1% 4.1% 5.7% 3.7% 6.4%
Last 10 Years 3.5% 4.0% 6.2% 4.9% 7.5%
Last 15 Years 3.0% 5.0% 7.2% 5.6% 6.0%
Last 20 Years 4.6% 6.7% 9.2% 6.4% 5.7%
The economic downturn and residential real estate crisis in our country during the past two years has resulted in millions of people being forced to sell their homes at a loss, or worse, to face foreclosure. These people actively are searching for nice rental property, because in many cases they can’t afford a new home or can’t obtain a mortgage due to much stricter lending requirements now in place. I believe that multifamily is likely to outperform other real estate sectors for several years, until the economy gets moving again and consumers can ‘trade up’ again.
Multifamily real estate can be obtained through publically traded REIT’s, or in my favorite structure, as privately offered investments. You need to do some homework on this investment, and I would like to help. Take some time to learn whether having 5 percent to 10 percent of your portfolio in multifamily real estate makes sense for you.
If you would like more information on available investment opportuniites, please contact us via our website at: http://www.sigequity.com/index.php?option=com_ckforms&view=ckforms&id=1
Time to Buy apartments again! Why it’s a perfect storm and why we are looking for multi-family investment opportunities for our investors now
Given the current state of commercial real estate, SIG Equity Partners continues to practice calculated patience in searching for the best multi-family investment opportunities for its investor partners.
Capital markets have begun to relax, economic fundamentals are beginning to improve, and significant capital is earmarked for investment in commercial real estate; primarily in apartments. Transaction volume is expected to increase throughout the remainder of 2010, and SIG Equity is ready to act on prudent investment opportunities as they present themselves through our network of lenders, investors, owners, brokers, and real estate professionals. We have a number of new opportunities on the horizon and will be presenting our latest deal to you within the next few weeks. Please let me know in advance if you have interest and would like a quick summary of the project highlights. My contact information is listed below, feel free to contact my by phone or e-mail to discuss investment opportunities .
Below are links to a few articles that reflect SIG ’s sentiment that now is the time to acquire multi-family real estate:
Why multi-family real estate? Why now?
We are about to experience one of the largest rental markets in our lifetime for many reasons. These reasons result in a significant shift away from home ownership and toward a strong demand for rentals. The current state of foreclosures, unemployment, and stringent lending guidelines make any decision other than renting difficult for most Americans. Additionally, the economy has significantly hindered and reduced the supply of new housing. Securing construction financing is as challenging as ever and as a result, the pipeline for new construction is expected to lag for years to come while the U.S. population continues to grow.
All of these factors contribute to decreasing supply and increasing demand for apartments, but none as important as the arrival of the Echo-Boomers to the market. The Echo-Boomers are the children of the Baby Boomers and are the largest generation of young people since the 60’s to come of age. This next dominant generation of over 80 million Americans (almost 30% of the U.S. population) will affect our society like never before. The Echo-Boomers are just starting to graduate from college and are about to enter their prime rental years.
SIG Equity and its investment partners are poised to take advantage of these economic and demographic factors by acquiring premier multi-family properties with stable cash flow and long term appreciation. Strategy By identifying, recognizing and acting rapidly on today’s discounted value opportunities and current employment trends, SIG Equity and it’s sponsors will continue to outperform the real estate market.
The current economic environment presents the ideal opportunity to acquire premier assets in prime locations at a substantial discount to replacement value, and at prices which are conservative and are underwritten with realistic growth and occupancy expectations. We are purchasing stablized multi-family properties which generate high yield passive cash flows. These properties are located in strong employment centers, having growth and stability that will better the national averages.
Our philosophy is that if we can acquire quality assets with above average cash flows in the worst recession since the Great Depression, then we are positioned to ride the wave of recovery and achieve strong, long term upside potential and appreciation as the Nation and economy rebound over the next 5-7 years. Demand Growing In US for Rental Housing Many Americans are still priced out of the traditional housing market, despite month-over-month declines in home prices and some of the lowest mortgage rates on record. The income needed to pay a mortgage on a median-priced home fell in more than 90 percent of the markets examined by the Center for Housing Policy, the research arm of the National Housing Conference, an affordable housing policy advocate. Despite the decline, however, many Americans still do not make enough to buy a home. The study, which ranked purchase and rental costs for properties in more than 200 U.S. metropolitan areas, found that consumers are renting more and are paying higher rental costs than in previous years.
Bob DeWitt, CEO of GID Investment Advisers, recently testified before federal lawmakers that the apartment industry is in need of government backing. He cautioned lawmakers about the risks of creating a capital shortage for the second-priority rental sector as they strategize on ways to mitigate taxpayer exposure. “This is important,” he stated, “because the nation is increasingly relying on apartments as fundamental changes in our society are changing the types of housing we need to build. Housing expert Professor Arthur Nelson of the University of Utah projects that half of all housing built over the next 10 years will need to be rental housing to meet the dramatically changing landscape of demand.” Apartment Vacancy Rates in U.S. to Decline in 2010 Experts report that apartment vacancies in the U.S., which hit an all-time high of 7.4 percent in 2009, will decline throughout 2010 as job losses stabilize and fewer new rental homes are added to the market. The nation’s vacancy rate will fall to 6.8 percent in 2010, CBRE forecasts. In some areas, apartments could fill up quickly as employers begin hiring again and Americans in their 20s and early 30s give up sharing housing with roommates and parents. To this end, Avalon Bay Communities Inc. CEO believes developers will have to ramp up rapidly to meet demand after cutting apartment starts by 58 percent in 2009. Apartment REITs to Rebound First US Realty Fund expects real estate investment trusts that invests in apartments, health care and self-storage sites to gain. It sees commercial real estate in the early stages of a three to five year recovery. Areas among Best for Growth, study says Texas metro areas have already been singled out as among the best places to ride out the Great Recession. Texas remains one of SIG Investments’ focus markets. “There is no other state in the country that has had a better track record for 20 years of quality economic growth than Texas,” says William Fruth, president of Policom, a Palm City, Fla., company that specializes in analyzing local and state economies. In addition to Texas we are focused on the several key growth markets throughout the west and south east. We will be sending out a link for an online webinar very soon that will explain the markets we are focused on and why.
Thank you for your continued trust and support.
How to Avoid Mirages in a Desert of Distress
Editor’s Note: As the volume of distress continues to rise, commercial real estate fundamentals take on critical importance for investors. To address these issues and trends, NREI is launching a new monthly column by Dr. Victor Calanog, research director for Reis Inc., delivering up-to-date assessments and expert analysis of property level fundamentals.
There is much talk about investment opportunities in light of the ongoing distress in commercial real estate. Many organizations are said to be amassing capital and building war chests to take advantage of property prices that have fallen anywhere from 25% to 45% after the bubble began its slow deflation in late 2007.
Commercial mortgage defaults on loans held by U.S. banks spiked almost eightfold, from less than $6 billion in 2006 to close to $45 billion by the third quarter of 2009.
However, current data on single property sales of office, industrial, retail and multifamily properties reveal continuing declines in transaction volume.
Portfolio sales are virtually non-existent. Less than $9 billion of commercial properties were sold in the third quarter of 2009, representing about a 70% year-over-year decline and close to a 90% fall from peak transaction volumes achieved in mid-2007.
There is some indication of rising investor appetite for deals supported by the Term Asset-Backed Securities Loan Facility (TALF) program, but the private market is essentially still waiting to be resuscitated. Why are investors still waiting in the wings when there is supposed to be a plethora of distressed opportunities?
Investors must think clearly and precisely about how to take advantage of distress in today’s environment. First, a distinction must be made among several forms of distress since not every instance of distress implies that it is a good investment opportunity. Here are the main types of distress:
• Asset-level distress: An office building that lost a large tenant and must now survive with less income is an example of asset-level distress.
• Seller-level distress: The aforementioned office building may trade but that would depend on seller-level distress. If the owner has deep pockets and is willing to tread water as he waits for the building to lease up, he may not be willing to sell the asset at a discount. Conversely, a building may experience no asset-level distress but may be put up for sale at a discount because joint owners may wish to dissolve their partnership agreements quickly.
• Borrower-level distress: This is closely related to seller-level distress, but is conditional on a seller’s debt levels. Dubai World’s recent announcement of the possibility of selling some of its real estate holdings to pay off its debt is a good example. The conglomerate owns several office buildings in New York and London.
Although these properties may be generating acceptable cash flows, they may need to be sold anyway to generate liquidity if no bailouts are forthcoming. This is a case where asset-level distress may not be present but borrower-level distress is compelling the seller to dispose of assets at a price that might justify hurdle rates, or the minimum rate of return an investor requires to invest money.
• Market-level distress pertains to the performance of property fundamentals such as rents and vacancies for the market as a whole, often defined geographically. Given the depth and magnitude of the current recession, 100% leased trophy properties owned or managed by conservative owners may have to contend with downward pressure on net operating income.
Reis projects negative rent growth through most of 2010 and 2011 for office and retail properties, with vacancies breaking historic highs for apartment and retail. Until the overall economy and property markets come back to life, investors need to be wary of assets that seem to be weathering the storm but could suddenly become part of the overall downward trend. Often all it takes for a property to fall into distress is for one large tenant renewal to fall through.
Evolution of distress
As investors carefully distinguish among the different types of distress to unearth attractive opportunities, another important factor to analyze is how distress has evolved over time. An office building that has limped along at 50% vacancy for years — even when market vacancies were at cyclical lows — may not be a viable investment opportunity even if structure-level distress abates as the economy recovers.
Such a property may require major outlays through renovations and marketing campaigns to attract tenants. This is a situation where asset-level distress has been present for some time, even before the current downturn heightened market-level distress.
Given the different manifestations of distress, the dearth of transaction activity may imply that most investors are putting in the time and diligence and using updated market information to properly evaluate opportunities before they make decisions.
On the other hand, arriving late to the party after prices have begun to rise and the best deals have evaporated is something investors want to avoid. Only in hindsight will we be able to evaluate which winners truly thought carefully — or got lucky — with their investment decisions.
Dr. Victor Calanog is the director of research for New York-based Reis. He can be reached at Victor.Calanog@reis.com.
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