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.

Making a difference

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.

The amount of distressed commercial real estate assets on the books of the nation’s banks and thrifts approached $60 billion as of year-end 2009. That is up from $52 billion just three months earlier, a 15% increase.

The $59.9 billion includes loans on multifamily and nonresidential income producing-properties that were 90 or more days past due, or in nonaccrual or foreclosure status.

The year-end numbers are contained in the Federal Insurance Deposit Corporation’s latest Quarterly Banking Profile, released this week. And they confirm that commercial real estate troubles are eroding the balance sheets of the nation’s banks.

As the CRE distress numbers went up, so did the number of troubled institutions on the FDIC’s “Problem List.” At the end of December, there were 702 insured institutions on the Problem List, up from 552 on Sept. 30. In addition, the total assets of “problem” institutions increased during the quarter from $345.9 billion to $402.8 billion. Forty-five institutions failed during the fourth quarter, bringing the total number of failures for the year to 140, the highest annual total since 1992.

The FDIC does not release the identity of the banks on its Problem List.

Loans on nonresidential income-producing properties that had been foreclosed on increased from $5.84 billion to $7.05 billion – a 21% increase.

Loans on multifamily properties that had been foreclosed on increased from $1.44 billion to $1.75 billion – a 22% increase.

Loans on nonresidential income-producing properties that were 90 days or more past due or were in nonaccrual status increased from $37.05 billion to $41.74 billion – a 13% increase.

Loans on multifamily properties that were 90 days or more past due or were in nonaccrual status increased from $7.75 billion to $9.39 billion – a 21% increase.

Reserves for loan and lease losses increased by only $7 billion (3.2%) in the fourth quarter, as institutions added $8.1 billion more in loss provisions to their reserves than they took out in net charge-offs.

Total net charge-offs totaled $53 billion, an increase of $14.4 billion (37.2%) over the same period in 2008. The annualized net charge-off rate rose to 2.89%, up from 1.95% a year earlier and 2.72% in the third quarter of 2009. This is the highest quarterly net charge-off rate reported by the industry in the 26 years for which quarterly data is available. Banks charged off 0.77% of their loans on nonresidential income-producing properties, up from 0.62% in the previous quarter. Banks charged off 1.11% of their multifamily loans, up from 0.92% in the previous quarter. This was the sixth increase in as many quarters in both categories.

For related CoStar coverage, see “http://www.costar.com/News/Article.aspx?id=6A579770FF5EC1CFD05D7036BE366D25”

The average coverage ratio of reserves to noncurrent loans and leases fell from 60.1% to 58.1%, ending the year at the lowest level since midyear 1991. In contrast, the industry’s ratio of reserves to total loans and leases rose from 2.97% to 3.12% during the quarter, and is now at its highest level since the creation of the FDIC.

Not surprisingly, the total amount of commercial real estate loans on bank books was flat. Banks posted only $2 billion more in CRE loans at $1.092 trillion. The total amount of multifamily loans decreased slightly from $216 million to $211 million.

Despite the troubles in their CRE portfolios, commercial banks and savings institutions reported an aggregate profit of $914 million in the fourth quarter compared to $37.8 billion net loss a year earlier. More than half of all institutions (50.3%) reported year-over-year improvements in their quarterly net income.

Almost one-third of all institutions (32.7%) reported net losses for the quarter, compared to 34.6% a year earlier. For the full year, banks reported net income totaling $12.5 billion – up from $4.5 billion in 2008.

Do you want to increase your investment stake?  Whether your Want Vancouver, WA multifamily, or Lake Oswego Apartments, call Rose City Commercial Real Estate at 503.577.1034

Taxes, Taxes, Taxes

The last couple of years have taken a toll on investment properties. With vacancy rates climbing and weakening Cap Rates, some properties have lost 30% or more of their value.  Regrettably, property taxes on commercial properties have not been adjusted to reflect this new value. As such, already strapped owners are paying an even higher percentage of their revenues to property taxes.

The rule I have always given my teams is don’t present me with a problem…unless you also have a solution.  Having identified a problem…here’s a great solution: Prime Property Tax Negotiation, LLC.  Prime PTN was formed to be an advocate for property owners that have been over-taxed. They will evaluate your taxes at no charge to you and fight for a lower assessment on your part.  There are no up-front fees.  Here’s the very best part: There’s no cost to you unless they are successful. 

Contesting assessments that overstate a property’s value is an extremely important component of wealth management.  I worked on a multifamily project in Phoenix, AZ that had an assessment that inflated the assessed value well over what it was really worth. By contesting the assessed value we reduced taxes and created over $150,000 in additional profits in one year.

How much will you benefit? To discuss potential savings call 503.336.6382 and ask for information about Prime Property Tax Negotiation, LLC.

Grace Hill does it again! 

One of the challenges of multifamily management is creating knowledgeable and professional employees.  Each month Grace Hill offers free training as a partial solution to the problem.  They also offer additional training on a variety of multifamily topics at affordable prices.  This month Kate Good & Jennifer Stamp will be presenting information on marketing, advertising and promotions.  I feel that apartment owners should change their “I can’t afford training” refrain to: “I can’t afford not to train!”  Why would anyone let someone be in charge of a multimillion dollar asset and deny them the resources to perform their job with excellence?

DATE/TIME: Wednesday, 6/17/09 @ 4pm ET, 3pm CT, 2pm MT, 1pm PT

SESSION DESCRIPTION: No need to rack your brain over advertising and promotions any longer.  Sign up for this exceptional chat experience and let these marketing gurus lead the way to unique and original campaigns that will certainly bring customers running through your doors.  Flex your marketing muscles and RSVP now!

COST: Spherexx.com and Video Rental Services have made this chat available to you at no cost.  Thanks for your sponsorship!

RSVP: Visit them at www.gracehill.com and look for the details of this event on their home page.  Click the RSVP link to sign up and receive Chat Event Instructions.  Then, log into Grace Hill about 10 minutes prior to the event and click on the Chat Room link, under the chat description, to be delivered to the Chat Room.  

*Please note that space is limited to 350 attendees in our chat room.  Be sure to login to the chat room 10–15 minutes prior to the event.

Rose City Commercial Real Estate supports all efforts to improve the effectiveness of multifamily pros.  If you would like to work with a pro, contact Rick M. Bean at 503.577.1034 or rick@rosecitycre.com

The future of the residential market is not clear in my crystal ball…but it takes no wizardry to assess the current situation:  There’s a lot of good people hurting right now.  A few of the folks that are upside down have taken foolish risks, but there are many more that  may even have a legacy of success, of winning and good luck…but whose joss just ran out.  Whether they got there for good reasons or bad, the many who are down on their luck are easy prey for charlatans and thieves.   There are real and effective solutions ranging from working out a loan accommodation, to creating a short sale.  In a short sale a homeowner’s bank permits the house to go for less than is owed.  This can result in a much, smaller credit rating hit than bankruptcy or just walking away from the home.  But it needs to be handled by a pro.

Enter Donna

Folks that have had a rough go of it deserve to be helped by someone that is not only compassionate, competent, and trustworthy, but by someone who will be their passionate advocate.  My friend Donna exemplifies these traits.  This specialty is well outside of the capabilities of most homeowners…it also exceeds the training and expertise of most real estate agents.  Donna’s Accomodation success percentage is 4 times higher than the average.  (Her win/win percentage is 100%.)

Perhaps most telling about her character, Donna was the CEO and teamleader of a branch of the third largest real estate brokerage in the US.  She left that position to be of service to those in need.

Who can you help?

1. Friends, family and acquaintances who need an accommodation workout to save their credit.
2. Someone who needs a short sale expert to evaluate options.
3. Those desiring a rapid turnaround on selling their home.
4. First time homebuyers and investors looking for value priced homes.

Be kind to those you care about and forward this information.  If I was in need…I’d want Donna fighting for my family’s future.  Wouldn’t you?

Take action today:  503.577.1034 or:  rick@rosecitycre.com.