Tag Archives: landlord

Survey Finds CRE Investors Refocusing On Strategy as Fog of Uncertainty Begins to Lift

2013 growthWith the distraction of the U.S. elections disappearing in the rear-view mirror, more investors are again ready to focus on the opportunities they see in commercial real estate, even though uncertainty remains about the looming fiscal cliff and the political solution to address the nation’s rapidly growing debt.

According to the fourth-quarter 2012 PwC Real Estate Investor Survey, investors expect to see an uptick in sales activity in 2013 as property owners cull portfolios to take advantage of the lower capitalization rate environment. Survey respondents expect cap rates to continue to compress in the multifamily sector and begin to dip in sales across all property types.

“The CRE industry continues to show its investment durability as assets command attractive spreads over fixed-income investments and offer more stability than stocks, while most property sectors continue to post occupancy gains and rental rate growth,” said Mitch Roschelle, partner with the U.S. real estate advisory practice leader for PwC. “Foreign investors are particularly bullish on U.S. commercial real estate as they look for stable investments during uncertain times abroad.”

The real estate industry and corporate America adopted a “wait-and-see” attitude as the U.S. presidential election drew closer and investment demand and the industry’s recovery both noticeably slowed at the start of the second half of 2012.

But going into 2013, survey respondents say they see a bit more clarity and optimism even though the nation is still grappling with the fiscal cliff, next year’s debt ceiling debate, a choppy housing recovery, tepid demand for office space and a weak manufacturing sector.

At the same time, most property sectors continue to post occupancy gains and rental rate growth and an era of zero to low new supply is starting to give way to new construction starts in most property sectors.

“We’re starting to see good news eclipse the bad news, and that makes us want to invest more capital in CRE assets,” noted a participant.

Among office investors, more are starting to accept slower rent growth and have less concern about moving further out on the risk spectrum. Core trophy assets remain the preferred target of both domestic and international investors, however, aggressive pricing and improved fundamentals have resulted in certain investors looking to buy either core properties in strong secondary markets or “less-than-core” in primary markets, according to respondents.

At the same time, overall cap rate compression and assertive bidding are providing incentive for office building owners to sell.

“It’s a good time to cull portfolios,” noted a participant.

Even the retail sector, not as popular among investors for some time, is seeing cap rates compress. Due to limited new construction, moderate spending on the part of consumers, and stabilizing housing markets, many investors are starting to revisit strip shopping centers and even power centers.

“As yields for well-leased shopping centers have compressed too much, we are considering buying value-add in great locations due to a lack of new supply,” said an investor.

Lack of new supply combined with rising tenant demand have caused investor interest in the warehouse sector to surge over the past year, creating both buying and selling prospects. In addition, new construction is occurring in certain warehouse hubs where overbuilding is usually less of a concern, like Miami and Chicago, and in select apartment metros.

However, disciplined CRE construction lending and an overall slow-growth environment are expected to temper thoughts of adding too much new supply to a healing CRE industry, where buyers and sellers may soon be on equal footing.

The CRE recovery remains uneven and very location and sector specific. Still, real estate remains a prime target for investment capital as it continues to perform well relative to alternative investments. The largest percentage of respondents, 34.6%, believe that equity real estate capital will be moderately oversupplied in 2013, while 26.4% feel it will be somewhat undersupplied.

At the same time, interest rates are not likely to shift anytime soon as investors continue to “jockey for position in the capital stack to achieve the best risk-adjusted returns,” in the words of a participant.

Click here to view the original article written by Randyl Drummer for CoStar.com.

Multifamily Still a Choice Investment

multifamilyOn the face of it, the robust demand the apartment industry has enjoyed lately appears somewhat inconsistent with our economy. But, on closer evaluation, the seeming disparity isn’t so clear after all.

Mild job growth and favorable demographic trends actually support the recent performance of multifamily, and issued permits, starts, and construction trends all reflect a sizable upward trend.

Nonetheless, investors may question how far the sector has moved in the expansion cycle, as well as the impact of new supply and an improving single-family industry on apartment performance.

Supply Factors

In some markets where new supply has been introduced or rising rents have bumped up against an affordability ceiling, mild leasing incentives have crept back into the marketplace. In addition, single-family sector fundamentals now exhibit consistent improvement, offering a competitive housing alternative.

With significantly higher levels of new supply coming on line over the next two years, investors should be aware of a metro’s employment momentum; submarket vacancy rates for existing Class A product, which may or may not be low enough to compete effectively; and growing housing affordability relative to new development. The concentration of new development in expensive mid- and high-rise properties located in core urban areas implies that the education and income levels of the local population will be crucial to success.

Financing Avenues Grow

The GSEs are providing the bulk of apartment mortgage loans, and new legislation to change that seems unlikely anytime soon. As apartment development ramps up, construction financing is readily available in some markets and for developers with solid financial relationships and successful track records.

Apartments, in particular, remain a perennial favorite among investors who favor stable cash flows and desire a lower-risk profile and a more-liquid capital market relative to other product types. A high degree of risk aversion led investors to pay a premium for properties in preferred and primary markets as well as Class A apartments. Core investors may still prefer the safety and cash flow of top-tier communities in gateway markets, but revenue gains will slow in metros where Class A apartments post sub–5 percent vacancy and several years of steepening rents now outpace wage gains. Increasingly, investors seeking higher yields have gravitated to secondary and even tertiary markets.

On balance, increased liquidity will aid in financing new mortgages, restructuring loans, and driving capital into real estate, now viewed as a compelling alternative to the low-yielding bond and volatile equity markets.

The Fed Steps Up

The Fed’s recently announced open-ended program of quantitative easing, along with an extension of ­“Operation Twist” through the end of the year, delivered a forceful message of support to investors. If the Fed takes additional steps to increase the velocity of capital, such as paying banks no interest for parking money or easing reserve requirements, these actions could have an even more direct impact on the recovery.

Click here to view the original article written by Hessam Nadji for the December 2012 edition of Multifamily Executive Magazine.

Should Apartment Landlords Worry About an Improving Housing Market?

renter nationIn last month’s column, we argued that the strong multifamily market will continue on despite the flood of new supply in the coming years. This month, we tackle another source of concern for landlords and apartment investors. Could further improvements in the housing market dent the current upswing in the apartment market?

Home prices and sales have recently passed what many believe to be their cyclical trough, coinciding with a slowdown in demand for apartments that was visible in third quarter data. The timing of both these occurrences suggests that an upturn in the single-family housing market may be contributing to slowing improvements in multifamily fundamentals.

Housing market data releases have been uniformly positive in recent months. Home prices, as represented by the S&P/Case Shiller Composite 20 Index, having been increasing on a month-to-month basis for six straight months. More importantly, year-over-year price growth turned positive during the summer and his been increasing in each month since then.

While we may see some month-over-month declines in prices in the next few releases, this is mainly due to seasonality. Given that the popular home buying seasons have come to an end, distressed sales will make up a bigger share of transactions, putting downward pressure on prices. This, however, will just be temporary. For a better indicator of price movements, we will look to year-over-year changes in the S&P/Case Shiller Composite 20 Index, which should continue to exhibit somewhat healthy increases.

Total housing starts stood at a seasonally adjusted annual rate of 894,000 in October, up 41.9 percent year-over-year with the single-family portion rising 35.3 percent. New home sales were at a seasonally adjusted annual rate of 368,000 in October, a 17.2 percent increase from one year ago (though sales were stagnant month-over-month). Additionally, existing home sales in October totaled 4.79 million units at a seasonally adjusted annual rate, which is 2.1 percent higher than in September and 10.9 percent greater than in October 2011.

While the single-family housing market finally appears to be on the mend, this does not automatically mean less demand for the multifamily sector. Jay Lybik, vice president for market research at Equity Residential, a Chicago-based REIT, tracks move-outs closely and has witnessed little to no change in the number of residents leaving to buy a home.

Data from the National Association of Realtors also shows the percent of sales accounted for by first-time home buyers is flat after spiking due to the Home Buyer Tax Credit, which expired in 2010. Single-family homes that are being purchased by investors for rent cater to different household types than investment-grade multifamily properties. Single-family rentals see households with children as their largest household type compared to investment-grade multifamily properties in which singles dominate, especially in urban locations.

And while all of the recent housing data releases have been quite promising, we must remind ourselves that all of these data points are recovering from a very low base.

Even though some housing figures are increasing at double-digit year-over-year rates, they are rebounding from historic lows. The housing market is not firing on all cylinders. Families are still burdened by underwater mortgages and heightened levels of foreclosures will continue for the foreseeable future. Yes, the market is certainly improving as of late. But then again, when coming out of a historic housing market meltdown, it does not take much to exhibit improvement.

Another reason for continued optimism for apartments in the face of an improving housing market is the increasing popularity of urban living. The post-war era in America saw a great migration out of cities and into the suburbs. Suburban expansion brought with it an explosion in demand for home ownership. The suburbs provided the parents of the baby boom generation relatively clean, quiet and crime-free towns to raise their kids. The proliferation of automobiles made suburban living a viable option.

However, recent trends suggest a reverse migration away from the suburbs back to the cities. There are several explanations for why the trend has reversed. Urban areas are no longer the hotbed for crime they once were. The surge in gasoline prices over the past decade has made automobiles a less popular mode of transportation, with many now favoring the public transportation provided in cities.

Urban areas also offer higher pay and wage growth. Following a decade or more of stagnant wages, that is a mighty strong incentive for people to move into or closer to cities. While this trend won’t push the apartment demand needle much higher in any one quarter, it is a powerful tailwind for the sector that should not be ignored.

There is no reason to discredit the housing market’s recovery. Recent improvements have been significant, even if the housing market is experiencing a case of lowered expectations given the relative pain endured in the past five years. However, the housing market poses no imminent threat to the multifamily sector.

In fact, it is notoriously difficult to trace a direct correlation between single-family home prices and demand for multifamily rentals. Fundamentals have more to do with supply and demand trends within each property type then any interaction between them. This is why the forthcoming increase in multifamily supply is the bigger worry for most. Still, we believe the multifamily sector will do just fine in the coming years despite both a wave of new supply and a revived housing market.

Brad Doremus is Senior Analyst, and Victor Calanog is head of research and economics, for New York-based research firm Reis.

Click here to view the original article written by Brad Doremus and Victor Calanog, Contributing Columnists for the National Real Estate Investor.

 

It’s a Good Time to Be a Landlord

soaring rentsIn cities all across America there is a housing boom taking place, but it is not single family homes, it is apartment buildings.

The reason… soaring rents.

During the recession, the housing market was one of the hardest-hit segments of the economy, but we have been seeing signs that housing is recovering. One of the best recovering sectors of the housing market has been multifamily homes. Construction of multifamily homes has recovered to two-thirds its pre-recession level, while single-family home construction is still at just one-third of its pre-recession level.

Apartment complexes are going up at their fastest rate since July 2008, especially in the South and West, were job markets are making the strongest comeback.

While a lot of people have been trying to take advantage of low interest rates to buy a new home, others are too worried about the economy to take on a new mortgage, and therefore there has been a boom in renting. Even with low interest rates, credit is not as easy to obtain as it was before the recession, so that too is working in the favor of apartment landlords.

In 2011, the national average for rents rose by 4.2%, which was followed up with an additional 3.6% increase so far this year.

The danger that we see is the possible over-building of new apartments, and the market being too saturated with new developments. This would backfire on the industry, and we would see rents start to fall again.

For apartment landlords, business is booming, and it should continue to do so, at least until credit becomes easier to obtain, and unemployment comes way down… neither or which will happen quickly.

Click here to view the original article written by Michael Fowlkes for Market Intelligence Center.com.

Transit-Oriented Apartments Offer Rent Perks for Landlords

tri-metStubbornly high gas prices and gridlocked freeways have compelled younger workers and retiring Baby Boomers to rethink the suburbs as a place to live and work. As the apartment pipeline again fills to pre-recession levels, recent construction data shows that cities and forward-thinking multifamily developers are getting the message.

A CoStar analysis of apartment construction data since 2000 shows a significant shift over the last couple of years toward new multifamily projects located within walking distance of rail and bus lines. It also found that landlords such apartments collect higher rents and have higher occupancies than non-transit-oriented properties. These communities are often part of larger, pedestrian friendly transit-oriented developments (TODs) featuring a mix of office, shopping and entertainment districts encouraged by municipal planners as a key strategy to lure businesses, residents and visitors to revitalize urban and outer-ring neighborhoods.

From 2000 to 2010, less than 20% of new apartment units built were within walking distance of mass transit stations and stops. But the new wave of multifamily development is very different. Of the units under construction today across the nation, about 42% are within a few minutes’ walk of trains and buses, according to data presented recently at CoStar’s Third Quarter 2012 Multifamily Review and Outlook.

CoStar analysts also found that developments near major transit fetch higher rent premiums and tend to have higher occupancies than non-TOD properties.

“Developers are smart. They are delivering [new apartments] into strength because these projects command higher rents,” said Erica Champion, senior real estate economist with CoStar Group’s Property & Portfolio Research, (PPR) division. “One reason landlords have been able to achieve higher rents with these properties is that renters can afford more [rent] when they don’t have the added expense of a car payment every month.”

In metros with mass transit available, effective rents per square foot for existing properties located outside of a realistic walking distance to transit are about $1.42 per square foot, while “transit walkable” properties average about $2.20 per square foot. New properties within walking distance of transit command an average of $2.70 per square foot — a striking 90% rent premium over non-transit-oriented properties.

Not all of the projects along transit routes are upscale apartment communities with luxury amenities such as dry cleaning and concierge service. Luis Mejia, director of research/multifamily, noted that the new apartment supply “comes in different flavors,” including properties with more affordable rents to accommodate the wave of younger households coming into the marketplace and other people with lower or moderate incomes. Mejia’s comment underscores the need for owners and developers to diversify their portfolios by building size, amenities and design to meet the requirements of renters who prefer to trade luxury for location, especially if that location gives them an attractive transit solution.

Even properties where renters have to get into their cars and drive to work or shop have high occupancies of 96% in today’s tight apartment market. However, occupancies at newer transit-proximate communities are even tighter at 97.2% occupancy, a 120-basis-point increase.

Public Transit Helps Create Economically Prosperous Communities

The strong appetite for units located near transit is likely to remain strong, Champion said, pointing out that use of public transit has been steadily increasing over the past six quarters, with use of light rail (4.3%) and heavy rail (2.5%) up the most over the past year, according to a September report by the American Public Transportation Association (APTA).

Nearly 60% of the trips taken on public transportation are work commutes, noted APTA President and CEO Michael Melaniphy.

“Public transportation not only enables people to get to work, but development around public transit helps to create an economically prosperous community,” Melaniphy said.

Not surprisingly, transit ridership is up in regions and local areas where jobs are increasing and the economy is rebounding, including the San Francisco Bay area, Los Angeles, Pittsburgh, Louisville, Salt Lake City, Denver, Boston, Chicago and Phoenix, Melaniphy said.

In those markets and others around the U.S., TOD projects are finding a warmer reception from state and local governments and planning agencies than apartment projects received in past economic cycles.

In the Boston metro area, for example, a state-approved incentive program to encourage “smart-growth housing” projects by paying communities to set aside land passed by the state of Massachusetts in 2004.

While it took time for initial construction to begin due to the recession, initial construction has started as of this year in more than half of the 33 smart growth “zoning districts” approved by the state, according to the Greater Boston Housing Report Card, released by the Dukakis Center for Urban and Regional Policy at Northeastern University. Altogether, over 1,200 housing units have been built with another 700 unit under construction or soon to be under way under previously issued permits.

Studies in the U.S. and Europe support the TOD investment premium findings. Great Britain’s Network Rail organization found in a report called “The Value of Station Investment” that among other economic benefits, transit stations at Manchester Piccadilly and Sheffield created a positive climate for investment for office space as well.

At Manchester, new and renovated offices are seeing rents increase by nearly $16 million annually, and values in the area are rising by 33%. Values near Sheffield Station rose by 65% between 2003 and 2008 near improved stations — three times the appreciation of the Sheffield market as a whole. Overall, redeveloped urban transit stations can create value appreciation of 30% or more compared to those located elsewhere, according to the report.

According to a study on the impact of TODs in West Cook County, IL, by the Center For Neighborhood Technology (CNT), station areas where residents have low transportation costs and high buying power are most likely to support near-term TOD investment.

Certain station areas within the county have competitive advantages and could attract a greater variety of developments and promote greater mixing of land uses.

For example, while Rosemont, IL, has very low residential density, its abundant businesses and well-utilized transit station make for relatively low transportation costs for existing households. Developing more housing and retail within walking distance of transit would allow Rosemont to diversify and expand its sources of tax revenues, moving from a successful employment center to a more vibrant, mixed-use area in which people can easily get around without a car, according to the CNT study.

Click here to view the original article written by Randyl Drummer for CoStar.com.

Apartment Rentals a ‘Landlord’s Market’ in 2013

2013WASHINGTON (MarketWatch) — Vacancy rates for apartment rentals are expected to remain low enough next year to maintain a “landlord’s market” and increasing rents, according to a forecast released Monday by the National Association of Realtors, a trade association.

Looking at multifamily housing, NAR expects a vacancy rate of 4% in the fourth quarter of this year to tick down to 3.9% in the fourth quarter of 2013. Rates less than 5% are considered a landlord’s market, according to NAR.

On average, apartment rent is expected to rise 4.6% in 2013 after a gain of 4.1% this year, according to NAR. Other types of commercial real estate, such as office, industrial and retail, are also expected to see lower vacancy rates next year.

However, multifamily housing in the apartment rental market is a standout due to particularly tight availability and rent increases that far outpace inflation, according to NAR. Metro areas with the lowest multifamily vacancy rates are Portland, Ore., with a rate of 2.1%, New York, at 2.2%, and Minneapolis, at 2.3%, according to NAR.

Click here to view the original article written by Ruth Mantell for The Wall Street Journal’s Market Pulse.

Apartment Rents Continue to Rise

rent increaseThe average rent for an American apartment has increased by a very healthy 4.8 percent in the third quarter from a year ago, a report from RealFacts/Meyers, a real estate information service released late last week found.

Anyone looking to rent an apartment in one of the United States’ 28 largest metropolitan areas has needed to put aside at least $1,000 a month in all three quarters of 2012, the survey found. The average rent for the third quarter was $1,042, up about $12 per month from the second quarter.

The vacancy rate is dropping slightly and is now 6.4 percent.

The reasons for the increase in rents is based on supply-and-demand and affected by the economy coming from two diverse directions. The marginally better job market means younger people who have been sharing apartments, or living with family members, are now looking for places of their own.

On the other side of the spectrum, there are still a host of economic uncertainties out there. That means people who are considering home ownership are moving slowly and are probably staying in rental units longer than they’d like. Either way, it means apartments are desirable commodities and landlords can charge more for them.

RealFacts/Meyers found that rents are increasing in every major metro in the country except Las Vegas, where they’re declining, and in Boston, where rents are flat.

Why Your Renters Will or Wont Renew

 

apartment leaseBelieve it or not, tenants care a little less about rental rates and a bit more about property management in 2012.

Over the last year, there has been a slight shift in what weighs more heavily into a renewal decision for multifamily tenants, according to the Q3 2012 Multifamily Industry Trends survey conducted by San Francisco-based research firm Kingsley Associates.

For renters who say they are “unlikely” to renew—the ones who have already been rubbed the wrong way—the top gripe was being pushed too far on rental rates, with 32 percent citing that as the deciding factor. But that figure is down 11 percent from last year. The top factors gaining importance from Q3 2011 to Q3 2102 were community management, up from 25 to 27 percent, community appearance, up from 11 to 15 percent, and location, up from 16 to 18 percent.

Perhaps the most interesting finding was that while fewer respondents cared about rental rates this year, more cared about pet policies, overtaking building upkeep in importance.

The top reason for respondents who identified as “likely” to renew? It’s all about the location. Tenants cited property location as the No. 1 factor when decided whether or not to renew with a majority 59 percent saying it was the most critical factor in resigning a lease. But that figure is down from 74 percent in 2011.

Among the other major changes in renewal behavior this year were the rise in importance of community management and pet policy, up to 42 percent and 18 percent, respectively. One huge drop in importance was in community quality, down from 37 percent in the third quarter of 2011 to 24 percent in 2012.

So it sounds like as long as you are located in a prime spot, take care of resident’s needs, and let them have their dogs, renters are happy to accept less-than-perfect communities with rising rental rates.

Click here to view the original article written by Derek Mearns for Multifamily Executive.