I prefer to buy at the bottom of the market…how about you?

The time to buy multifamily assets is now…its a refrain that I’ve been offering for several months.  But there is a difference…now it makes sense for stock holders to move their equity into multifamily.  Rose City Commercial Real Estate can show you how to invest your IRA…and not create a taxable event!  Let me show you how by calling 503.577.1034 or contacting Rick Bean at: rick@rosecitycre.com.

The latest data shows Portland at a 3.5% average vacancy rate…yet multifamily building permits for the period  fell.  Why? The costs and risks of development are still high

If you want to be a genius in 5 years…make smart multifamily investments today.

relative to the returns available at the current revenue structure.   (Particularly when the costs and risks of building are compared to buying existing multifamily assets.) For those that have only been in the multifamily arena for a few years that may not mean much.  What it says to the others is that:

A.)  We are poised for significant increases in rents even without macroeconomic improvement.  Our population continues to grow, yet the market has not responded by starting more apartments.  If the economy does turnaround rents will really head up.

B.) There will be downward pressure on Cap Rates. This will raise asset prices. 

HOW I SAY IT:  “The next few years will be a golden age for Portland apartment owners.”

Below I have attached a great article from Investor’s Business Daily:

By JOE GOSE, FOR INVESTOR’S BUSINESS DAILY Posted 08/25/2011 03:51 PM ET

 Rising renter demand is filling apartment buildings around the U.S., in defiance of the economic malaise.

Vacancy rates are shrinking all over, in tight markets such as Minneapolis and loose ones like Phoenix.

It’s an unusual situation. Job creation typically drives apartment demand. But this time the tenant top-up is largely about a lack of new supply — in the face of paltry employment growth. Meanwhile, demographic trends and the single-family housing slump are creating tenants, says Hessam Nadji, a managing director at Marcus & Millichap Real Estate Investment Services.

 

“The demand for apartments is at levels that we haven’t seen since economic boom years like those in 1999 and 2000,” he said. “It is clearly decoupled from the economy.”

The property brokerage projects that asking rents will grow an average of 3.5% this year in the U.S.

After the Big Apple at just a 2.8% vacancy rate, the tightest areas are now Minneapolis, San Jose, Calif., and Portland, Ore., all under 4%.

Widespread Improvement

Some 3 million young adults age 24-34 that moved back in with family or roommates in the last five years are now moving into their own places as their employment prospects improve, Nadji says. Hiring has sputtered over recent quarters, but this age group captured 65% of the new jobs created in 2010.

Other factors are creating tenants too, Nadji notes: A double-dip in single-family home values has made house hunters wary of buying. Tougher mortgage qualification requirements deter purchases. And homeowners who lost houses to foreclosure have become renters.

Together, those trends helped to lower the U.S. average apartment vacancy rate to 5.9% at the end of the second quarter. That was a 1.9 percentage point improvement from a year earlier, as noted by Marcus & Millichap.

While bellwethers like New York and Boston are among markets with vacancies below average, Minneapolis, Milwaukee and other markets also beat the average, largely due to decent job creation and scant new construction. Minneapolis employers added 7,000 workers in the first half of 2011. They had let go 6,200 a year earlier.

Among very tight markets, Minneapolis and Portland vacancy rates fell 2.2 percentage points from a year ago in the second quarter.

Even markets that were battered by rampant speculative home and apartment construction in the last decade have seen rapid improvement. Vacancy in Las Vegas, for example, plunged to 8.1% at the end of June from 11.1% a year earlier.

Continuing weakness in the Las Vegas housing market contributed: One in every 99 homes in the metro received a foreclosure notice in July. But now the jobs picture is improving slightly. Employers are expected to hire 16,200 workers this year, which would mark the first year of job growth since 2007.

A glut of empty single-family homes reverting to rental houses in Sin City and other overbuilt markets could slow further occupancy gains, Nadji says. But he and other observers point out that single-family homes don’t appeal to most renters ages 24 to 35. Instead they want places that provide maintenance, amenities and services.

Terry Considine, CEO of Denver-based Apartment Investment and Management Co. (AIV), told analysts during the second-quarter earnings call in July that foreclosed homes and rental houses were “not really competitive with professionally managed apartments.”

A sign beckons renters near Tampa, Fla., where vacancy has fallen to 6.9%. AP View Enlarged Image

“They serve different market segments where customers have different interests and preferences,” said Considine, whose company owns or manages more than 600 multifamily properties in 38 states, Washington, D.C., and Puerto Rico.

Buying Splurge

Encouraged by improving fundamentals, investors are flocking to apartments. Some $21.6 billion in multifamily properties changed hands in the first half of 2011, more than double a year earlier, says Real Capital Analytics, which tracks sales of more than $5 million.

Capitalization rates slid to an average 6.4% in the second quarter from 6.6% in the first. They tell a property’s initial yield, falling as prices rise.

Sellers in major coastal markets are fetching prices that reflect cap rates of 5% or less, says Jeffrey Baker, executive managing director in the New York office of global brokerage Savills. That’s sending some institutional investors to secondary markets, where yields are higher.

It also is sparking new construction, which can ultimately generate higher yields of 6.5% to 7.5% for investors. Savills recently arranged equity financing for The Victor, a $140 million luxury apartment project in Boston that just broke ground. It’s the first big multifamily development in the city since the financial markets collapsed in 2008.

“There certainly will be some measured development that’s going to happen over the next couple of years,” Baker said.

Opportunities also exist for mom-and-pop investors in most markets among smaller properties, yet to appreciate at the same rate as top-tier assets, Nadji and Baker say.

While buyers typically need to do minor upgrades to justify rent increases in such properties, the reasons to pursue acquisitions have become more compelling, particularly with interest rates around 4.5% on a 10-year loan, Nadji adds.

“The turmoil in the stock market has made people think harder and more aggressively about buying apartments,” he said.

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If you would like to talk about transitioning your equity from a volatile stock market into the relative stability of multifamily investing please contact Rick Bean today at 503.577.1034 or rick@rosecitycre.com

The Portland multifamily market continues to improve…leading the way for all Oregon commercial real estate investments.  Whether you want to make your first acquisition or expand your portfolio, contact Rick Bean at Rose City Commercial Real Estate: 503.577.1034 or rick@rosecitycre.com.

We’ve summarized their reports below.

Credit Suisse: Follow the Money

After suffering through the credit crisis, commercial real estate macro indicators are beginning to show signs of improvement, according a paper from the Customized Funds Investment Group (CFIG) of Credit Suisse’s Asset Management division.

Entitled, “Commercial Real Estate: Has the Tide Turned?”authors Kelly Williams, head of CFIG, Nadim Barakat, CIO of CFIG, and Peter Braffman, a partner on the CFIG Real Estate team, discuss the sector’s uneven global recovery, and how the U.S. commercial real estate market may well provide the most compelling opportunities in the first phase of the recovery.

“We believe that the U.S. commercial real estate market will likely provide the most compelling opportunities in the first phase of the recovery,” the authors write.

This is a result of:

• Stabilizing debt markets and the re-emergence of commercial mortgage-backed securities (CMBS) issuance;
• Property demand improvements, as shown in vacancy and absorption trends;
• Favorable commercial property valuations;
• Macro-economic tailwinds; and
• Significant level of capital ready to be deployed for U.S. real estate.

“Many of the world’s largest investment firms, institutional investors and pension plans have been increasing allocations to this asset class. Starting in 2009 and throughout 2010, institutional capital poured into core and stabilized real estate in primary U.S. market regions in search of reliable, long-term yield,” the authors write. “Public pension plans, such as California Public Employees’ Retirement System (CalPERS), have been restructuring their real estate initiatives to include a greater allocation to core commercial property.”

“This investment activity has led to a meaningful recovery for these properties as yields re-approached pre-financial crisis levels,” the authors write. “The growing liquidity has also made possible the re-opening of the initial public offering market for real estate ventures.”

Of note, the authors point out that Archstone, one of the largest real estate firms focused on the development and management of multifamily (apartment) properties, has been exploring the possibility of a $5 billion IPO, which would be the largest real estate IPO in history.

Low interest rates in the U.S. have also been instrumental in containing the cost of capital for real estate investors and making property returns attractive in comparison to other asset classes, such as fixed-income instruments.

The authors say that investors may be able to take advantage of the changing real estate conditions in the U.S. by considering a number of specific strategies, including income-generating value-added commercial property, opportunistic distressed commercial property and certain other niche income-generating real estate such as senior housing, student housing, medical offices and self-storage.

Despite compelling opportunities, the paper also addresses the risks associated with the commercial real estate market and how investors should consider developing real estate investments in the context of their aggregate portfolio.

Maximus Advisors: 4 Years of Improving Multifamily Conditions Coming

As the U.S. economic recovery gathers sustained momentum and spending returns to pre-recession levels, fundamental shifts in consumer behavior are expected to have lasting effects on numerous real estate sectors, according to the latest national economic and property ratings report by real estate research and consulting firm Maximus Advisors.

“As we have previously predicted, the U.S. apartment market has been recovering at an astounding pace,” said Dr. Peter Muoio, senior principal of Maximus Advisors. “The sector will continue to benefit from the growing preference for renting over homeownership as well as rapid growth of the young adult population. We predict that vacancies will continue to decline while effective rents grow robustly during the next two years due to limited development of new multifamily properties during the recession.”

Key findings from the report include:

• The apartment market will continue to improve over the next four years as renting remains more attractive than homeownership and there is little in the pipeline in terms of new construction.

Just under 4,000 multifamily sales transactions were recorded in the quarter at a total volume of $9.4 billion, according to preliminary CoStar sales data, compared with $6.7 billion in first-quarter 2010 and just $3.76 billion in first-quarter 2009. Despite the heightened activity, sales were just 22% of their mid-2007

Please note that his article has a national scope in mind…Portland Multifamily properties are experiencing a vacancy rate half of the national average as we have a market that is surging.  To learn more about investing in Portland multifamily properties contact Rick Bean at Rose City Commercial Real Estate: rick@rosecitycre.com, or 503.577.1034.  This market promises to be hot for some time…but why not get in early?

market peak of $43 billion in the most recent quarter. Sales volumes declined about $6 billion from fourth-quarter 2010.

While leasing fundamentals are no longer improving at last year’s torrid pace, investor interest by all accounts remained sharp for quality apartment product. Renter demand for apartment units remained solid in the first quarter, as the supply of new units continued to dwindle and the national apartment vacancy rate fell to 7.4%, a decline of 100 basis points since late 2009.

Despite an uneven economic expansion, “fundamentally, the outlook for the economy remains one of recovery and growth, and CoStar remains optimistic about its prospects. That is good news for commercial real estate and good news for apartment demand,” said CoStar Real Estate Strategist Kevin White during the Washington, D.C.-based company’s recent First Quarter 2011 Multifamily Review & Outlook.

Investor appetite for newer institutional-grade product in high-barrier coastal markets is driving sales volume in recent quarters, unlike 2008 and 2009, when larger transactions were difficult to finance and the limited pool of mostly local investors opted for smaller properties in suburban locations, explained CoStar Senior Real Estate Strategist Michael Cohen, who co-presented the outlook with White.

REITs and private equity firms were the dominant net buyers of multifamily property in the first quarter. REITs purchased a total of $515 million in the quarter, with $130 million in net purchases after subtracting dispositions. Private equity player netted $117 million in sales, an amount expected rise into 2012. Institutions were the largest apartment sellers, disposing of a net $354 million in assets.

Washington, D.C. and Los Angeles logged the highest year-to-date sales volume at $900 million, followed by the San Francisco Bay Area ($600 million), Phoenix ($500 million) and Long Island ($400 million). The top five multifamily markets accounted for $3.3 billion, about 35% of the $9.4 billion in total sales volume. Collectively, those top markets saw a 15% year-over-year increase in the first quarter.

“Core investors are still very interested in paying up for stability and low volatility,” Cohen said. “Pricing has been strong in D.C., but it still took the top spot for multifamily investment dollars.”

Distressed transactions, including REO sales, deeds in lieu of foreclosure and properties with high vacancy and/or deferred maintenance costs, accounted for about 21% of all multifamily sales volume in the first quarter. While still quite high, the percentage of distressed deals declined 5% from the previous quarter, however, and CoStar expects distress levels to slowly drift down as fundamentals continue to improve.

In housing-exposed markets like Tucson, AZ, Fresno, CA, Jacksonville, Las Vegas and Atlanta, distressed trades exceeded 60% of all transactions. Supply constrained markets like Boston, Marin/Sonoma counties, CA; San Diego, Northern New Jersey, Portland, Washington, D.C. and San Jose, CA showed distressed levels of 20% or less.

OCCUPANCY, RENTS RISE EVEN AS ABSORPTION SLOWS

While the drop in the homeownership rate has led to higher absorption of apartments over the last five quarters, the pace has slowed from last year’s 167,000 units absorbed, which was the strongest level of demand since 2005. The last two quarters have seen demand of 19,000 and 23,000 units, respectively.

CoStar forecasts total supply additions of just 27,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average between 2003 and 2008. However, CoStar expects to see occupancy gains in 49 out of the 54 metros over the next three quarters, led by San Antonio, Houston, Raleigh, Salt Lake City, Orlando and Portland. Markets such as Richmond, VA, Norfolk, VA, Seattle, Cincinnati and St. Louis will see modest increases in vacancy.

The limited supply of Class A and B properties continues to generate the most demand, resulting in fewer rent concessions a strong effective rent growth in 2011.

Three of the five top markets for rent growth in 2011 are in the supply constrained San Francisco Bay Area, led San Francisco (7.3%) and San Jose (7%). The East Bay, Honolulu and Boston round out the top five, followed closely by Phoenix, Raleigh, Washington, Baltimore and Denver.

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

 Associated Estates is a self administered, self managed Real Estate Investment Trust that owns 13,192 multifamily units in 52 communities in 9 states.  Their CEO, Jefferey Friedman, was interviewed by Keat Foong, the Executive Editor of Multi Housing News. 

New Renters Will Outstrip the Supply of Apartments

The number of new renters will exceed the supply of apartments by as much as two times, according to the president and CEO of Associated Estates Realty Corp. Jeffrey Friedman.

In an interview with MHN, Friedman argued that demographic patterns in this and next decade dictate that there will be strong demand for apartments that will outstrip supply. 

Friedman explained that the homeownership rate is about 65 percent currently, and that the total number of households in the US is about 120 million. “If 35 percent of the population rents, we are talking about 40 million households that are renters,” he said.

According to the census bureau, there will be 15 million new households over the next 10 years, translating to about 1.5 million new households per year. If only 30 percent of these households rent, says Friedman, this will mean there will be 450,000 new rental households per year in the next 10 years. 

However, apartment starts have been hovering at around only 200,000 units from the supply standpoint. “We know there is no overbuilding,” says Friedman. If this pattern holds, “In fact, there will be half as many new apartments built as new renters coming into the market,” he says.

The difficulty for the apartment sector in the mid-2000s was the number of renters going into homeownership, says Friedman. “There is a tremendous number of young people coming into the market. If there is a high number of new households and the propensity to rent is high, what keeps them from renting is homeownership.”

Friedman argues that the level of homebuying will not likely return to the levels seen in the past few years. “In 2004 to 2006 was the worst time for us when everyone can obtain a home loan, because our customers can go out and buy a home. We will not see thing getting to that level again.” 

The “spoiler” now for the apartment industry, says Friedman, is unemployment. In 1980 to 1981, when unemployment reached 10.8 percent, occupancy was about 92.5 percent in the 49 largest rental markets, he says.

Friedman says with current unemployment levels, the industry is likely to be able to maintain an occupancy level of 92 to 95 percent, “but we won’t be able to raise rents as much,” he says.

Household formation, rather than job growth and wage increase, is the main driver of the apartment business.

For this reason, Friedman suggests, demand for apartments should not be as affected by the economic downturn than if job growth were the major engine of demand for apartments.

Contact Rick M. Bean today if you would more information about the uptick in multifamily investing:  Rick@rosecitycre.com or 503.577.1034.

Beautiful, Affordable Portland

One of the metrics to look at when picking an area for a long term investment is the affordability index.  And by that I don’t mean looking soley at how much the median income is in an area…I mean:

Average Rent/Median Household Income = Affordability Index.  (What portion of your pay goes to rent?)

It’s great that some investment counselors track Median Household Income (MHI), but without the context of average rent for that area we really don’t have a way to evaluate areas that have long-term rent expansion capability.  An obvious example is New York City.  Clearly the MHI is higher there, but so are average rents.  New York has an affordabilty Index of 57.2%.  That means that between half and two thirds of the household income goes for rent.  I suggest that while NYC has posted impressive rent gains for all property types, that the pace of those increase is likely to wane…how much more than 57% of your income could you afford to pay for rent?   Years ago I had an employee that considered himself to be a real tout, a master horse race handicapper.  Mark would always tell me:  “Rick, there are horses that run fast, and horses that run long…but aint no horse that runs fast and long.”

Highly Ranked Portland

With Average Rents at $825 and Median Household Incomes at $57,757, Portland’s Affordability Index is 16.8%.  That’s fifth in the nation.  Portland-Beaverton-Vancouver “Asking Rents” jumped an average of of 3.1% in the fourth quarter of last year compared to a year earlier.   Full disclosure:  Oklahoma City had the nations best ratio at 12.3%…but the catch is that if you move there …every morning you wake up in Oklahoma.

With room for long term rents to expand and a great area to live in, isn’t this a great time to invest in Portland area multifamily properties?

Details: The large unit is 1,208 Sq. Ft. 2 bedroom/1.1 bath home with a fireplace.  It rents for $795 per month.  the smaller 1 bedroom/1 bath unit has 650 Sq. Ft. and rents for $625/month.  Contact me at 503.577.1034 if this sounds attractive.  Or e-mail me at rick@rosecitycre.com.

I will be describing cash flowing commercial deals soon!