While it may be a scary time to be in the stock market these days, that doesn’t mean that all avenues of equity expansion have collapsed.  Commercial real estate in general and apartment investing in particular is a clear alternative to stocks. And like the market you can invest your 401K to try to increase your retirement.

Two stock market related articles caught my eye this morning.  One entitled: Investor Uncertainty At 6-Year High: Survey has details of a survey taken by the American Association of Individual Investors.  The percentage of stock market pros surveyed expecting the market to remain flat for the next 6-months is the highest that it has been in 6 years.  Ouch! Short term solutions to our domestic malaise and the European dept problems just don’t seem to exist. And this has the market on edge.

Another article from Aaron Task of The Daily Ticker was even more dire than the first: “Very Scary”: The World Won’t End in 2012, But Might Feel Like It’s About To.  Follow the link to the article and a video if you’re feeling cheery and want to change your mood.  Perhaps even scarier than the short-term fundamentals of the stock market is the overall lack of stability.

Daily changes in the Dow are much greater than they used to be.  On May 6th of 2010 the DJIA lost a $1,000,000,000,000 in a few minutes. 1,000 points. Starting at 2:45 PM the bottom fell out and within a few minutes a trillion dollars in value was gone.  Shortly thereafter the market went back up again and people seemed to forget about it almost immediately.  For thrill seekers that like stock markets and roller coasters:  Good luck to you!  I am counseling potential clients that real estate offers a more stable placement for equity that has never gone down a trillion dollars in value in a single hour.

Contrast the doom and gloom with the apartment market.  Over the past few years apartment construction both locally and national has come to a near standstill.  Rents are beginning to rise, vacancy rates are falling…I expect to see raising Net Operating Incomes and falling Cap Rates for the foreseeable future.  Portland has become a great market for institutional investors, and other ownership segments are following their lead.  Please contact me to discuss equity expansion at: 503.577.1034 or rick@rosecitycre.com.

Anyone who reads my blog assumes that I have a bias for multifamily investments.  I just think they’re the safest niche of commercial real estate…so to assume that would be correct.  But my greatest bias is toward taking considered ACTION.  So many investors miss the best part of the market by aiming, aiming and aiming some more before pulling the trigger.

My Dad taught me a valuable lesson when I was a youngster.  He asked me if I had mowed the lawn as asked.  I replied: “No…but I’m thinking about it.”  He said:  “Well now…thinking about something is a step, but not a very big one.  And now we’re talking about it…an even further step, but still not very big.  To sink a long putt you have to take your time, read the green and envision your success.  But at some point you have to actually strike the ball.  Planning improves success, but without action planning is useless.”  I went out and mowed the lawn right away.   I’d like to tell you that I learned the lesson my father offered me immediately, but like many 14 year old kids it took the message a few weeks to sink in.  Of course, now the message is clear: ” Words and thoughts take a back seat to action.”

“The best time to make an offer on a building is while the firemen are  still moping up.  After its rebuilt the price will go way up.  The multifamily market has taken some hits over the past few years…but I feel now is a good to start a portfiolio…or to expand one. Take action now…call Rick Bean at 503.577.1034 or email me at rick@rosecitycre.com.

Years ago a bright and energetic fellow as running around Eugene with a waffle iron in his trunk trying to get folks interested in a new type of shoe that was designed for running.  The waffle pattern was purported to offer superior traction and performance.  Someone I love and admire was made the same offer given to so many around town:  “Give me $20,000 and I’ll sell you 10% of my new shoe company.”  Today that slice of Nike is worth considerably more than the original offering price.  Many thought about it, few acted.

My question to those that are thinking, talking, and considering investing in apartments is this:  “Will your story 10 years from now be that you thought about investing in multifamily?”  To paraphrase my father’s wisdom: “You are in no danger of making a profit on the good investments you don’t make.”

Take action! Contact Rick M. Bean at Rose City Commercial Real Estate today: 503.577.1034 or rick@rosecitycre.com.

 

Failure to review each property’s profit profile annually is roughly the same as burning money.  There are a number of ways to increase the profitability of a single commercial asset or portfolio.  Remodel, Repaint, Reposition, and Repurpose are obvious choices…that typically require significant equity and allocation of resources to accomplish.  Revamp the rent schedule is another…although being too aggressive can actually increase vacancies and turnover costs.  In this post we’ll cover low and no cost solutions, such as lowering property tax, utility and insurance costs, plus enhancing revenue through captive cable programs.

REMINDER: In a 6 Cap rate market every dollar in reduction of expenses (tends) to increase the value of the asset by $16.66, in addition to the increasing NOI.  Permanently shave $15,000 off your operating expenses and you’ll increase the cash flow to the owner by $1,250 per month and increase the value at time of sale by $250,000.

PROPERTY TAXES

Property taxes are the second largest single expense item for many multi family assets.  The truth is that the assessor gets it right much of the time.  But if someone has to pay more than their fair share of taxes it wont be my client.  I became a believer in property tax appeals working on profitability improvement projects in Las Vegas, NV and Tempe, AZ. 

Las Vegas, NV:  The REIT I worked for had approximately 200 total 3 and 4 bedroom homes in Clarke County, NV that they purchased from a builder as a bulk sale.  They were on only one tax lot so it was pretty obvious that they were being operated as a multifamily asset.  Part of what we were working on to create additional value was getting them individually platted so we could sell them as condos.  Shortly after the plat was recorded tax bills were delivered and they went up collectively $200,000.   The reason I tell you this is that I called the Clarke County Assessor’s office and told them that I thought the property should be taxed as it was being operated…as an apartment.  I followed up with a formal letter…they agreed and changed back to apartment values, saving the firm $200k per year. 

Tempe, AZ:  When the market started cooling in Phoenix we felt one of our assets was grossly over valued by the Maricopa County Appraiser.  We worked with a vendor and reduced the assessed value by $13,000,000.  That raised the cashflow significantly due to adding $150,000 to NOI.  At the prevailing Cap at that time this would have created a $3,000,000 increase in sales price if the property was to be marketed.

Full Disclosure:  I saw how important property tax appeals were that it inspired me to found a company that does just that.  Prime Property Tax Negotiation appeals property taxes on commercial assets in the US with a focus on OR, WA, and CA.  More information is available at: www.primeptn.com .  You can contact us at:  info@primeptn.com or 503.577.1034.

MULTIFAMILY INSURANCE

One of the best bargains in multifamily is insurance.  Coverage is far more affordable now than it was 5 years ago.  Price per door has actually dropped.  It’s also important to review your coverage.  You should have the higher of what your loan agreement requires, and replacement cost.  This is not a place to go cheap.  The three really good providers are usually well priced…I recommend using them instead of second or third tier vendors.  (If you want my opinions on the best companies and agents please contact me at 503.577.1034 or rick@rosecitycre.com.)  Second thing to remember if you have a portfolio of properties is that you may be able to improve your coverage and reduce your average per door cost of insurance by getting bids based on the portfolio rather than the individual properties.  I worked for a local investor on a portfolio approach and reduced his cost per unit, increased cash flow by $10,000 per month and increased the aggregate value at time of sale by $2.6 million dollars.

RUBS

Utility cost increases that are borne by the owner are a silent profit killer.  When Renters Utility Billing Service (RUBS) is used the landlord pays the utility and bills back to the tenant their portion.  The way to cut the water usage in half is to make the tenant pay for using it.  All of a sudden a toilet that flushes continuously will be reported, as will the under sink leak.  Billing amounts may be derived from sub-metering, or apportioning, and in some cases the landlord actually breaks even or makes a buck.  Be aware that some municipalities have laws regarding the methodology permitted.  This program is good from day one…and will help the landlord from absorbing future utility increases.

CAPTIVE CABLE REVENUE SHARING

A number of  cable signal providers want to shut out their competition.  To secure sole provider rights they offer revenue sharing programs to multifamily property owners.  Most of the ones I’ve checked into require 100 to 200 doors as a minimum.  this can be as a single asset or as a portfolio.  Typical contracts range from 4 to 8 years with an initial payment of $100 to $125 per door and additional quarterly payments totalling $400 over the life if the contract.  When the contract is up you can renew or change vendors.  (Note the numbers cited are for one example…other offers may be higher or lower.) This works out to be roughly $1oo per door per year additional revenue.

HOW MUCH MONEY ARE YOU BURNING?

Contact Rose City Commercial Real Estate for additional information on how to tune up the profitability of your multifamily investments, or to expand your portfolio: Rick Bean, rick@rosecitycre.com. Phone:  503.577.1034.

Investors continue to prefer U.S. apartment buildings over most commercial properties, even commercial office space, as total multifamily sales volume jumped nearly 80% in the second quarter over the same perioud last year.

Although still just a fraction of its mid-2007 peak, the nearly $15 billion in sales in the quarter brought total investment for the first half of 2011 to $24.5 billion, according to CoStar Group data.

The average per-unit price of apartment properties reached $88,500 in the quarter — the highest since the third quarter of 2008, said CoStar Global Strategist Michael Cohen during CoStar’s Mid-Year 2011 Multifamily Review & Forecast.

FREE:  Rose City Commercial Real Estate will give you a no cost opportunity to develop a long term investment plan customized to your goals.  Portland multi-family investments are poised for solid gains.  Contact Rick Bean now at: 503.577.1034 or rick@rosecitycre.com

Meanwhile, strong renter demand continues to push down apartment vacancy rates and nudge up rents. With capitalization rates for existing properties seeing strong compression in some high-flying markets, larger multifamily developers have responded by starting to ramp up their development pipelines with new projects.

Top coastal markets continued to dominate sales volume in the first half of 2011, including Washington, D.C with $2.6 billion; Los Angeles, $2.3 billion and the San Francisco Bay Area, $2.1 billion. In Atlanta, where investors have sought a large number of distressed properties, sales totaled $1.3 billion in the first six months. In Phoenix, a housing bust market where fundamentals have picked up markedly, also logged $1.3 billion in sales.

For the second quarter, the top five transaction markets were New York City, with $1.35 billion; D.C., $1.3 billion, Los Angeles, $1.21 billion; Atlanta, $764 million and San Francisco, $689 million. Those markets accounted for about 36% of all sales volume nationwide during the quarter, with CBDs and well-located submarkets seeing the lion’s share of deals.

Institutional investors were by far the most active net apartment buyers, with net purchases of $1.6 billion on total acquisitions of $3.9 billion. REITs, private equity and owner/users were also net buyers, while REITs were also net sellers in a few markets such as Portland, Phoenix, the San Francisco Bay Area and Atlanta.

Average apartment capitalization rates continued to fall in the second quarter to slightly below 7%, while weighed average cap rates, driven by the large high-priced transactions in prime markets, declined to 5.7%. However, cap rates for mid-size value-add and opportunity deals are also declining. Cap rates on smaller transactions remain in a holding pattern.

Top deals in the second quarter included the acquisition of a 25% interest in a 20-property foreclosed portfolio by The Related Cos. from Fannie Mae for about $300 million; TIAA-CREF’s acquisition of The Corner at 200 West 72nd St. in New York from Gotham Organization and Phillip International for $209 million, or 1.07 million per unit; and Canada Pension Plan Investment Board’s $84 million acquisition of a 44% interest in a 654-unit property in Seattle from New Tower Trust Co.

Supply Tight Now, But Construction Starts Are Rising

Job growth has been the traditional source of apartment demand in the past. But in this cycle much of the demand is coming from many former homeowners who have become renters since the beginning of the housing crisis. That trend, combined with a growing number of young people forming households, is driving competition for a diminishing supply of apartments, powering the improvement in apartment fundamental since 2009.

CoStar forecasts total supply additions of just 30,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average of apartment delivered between 2003 and 2008. However, multifamily construction starts are starting to tick up, with more than 70,000 starts in the first two quarters of 2011, suggesting a rise in completions in coming years, particularly in the 2013-2015 time period, Cohen said.

“It’s worth paying attention to the supply front,” Cohen said. “This is where I think the apartment market could be a victim of its own success. While we are forecasting below-average annual supply growth, we need to monitor the permitting data and the starts data.”

Vacancies, Rent Concessions Continue to Decline

Renter demand, while not at the outsized levels of 2010, remains very strong across the board, led by the fast-growing southern metros and the rebound in Detroit. Demand growth equaled about 66,000 units in the first half compared to the extraordinary increase of 105,000 units in the first six months of 2010, which was the strongest since 2005. However, the 45,000 units absorbed in the most recent quarter was more than the absorption of the two previous quarters combined, Cohen noted.

By Erika Schnitzer, Managing Editor

Portland, Ore.—Portland-Vancouver-Beaverton has the lowest apartment vacancy rate, 4 percent, among the top 75 U.S. MSAs, according to the U.S. Census Bureau’s latest report.

While the unemployment rate has declined, it’s still relatively high at 9.6 percent, according to the U.S. Bureau of Labor Statistics. But, as Greg Frick, partner at HFO Investment Real Estate, points out, “even when we had high unemployment, our vacancy was about 10 percent, so we didn’t fall that far. We’re not typically a boom-or-bust market; we’re really slow and steady.”

Some good news includes Intel’s commitment to invest in an existing plant in Hillsboro,

A perfect storm for profits: Last week we learned that Portland multifamily was the nation’s 3rd leading market for rent escalations; This week our fair city is celebrated for having the lowest vacancy rate in the nation.   Contact Rose City Commercial Real Estate immediately: rick@rosecitycre.com or 503.577.1034.

says Frick. And the market’s continued in-migration and urban growth are expected to help the market’s recovery.

In the multifamily arena, construction remains extremely limited. The market typically averages between 4,000 and 5,000 units per year, Frick tells MHN; in the last two years, about 750 units were permitted each year.

Meanwhile, concessions are burning off, and the market is experiencing between 5 percent and 10 percent rental growth. But, Frick adds, “we’re typically the lowest on the West Coast for rent numbers, so 5 percent in our market does not equate to the same dollar amount as some of the other markets.”

On the investment side of the market, Frick reports, “there’s been a lot of money chasing deals … [for the] Class A institutional stuff.” In-core Class A assets are trading at sub-5 cap rates, while suburban Class A deals have traded between 5 percent and 5.75 percent. Meanwhile, B and C asset values have held steady.

“We are seeing some B/C stuff trade, but it’s not at the fevered pitch you’re seeing in the Class A,” Frick tells MHN. “There’s institutional money chasing deals now, trying to get into this market because of the demographics and low vacancy.”

As far as the recovery, Frick points to the bond measures that are trying to get passed, and the resulting increase in taxes and utility charges, that could have a negative impact on the apartment market. “Those are a couple of expense items you don’t really have control over,” he notes. “Will we get enough rent growth to keep pace? How much will that be eroded from these added operational costs?”

While Portland’s livability factor poises it for a strong recovery, Frick notes, “we just need …[to] get some jobs in here and wage inflation so apartment owners can really capitalize on that increased demand.”