The Coming Rental Housing Wave

I have been forecasting a “new golden age for multifamily” for some time.  My opinion: six months or a year from now will be a great time to get in…but not as good as today.  Prices will rise and “great yields” will turn into “very good” yields.  Act now by calling Rick Bean at 503.577.1034 or email: rick@rosecitycre.com.

 

 

“It’s an exciting time to be in this growing sector where it is projected that $1 trillion in capital and 10 million additional apartment units are needed in the next 10 years as more individuals turn to apartment living,” said Freddie Mac Multifamily Senior Vice President David Brickman. 

Renters now make up more than 40 million households – about one-third of total U.S. households, according to Brickman. For every 1% that the current homeownership level of 66% decreases, one million individuals become renters. 

The changing demographics also show a significant increase in immigrants, 20-34 year olds, and baby boomers entering the rental market. 

“The bottom line is that the multifamily market is poised for growth due to strong demand, healthy fundamentals, and limited supply,” Brickman said. “These trends have renewed interest in the sector and investors are returning as evidenced by an increase in acquisition and refinancing activity.” 

Another 1.4 Million Renters This Year Alone

Through the 12 months ending mid-2011, the Census Bureau reported a net increase of 1.4 million households that moved into rental housing, a 4% rise in the number of tenant households in just one year. 

The U.S. homeownership rate has fallen about 1.5% over the past year (from 66.9% to 65.9% during the second quarter of 2011) with owner rates falling by 4.4% (to 21.9%) for those under 25 years of age and by 7% (to 34.7%) for those aged 25 to 29 years. 

Apartment rents, which had been flat to falling in many projects during the 2008-2009 recession, have begun to rise, albeit slowly, Freddie Mac reported. 

New construction starts of apartments in buildings with at least 20 dwellings have picked up this year and in the second quarter were the highest since the end of 2008. 

“New construction starts are slowly picking up and multifamily lending appears to be rising as well with this year’s origination volume stronger than 2010′s,” said Frank Nothaft, Freddie Mac, vice president and chief economist. “In part, the rise in originations is related to the low-level of mortgage rates, improving apartment-sector economics, and the return of traditional lenders that had curtailed activity during the recession.” 

Apartment Development Ramps Up as Demand Swells

After a surprising delay, the increased demand for rental housing has finally led to a considerable uptick in multifamily construction, the National Multi Housing Council (NMHC) reported in its latest Quarterly Survey of Apartment Market Conditions. 

The pace of development activity has increased in most markets. Two-thirds (67%) of respondents noted considerable activity, either in the planning stage or actual new construction. 

In particular, 20% said developers are breaking ground on new projects at a rapid clip. The other 47% reported an increase in pre-construction activities-acquiring land, lining up financing, getting building permits-but not much actual construction yet. 

Even with this increased activity, more than half (54%) think new development remains considerably below demand. 

“Powerful demographic trends, along with changing attitudes about homeownership and tighter mortgage underwriting, continue to drive a shift toward renting, which is fueling a ramp up in new construction,” noted NMHC chief economist Mark Obrinsky. “While some survey respondents expressed concern over sporadic overbuilding, others noted that the lack of construction financing may prevent some developments from actually breaking ground.” 

Rents, Vacancies Benefiting from New Demand

Preliminary third-party data for the third quarter of 2011 suggest that the vacancy rate for institutional investment-type apartment properties has fallen and asking rents have now likely risen for six consecutive quarters, according to Fannie Mae. 

Vacancy levels are firmly back to historical norms at an estimated 6.5% for the third quarter of 2011. Asking rents also likely rose again in the third quarter of 2011 by 1% quarter-over-quarter. It appears that full-year 2011 national average asking rent growth remains robust and on track to reach 4%, with effective rents perhaps reaching 5%, or even 6% annualized growth, Fannie Mae said. 

While the strength of declining vacancy levels and increasing rental rates will vary by metro area, on a national basis the multifamily sector should continue to see steady improvement for the remainder of the year, Fannie Mae said. It expects average asking rents to experience an annualized increase of 4% and the vacancy rate to stay fairly stable, perhaps declining to 6.25% by the end of the year. 

States with Opportunities

CoStar Group senior real estate economist Erica Champion has been tracking the changing housing attitudes during and following the Great Recession. 

“For those of us with a special interest in the multifamily sector, we are chomping at the bit to find conclusive answers to questions that have been plaguing us since the collapse in the housing market,” Champion said. “Has apartment demand really been that strong? Yes. Are there really that many more people renting apartments? Yes.” 

With the newest U.S. Census data issued this year, Champion has found some answers. 

” ‘Robust’ is definitely the word for the rise in rental demand that took place over the decade from 2000 to 2010. In line with the drop-off in homeownership that started in 2006, 4.5 out of every 10 households added during the first decade of the new millennium are renters. This is compared to an average rental propensity of 34% in 2000,” she said. 

The trend has not been evenly apparent from state to state, she said. 

“Of the states that added renter households at a faster rate than the national average, some are not a surprise. California and Nevada have been poster children of the housing bust and they remain top-ranking states in foreclosure activity, with rates twice the national average. Investors and developers that have been in love with North Carolina and Oregon can congratulate themselves for jumping on the right bandwagon,” Champion said. 

“The other states are surprises because they are not necessarily the top-of-mind locations for apartment development or investment,” Champion added. “Developers and investors may have overlooked some areas with promising demand fundamentals. States such as Ohio, West Virginia, Pennsylvania, and Alabama saw enormous gains in the number of renters – more than six of every 10 households added over the decade were renters. Kentucky, Kansas, Indiana, Missouri, and Oklahoma adding more renters than the national average are also surprises. And there is no evidence to suggest that this boom is driven primarily by the housing bust. The foreclosure rate in West Virginia, Pennsylvania, Alabama, and Kentucky remains one-third the national rate. The rest are on par with or below the U.S. average,” she said. 

“With one in every two new households renting their homes, these surprise states may present an opportunity worth pursuing to build in a hidden gem location and, in some, to exercise a first-mover advantage,” Champion state. 

Unmet Demand for Middle Aged

Where Champion sees geographic opportunities, CoStar Group’s senior real estate strategist Michael Cohen sees opportunities in an overlooked group. 

Few concepts are tossed around more frequently at apartment conferences than the fact that younger households have the greatest propensity to rent, Cohen said. 

However, while true, “researchers (and investors) who focus exclusively on the potential impact of the Echo Boomers, are missing a substantial piece of the overall apartment demand story,” Cohen said. “The total number of middle-aged households in the U.S. – 35 to 64 years old – outnumbers households under 35 years old by three to one. In turn, 20 million, or half the total number of renter households in the U.S., can be found in this middle-aged demographic.” 

“Interestingly, as we begin a new wave of apartment construction as evidenced by a steady increase in multifamily starts, I wonder whether developers truly understand the contours of their renter base,” Cohen said. “After all, is it the 22-year-old fresh out of college at the leasing office inquiring about stainless-steel appliances and granite countertops? Quite the contrary: more likely than not (well, at least 50% of the time), it’s a middle-aged household.”

Following the passage of Measure 5, Oregon State transferred its property tax appeals from the Dept. of Revenue to The Courts.  A whole new system had to be created including rules, laws, procedures and the appeal process itself.  The Chief Hearings Officer for the State of Oregon, Scott Phinney, was one of the co-creators of the Magistrate Court and much of the current property tax appeal system.  Since then Mr. Phinney has spent 2 decades in private practice expanding his sphere of excellence to include property tax appeals in Oregon, Washington and California.  He has worked on successful property tax appeals on single assets and multi-billion dollar portfolios for a “Who’s Who of Big Business”:

• US Bank
• FDIC
• Hilton Hotels
• Marriott
• Rite Aid
• Met Life

Mr. Phinney’s talk will cover the broad strokes of the Oregon Property Tax Appeals system; I will use CCIM type techniques to quantify the potential short and long term values of appeals.  We’ll also show how real estate and accounting pros can promote appeals as a client development tactic.  We will also dispel misconceptions and bust myths about Oregon Property Tax appeals:

• “It’s not possible to win a property tax appeal in Oregon” (Wrong.)
• “You have to get the Market Value down to the Assessed Value to earn a compression refund.”  (Wrong.)
• “You just can’t win apartment appeals.” (Wrong.)
• “There is no system to appeal personal property assessments. (Wrong.)
• “I have to pay lots of money upfront to appeal my property taxes. (Wrong.)

Time permitting Scott will also talk about the most frequently overlooked property tax break that is missed by over 80% of the qualifying projects.  In one case Scott found overpayments of $506,000 on a single project.

Please contact Rick M. Bean at 503.577.1034 or rick@primeptn.com for pricing and details.

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.

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.

Hats off to Mike Sampson and Pam Edwards, First American Title’s crack marketing group from the Portland Eastside Team.  They (and their counterparts from FATCO’s other area branches) are hosting a Certified Distressed Property Expert (CDPE) Mastermind Workshop Thursday, October 22nd.    In addition to examining the view from the Escrow Officer’s Desk, they have arranged for Roy Rogers, CPA to discuss the Seller’s Tax implications.   They are also providing introductions to Umpqua Bank’s Loss Mitigators who will be in attendance.  This is hard to beat: a high quality event you would gladly pay for…offered free by the good folks at First American.

Date: Thursday, October 22, 2009 from 9:30 – 11:30 am.

Location: FATCO; 222 SW Columbia, 4th Floor, Portland, OR 97201

Seating: Limited To 80.

RSVP: Linda@lindaeaton.com

To attend a great training, The Distressed Property Insider Report suggest you contact your FATCO marketing representative for prerequisites and details imediately!  For a great deal on a distressed property use that same urgency and contact us at rick@rosecitycre.com, or rpoe@rpoe.com.