The highest average multifamily profits are expected in Portland, OR; Raleigh, NC; East Bay, CA and Austin Texas? So asserts Bendix Anderson in a recent article in National Real Estate Investor’s NREI-Online. Anderson says that Tier I markets such as New York City, Washington DC are expected to have the lowest average multifamily profits, while the aforementioned TIER II markets will shine brightest. He adds: “Markets that people gave up on are now markets that people are going back to,” quoting Walter Page, director of research for Property and Portfolio Research, a division of the CoStar Group. “In most primary markets the average price per sq.ft. is twice what it is secondary markets.”
Basic math is the reason for Portland’s high multifamily profits:
- Cities like Portland, OR have higher Cap Rates than Tier I Markets. A “no-brain-er”…when you are buying, a higher Cap Rate means that you pay less per dollar of NOI. NOI is the revenue generation engine…from which operational profits are derived . Paying less per unit of NOI is a very good thing. If that still doesn’t ring any bells, try: “Buy low…sell high.”
- Finance rates are roughly the same everywhere. You can still get sub 4.00% debt. (As of May 31, 2013, anyway.)
- Acquisition Cap Rates tend to be 100 to 200 basis points higher in Tier I Markets. If you buy multifamily assets in NYC or W-DC at 4.75% and finance at 3.85% you have a +90 basis point spread. (Great!) Buy in a Tier II Market such as Portland at a 6.50% Cap and finance at the same 3.85% and you have a whopping +265 basis point spread. (Much better!) A larger point spread between acquisition rate and finance rate also means its safer to borrow money, that there is less downside exposure.
I spent the first few years in this blog writing about great restaurants, nice people, investment basics and good vendors…but I didn’t tout our market. To do that would have been disingenuous to those I want to help. That’s because the commercial real estate investment fundamentals were horrible. I still like to acknowledge those that outperform their competitors, those that perform good acts. But things have definitely changed, and this is the time of action.
If you want to be a GENIUS in 5 years, make wise commercial real estate investments NOW.