by Ben Johnson from NREI

After two years of rising vacancies and slumping rents, apartment owners have reason to be cheerier these days.

According to the latest survey of 169 markets across the U.S. by researcher Reis, the national apartment vacancy rate peaked at a record 8% in the fourth quarter of 2009 and remained unchanged in the first quarter of 2010. Asking rents increased by a scant 0.1% in the first quarter, but that was the first gain since the third quarter of 2008.

When you hear that 1Q 2010 absorption rates were the best the nation has seen in a decade, Portland apartments, Vancouver multifamily…investment properties in the area are looking like better and better deals. 

One economist has opined that he sees cap rates falling as more and more investors return to the market. 

The best way to be a genius in five years is to make wise investments today.  Contact us:  503.577.1034.

Some 20,000 apartment units were absorbed in the first quarter of 2010, which is the strongest first-quarter showing in the past 10 years, according to Victor Calanog, director of research at Reis. “The multifamily market appears to be on the cusp of recovery. If so, pricing and transaction activity will rise and the window of opportunity for landing good deals may close soon,” says Calanog.

Rental demand drove the occupancy rate for downtown Chicago apartments higher in the first quarter, to 93.6% from 91.4% in the fourth quarter of 2009, according to consulting firm Appraisal Research Counselors.

The latest results surprised long-time industry watchers, including Robert Bach, senior vice president and chief economist at Grubb & Ellis. However, Bach is concerned about the abundant supply of empty condos and single-family homes that are entering the rental market in hard-hit areas like South Florida and Phoenix. He believes they are casting a shadow over traditional apartment communities, and siphoning off potential renters.

“I’m surprised the apartment fundamentals have bottomed out this quickly, but as long as there are these shadow units out there, then it’s going to be interesting to see if the apartment market can recover independent of that,” says Bach.

The rest of 2010 will be a telling barometer, notes Calanog. “The next two quarters will offer critical perspective as to whether positive rent growth is sustainable.” Calanog does expect the vacancy rate to improve over the next five years, dropping to 6.6% in 2014.

Unemployment stings young Americans

Certainly one of the most closely watched keys to the short-term apartment market turnaround is the jobs picture. According to the U.S. Bureau of Labor Statistics, the U.S. economy added 290,000 jobs in April, the largest gain since March 2006. That followed a revised 230,000 increase in March. Still, the overall unemployment rate rose from 9.7% in March to 9.9% in April, a sign that more Americans are starting to look for jobs.

According to some observers, danger lurks at the deep end of the renter pool. The primary renter market base, people aged 20-30, comprises 70% of the total U.S. apartment market, and that segment is recovering more slowly than others.

As an example, the unemployment rate among Americans aged 20-24 was 15.8% in March, but jumped to 17.2% in April. “The unemployment rate for young people has climbed faster than it has for the labor market in general,” says Sam Chandan, global chief economist and executive vice present at researcher Real Capital Analytics.

According to Chandan, the rental pool is not being supported by new entrants of young people graduating with jobs. “We need job growth among the younger age groups to drive apartment demand. There’s got to be some replacement there.”

Compounding the situation, one of the biggest challenges to recovery in this market is older, more skilled workers who are willing to take lower paying jobs just to find work. Typically this segment is more inclined to own rather than rent. “This is an issue that’s going to weigh on the performance of the apartment market,” says Chandan.

This is another great CoStar multifamily article by Mark Heschmeyer:  

The apartment market continues to rebound from the “Great Recession” according to the National Multi Housing Council’s (NMHC) latest Quarterly Survey of Apartment Market Conditions.  

Sales volume is up, debt and equity are more available and markets are tighter, according to respondents. For the first time since October 2005, all four survey indexes recorded better market conditions than three months ago. Indexes for both sales volume and equity financing registered all-time highs.  

Contact Rose City Commercial Real Estate today to bring the recovery to Portland:  503.577.1034 or rick@rosecitycre.com  

The biggest improvement came in market tightness, which jumped from 38 to 81.  

“There is clear improvement in apartment market conditions on all fronts,” said Mark Obrinsky, NMHC chief economist. “We saw a sharp increase in the market tightness index, which fits with the surprisingly strong (for a seasonally weak period) effective rent growth. And the all-time highs recorded by the sales volume and equity financing indexes offer even more reason for optimism.”   

“Even so, a sustained recovery in the apartment market needs a firm economic and demographic foundation,” Obrinsky added. “While the long-term prospects for the industry are bright, in the near-term the industry’s prospects still depend upon a stronger rebound in both the job market and household formation.”  

Other key findings:  

– The market tightness index, which measures changes in occupancy rates and/or rents, rose sharply from 38 to 81. This was the highest figure in nearly four years. Fully 64% of respondents said markets were tighter (meaning lower vacancies and/or higher rents). Only 2% reported looser markets. This is the sixth straight increase for this measure.  

– The sales volume index increased to a record-setting 72 from 56. 48% of respondents indicated sales volume was higher. This is the highest ever reported and represents a nearly complete reversal from a year ago, when 43% said it was lower.  

– The equity financing index increased further from 66 to a record 71, indicating that equity financing is more available. Nearly half indicated that equity financing was more available; another record. Only 3% thought equity financing was less available. This is the sixth consecutive quarter this index has improved.  

– The debt financing index also increased, from 49 to 58, meaning borrowing conditions have improved. 18% said conditions for multifamily borrowing were better this quarter; nearly 80% indicated that borrowing conditions were unchanged. Only 2% said conditions were worse.

Savvy like Trump...but better hair!

Having completed over $6 Billion in real estate deals makes Robert Knakal someone to listen to and learn from.  I subscribed: Robert Knakal’s Streetwise.     

Welcome back old friend! Yes, we have seen a re-emergence of the blessed 1031 tax-deferred exchange in recent weeks, and what a welcome sight it is.    

 The opportunity to protect hard earned equity in the sale of an investment has been available to investors since 1921. However, this part of the tax code was so complex that only a small segment of the investment community took advantage of this mechanism.  In 1990, the Omnibus Budget Act provided more widespread access to a broader set of investors as this option was clarified and simplified. Section 1031 exchanges are often mischaracterized as “tax free” when they are actually “tax deferred”.     

Contact the team at Rose City Commercial Real Estate to begin investing in Portland’s future…and your own:  rick@rosecitycre.com or 503.577.1034.     

The theory behind this mechanism is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay taxes. Only the form of investment has changed, therefore, it would be unfair to collect a tax on a “paper” gain.  When an investor utilizes this mechanism, the deferred gain is payable when the replacement property is sold and is not part of yet another exchange. At that point, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.    

 1031 exchanges in the investment property market have been growing in popularity since the mid-90s and fueled a majority of transactions in the mid to late 2000s. With falling property values and transaction volumes beginning in late 2007, we saw a significant reduction in 1031 transactions.    

 In previous StreetWise columns, I have gone into detail about the supply / demand imbalance and the fact that the volume of sales was so low due, mainly, to lack of supply as opposed to waning demand. The supply of available properties for sale is generally fed by discretionary sellers. When value falls, as it has done since 2007, discretionary sellers withdraw from the market and the supply is then fed by distressed sellers. Distressed sellers have not fed the supply in numbers which were expected because everything that has occurred from a regulatory perspective has allowed these sellers to avoid dealing with their distressed assets.    

 Recently, we have seen the flow of distressed assets begin to loosen as banks and special servicers are beginning to clean up their balance sheets and portfolios. Simultaneously, we have seen discretionary sellers returning to the market. The tangible evidence that this is actually happening can be seen in the 1031 activity we have seen recently. Distressed sellers are rarely left with any equity to reinvest in the form of a 1031 exchange. Discretionary sellers, on the other hand, often have significant equity to redeploy via this tax-deferred vehicle. We are, once again, seeing sellers ask for flexibility in closing periods to provide them with better chances of being able to effectuate an exchange.    

 During the past 4 weeks alone, we have signed 12 contracts with purchasers who are investing 1031 funds. Moreover, we are receiving multiple calls each day from investors who are looking for properties to complete exchange transactions. This is certainly reminiscent of 2006 and 2007 when so many transactions were motivated by tax-deferment. The demand side has been very strong for quite a while as institutional capital has returned to the market, joining the high-net-worth individuals and families which have dominated the horizon for the past couple of years. Foreign high-net-worth investors are present in rapidly growing numbers and the re-emergence of 1031 capital adds more pressure to already overwhelming demand for investment properties.    

 Don’t mistake my perspective as I am not suggesting that market conditions are back to the go-go, bubble inflating, years of 2005 to 2007. I am, merely, passing along a trend that we are seeing which has, for the most part, been absent for quite a while. It is yet another sign that the recovery is upon us.    

 From an intermediary’s point of view, or anyone’s, who is reliant upon transaction volume for their livelihood, it is positive to see this type of activity returning to the market. To the extent that distressed sellers continue to dispose of assets and discretionary sellers return to the market, transaction volume has no choice but to increase. As sellers with real equity sell, each transaction is likely to stimulate another transaction as a 1031 is contemplated.    

 This trend certainly bodes well for our projection that transaction volume will increase by about 40% this year over last year. Welcome back old friend, indeed!    

 Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career having a market value in excess of $6.2 billion.

The following article is emblematic of the reasons I feel that real estate should be a key component of any long term net worth building program.  Don’t get me wrong…it’s OK to put part of your money on Mr. Hare…I just think you should put most of it on Mr. Tortoise. -Rick M. Bean

From: Pittsburgh Business Times – by Patty Tascarella

 The Securities and Exchange Commission announced Tuesday that stock-by-stock circuit breaker proposals are being filed in response to the market disruption of May 6.

Stocks lost $1 Trillion in a half an hour?  That’s why I’m in real estate investing!  They’re proposing to limit losses to 10% in a 5-minute period.  Ouch!  To employ your wealth building strategy on a local level, contact us at Rose City Commercial Real Estate.  503.577.1034 or rick@rosecitycre.com

The national securities exchanges and the Financial Industry Regulatory Authority are filing proposed rules under which they would pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.

The SEC is currently seeking comment on the proposal, which would take effect as a pilot program running through Dec. 10, 2010.

The fastest, abruptest market slide in Wall Street history plunged the Dow Jones Industrial Average a fraction short of a 1,000-point drop on May 6. The exchange regrouped just as quickly to a 347.80 point loss by the end of trading.

.

It came down to an error stemming from a lack of communication between the six exchanges operating in the United States — The New YorkStock Exchange, Nasdaq, BATS, Direct Edge, ISE and CBOE. Each operates with different rules. So when the New York Stock Exchange put a hold on trading on a number of stocks, chaos ensued with traders and computer systems. The SEC has been meeting with the various exchanges to develop a structural framework for strengthening circuit breakers and handling erroneous trade.

“I don’t know if that’s the ultimate solution, but it’s a step in the right direction to avoid large issues like we just had,” said Dale Dominick, managing director of BenchMark Financial Network’s Pittsburgh office.

Circuit breakers could be “a good safeguard,” he said, “Until they figure out a better solution —if there is a better solution.  Anyone can make an error and it can cause a rippling effect through the whole industry.”

Senior reporter Patty Tascarella covers banking, finance, legal, marketing and advertising and foundations at the Pittsburgh Business Times.
Contact her at ptascarella@bizjournals.com or (412) 208-3832.

Read more: SEC proposes rules to curb market mayhem – Pittsburgh Business Times

Making a difference

Multifamily investments are leading the way!

In recent articles I have detailed about how equity players, particularly the big REITs are returning.  The Bid/Asked Gap is closing.  The final piece of the puzzle is the availability of affordable financing.  Please see the attached article about capital markets.

A friend of mine asked me recently if there was ever going to be a good time to invest.  I told him that there was no need to get in now…there will be another great time to buy in a few decades.  I’d call 503.577.1034 now!

from:  National Real Estate Investor

Real estate capital markets continue to improve. As investor sentiment rebounds, there is a large amount of equity capital chasing a relatively constrained supply of for-sale core assets. This increased liquidity has helped to boost sale prices for core assets in primary markets by more than 10% over the past few months.

Lenders also are beginning to re-enter the commercial mortgage market, with increasing competition between lenders leading to lower mortgage rates and higher loan-to-values. As of March 2010, the average commercial mortgage rate was approximately 6.8% to 7%, with spreads over the 10-year Treasury narrowing to 320 to 370 basis points.

On the CMBS front, all tranches have rallied appreciably. Spreads on the AAA CMBX index have narrowed by more than 100 basis points during the first quarter of 2010.

In early April, Royal Bank of Scotland (RBS) successfully completed a $309.7 million commercial mortgage-backed securities (CMBS) offering backed by multiple loans, suggesting that the securitization market also is strengthening.

According to Real Capital Analytics (RCA), distressed assets in the U.S. surged to $234 billion as of March 2010. We expect the amount of distress to continue to grow as more loans mature over the next three years.

Although some of the loans will be restructured and extended, we expect to see good debt and equity opportunities for well-priced and/or distressed investments in 2010 and 2011.

The NAREIT Equity REIT Index gained 10% during the first quarter, outperforming the S&P 500 Index (5.4%). Improved access to both debt and equity markets is helping to fuel REIT performance.

Meanwhile, the NCREIF Property Index (NPI) posted a total return of 0.76% during the first quarter, following six consecutive quarters of negative returns [Figure 1]. The income portion of the quarterly return was resilient at 1.7%, but prices depreciated by 0.9%. The total return was positive for all property sectors except lodging.

Try this on for size:  Pay cash for a distressed asset for a dimes on the dollar.  Remedy vacancy challenges and stabilize occupancy over 90% for six months.  Place a 70% LTV HUD loan on the property and you’ll be able to pull out virtually all of your original equity.  It will still cash flow. What’s the IRR calc when you’ve got $0 cash left in?  Infinite.  Call 503.577.1034 to discuss this further!

From:  CCIM Magazine 

Government-sponsored enterprises Fannie Mae and Freddie Mac have been a lifeline for multifamily investors, providing liquidity that is sadly missing outside of the apartment realm. “That has softened the amount of value decreases in the sector,” says Dan Fasulo, managing director at research firm Real Capital Analytics. “For prime multifamily, we’re not seeing the type of 40 percent to 60 percent declines in value that we are seeing in the office, retail, and hotel sectors.”

CCIMs say the U.S. Department of Housing and Urban Development’s loan programs may soon overshadow Fannie and Freddie as the darlings of multifamily borrowers. Those programs, insured by the Federal Housing Administration, include 223(f) loans, which can be used to refinance assets, and 221(d)(4) loans for new construction.

Loan-to-value ratios can be as high as 90 percent of construction costs and typically amortize over the 40-year term of the loan, says Jeff Siebold, CCIM, an appraiser and owner of Siebold Group in Caswell Beach, N.C. “This is not about subsidized housing; it is about market-rate apartments,” Siebold says. “Some of the nicest class A or B properties that you see very well might have a 221(d)(4) loan as part of their program.”

Government-backed loans won’t work for every project, in part because they are limited to stabilized properties, according to Brad Miner, CCIM, a CB Richard Ellis associate in Phoenix.

Brokers say cash transactions also are mushrooming. Wealthy individuals concerned about inflation are increasingly interested in multifamily as a conservative investment vehicle, says Robert Vallera, CCIM, principal of Commercial Realty Advisors in La Jolla, Calif. Vallera contends that many investors worry U.S. fiscal policy will soon fuel rapid inflation. “I have closed more all-cash apartment transactions with private investors in the past year than in my prior 25 years of apartment brokerage combined,” he says.

Yet another sign the economy is recovering

Even though this investment news doesn’t directly impact Portland multifamily real estate I’ve included it because it speaks to the general improvement beginning in the overall economy.  I’ve personally seen a huge surge in interest in Vancouver apartments in the last month.  

 From: Retail Traffic Apr 13, 2010 10:59 AM  

Bed, Bath & Beyond’s announcement last weekthat it plans to open 60 new stores in fiscal 2010 highlighted a change in attitude that’s slowly taking place among national retail chains. While most national retailers spent 2009 trying not to drown, a brighter outlook for U.S. economy and better pricing on available space has led to an increase in expansion announcements in 2010.   

Meanwhile, children’s apparel seller Gymboree has doubled the number of stores planned for its new off-shoot Crazy 8 up to 100 from previously announced 50. And Urban Outfitters Inc. decided to launch a new concept next year that will focus on the always popular bridal market.  This year, leasing activity might rise 5 percent year-over-year, according to some experts. But the growth will be concentrated among a few key sectors, including discount stores, furniture sellers and fast-food operators.  

“If you are a landlord, you’ve got to really focus like a laser beam on the strategies these companies have and the potential of these businesses,” says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. “At the end of the day, this economy is not going to be good, so they really have to understand who’s going to be a viable [long-term] tenant.”  

For example, Bed, Bath & Beyond, which reported a 4.4 percent increase in same-store sales for 2009 while the industry as a whole experienced a 0.5 percent decrease, seems like a strong bet, according to Davidowitz. During its earnings conference call on Apr. 7, the Union, N.J.-based retailer announced it plans to open 60 new stores in North America in fiscal 2010, including 30 namesake stores, 20 buybuy BABY stores and 10 Christmas Tree stores. Overall, the company believes it can support 1,300 Bed, Bath & Beyond stores in U.S. and Canada, according to Warren Eisenberg, co-chairman. As of 2009, it operated 958 namesake stores in the United States.  

“We continue to apply our stringent standards of growth as we evaluate new store price, as well as continue to review our existing locations and lease terms for opportunities to relocate and/or right size our stores in response to changing market conditions,” Eisenberg told analysts.  

“We are going to have tremendous growth in the extreme value sector, big growth in food retailers and it looks like home [furnishings] is coming back after a five-year slump,” Davidowitz says. “In extreme value alone you’ll see thousands of stores.”  

Overall, U.S. retailers plan to open 65,257 stores in the next two years, according to a March 16 report from RBC Capital Markets and Retail Lease Trac. (The report includes data on 2,000 retailers, but does not follow expansion plans for some of the bigger U.S. chains, including Walmart, Target and Macy’s.) The March figure represents a 1.2 percent increase from the number of stores planned in December 2009. The sectors with the greatest number of planned openings include variety, with 2,839 stores; salons and spas, with 2,509 stores; and pet care, with 493 stores.  

For example, Dollar General plans to open 600 new stores in 2010, while Family Dollar will open net 120 to 140 stores.  

As a result of this revival in interest, there has been a 20 percent to 30 percent increase in leasing activity from this cycle’s low point in 2009, according to Alvin Williams, principal with Excess Space Retail Services Inc., a Huntington Beach, Calif.-based real estate disposition and lease restructuring firm. Williams, who works with retailers to dispose of surplus store space, attributes the increase partly to his clients’ greater willingness to compromise on deals.  

“We are seeing more flexibility for what kinds of tenants they’ll expect, what kinds of deals they’ll do, they are much more open to splitting their spaces,” Williams says. “We have found what I would call a temporary new normal. There hasn’t been a month-to-month increase [in leasing activity], but we are off the low point.”  

Most national players, however, are still not launching new concepts and those outside the extreme value sector are approaching expansion very cautiously, notes John Bemis, executive vice president and director of leasing with Jones Lang LaSalle Retail, an Atlanta-based third party property manager. He estimates that under the best circumstances, leasing activity this year might increase 5 percent compared to 2009. But if same-store sales remain in the high single digits for the rest of the year, this might position the nationals for growth in 2011 and 2012.  

—Elaine Misonzhnik  

REIT Investing Skyrockets

Sam Zell’s Equity Residential has invested over half a billion dollars recently in portfolio additions…but they are also upgrading a number of their units and repositioning others.  These are irrefutable signs that they see enhanced rents around the corner.  For those of you who don’t know who Sam Zell is…he’s so rich that when Trump stands next to him…the Donald looks like just another guy having a bad hair day life.

My suggestion:  Read the article, then contact us to start acquiring additional multifamily assets for your portfolio! 503.577.1034

Apartment REITs Go On The Offensive

By Brad Berton, 03.16.10, 11:24 AM EDT

Equity Residential signals recovery with pace-setting deals.

How do some of the smartest real estate outfits begin buying and building again after a major economic collapse? Suddenly.

Adding to its recent $475 million purchase of apartment high-rise properties from the troubled Macklowe family, Equity Residential ( EQR – news - people ) has paid $45 million for an apartment complex rental community a mile from the beach in tony Del Mar, Calif., Forbes has learned. San Diego County real estate records of the deal, which closed Jan. 12, indicate the seller was DMG Associates, a company headed by developer Stuart R. Posnock. The complex, called Del Mar Ridge, includes 181 apartments built in the 1990s.

The Chicago-based apartment giant, headed by billionaire Samuel Zell, hasn’t disclosed the purchase price of this deal in SEC filings. For a company with an $11 billion stock market value, that’s not surprising. But at nearly $250,000 per apartment, Equity Residential’s deal in Del Mar is a significant outlay.

Equity Residential plans to invest more, too, on improvements to the property’s 181 apartments as tenants turn over–also part of a pattern of things to come. After a couple years marked by mostly defensive maneuverings, Equity Residential and other apartment REITs are returning to more offensive-minded investments. They aim to boost property values and rents by sprucing up properties like Del Mar Ridge, finishing up partially completed projects, redeveloping older communities or even launching entirely new developments.

Equity Residential Chief Executive David Neithercut cited the Del Mar deal while explaining the REIT’s renewed offensive strategy in a Feb. 4 conference call to discuss the company’s fourth-quarter earnings. Equity Residential plans to renovate and seek higher rents as tenants turn over.

“We’re going to do a repositioning on this asset, and we projected a year-two yield of 6.7%,” said Neithercut.