Alice Hua's Blog

Recent media headlines have been touting the creation of hundreds of thousands of jobs and rising gross domestic product (GDP), a so-called true sign of recovery. However, economist Peter Schiff points out that this rise in GDP can be primarily attributed to “increased spending financed by unprecedented borrowing” that is simply delaying the inevitable – that harder times must proceed before our economy can truly recover. Additionally, the bulk of the new jobs created last month were temporary jobs with the US Census. The stimulus packages, the bailouts, the Census jobs, the false pretense of “growth” are all very short-term fixes.

In spite of the media exaggeration of recovery and the potential for hyperinflation due to the artificially low interest rates, we can see a faint silver lining. The multifamily sector could benefit from a higher demand in the rental market as many people search for more affordable rental housing. Although property managers may need to increase efforts to advertise vacancies and offer incentives such as rent concessions, there is no shortage of people in the market for rental housing. Director of Research at Reis Victor Calanog even stated, “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.”

We strive to feature the best in investment news, and with the media focusing solely on GDP as an indicator of economic growth and the most renowned economists warning against government intervention, we encourage our readers to take the news with a grain of salt.

As the news headlines see an influx of Q1 2010 performance reports, we are greeted with a sense of improving numbers for the multifamily sector of commercial real estate. The OK CRE View article entitled “Q1 CRE Sales: Change in Attitude” shines light on a positive outlook for the rest of 2010 based on first quarter findings. Q1 2010 showed an increase in sales volume in all sectors of CRE, with multifamily seeing “the greatest spike in transaction volume.” The article interestingly points out, however, that these sales primarily consisted of core and not distressed properties. As potential buyers are incentivized to pursue quality assets and competition for these investment properties builds, cap rates are forced down, leading to higher prices and benefits to sellers. The drop in cap rate in apartment buildings was less dramatic, but this can be attributed to the fact that prices did not fluctuate as much despite the soft economy. This sector experienced the least drop in NOI, as occupancy level remained high thanks to an increased demand for cheaper rental housing.

Locally in Los Angeles County, there have been few distress sales. Even in the case of REO investment opportunities, Chase Bank, which holds most of the faulty multifamily debt, engages in several broker price opinions (BPOs) prior to selecting a broker to list the property at or even above market value in some cases. Recently, a 14 unit property in Van Nuys established a new price standard for properties in the submarket. The “REO” title stimulated activity, creating a bidding war of 22 offers as buyers scrambled to pursue the “distressed” asset. Furthermore, these REO properties are often sold as all-cash purchases, and still, the final price placed above the expected market value.

What does this all mean for investors? These Q1 results indicate a transition from the down-turning market and may begin to set the pace for an up-trending market. Now is the time to consider selling smaller 10-unit buildings and 1031-exchanging into a 20-unit building to take advantage of historically low metrics on cost per unit (CPU) and cost per square foot as well as the potential for pro-forma figures to grow as the economy improves. As the economy recovers and rents increase, pro-forma numbers will also rise. Investors can use these trends of historical rent growth in order to make calculated assumptions in pursuing investment opportunities. According to the article, Los Angeles stands as one of the top performing markets in Q1 2010. Use the market trend to your advantage.

We specialize in multifamily investments, and at a time when it feels like everyone laughs at you for working in commercial real estate, it is a comfort to read in the news that multifamily housing is the one of the highest-performing sectors. NREI Online just released a research article entitled "2010 Borrower Trends: All Is Quiet on The Lending Front." It is no surprise to hear that lenders are apprehensive when it comes to commercial real estate, especially given the current economic turmoil, but the article also brings optimistic news for the multifamily sector.

Our recovery is proceeding slowly but surely. At a time when real unemployment levels exceed those during the Great Depression and investors cannot afford to jump headlong into opportunities, the financing community has a positive outlook for apartment buildings. The article's survey yielded that "more than six out of 10 lenders (65%) say apartments offer the best investment opportunities." We cannot agree more. In Los Angeles especially, more and more people are looking to rent, filling the vacancies in multifamily housing. Additionally, landlords have come to realize the need to lower their asking rents to more closely reflect affordable effective rents, the primary appealing factor to the tenants in this economy. Investors in this sector also have financing support from Fannie and Freddie; in fact, according to CoStar.com, Freddie Mac just announced that it will be "partnering with experienced multifamily players to help bridge the capital gap for borrowers who need to finance or refinance overleveraged multifamily properties whose value has declined." Prospects are clearly looking up for the multifamily sector.

Sources:
2010 Borrower Trends: All Is Quiet on The Lending Front
Real Money: Freddie Mac To Accept Mezz Financing on Multifamily Deals 

 

The headlines are filled with mixed messages of optimism tempered by the recognition that a difficult path lies ahead. Is the commercial real estate market bottoming out? Should Congress be concerned by commercial real estate? What about financing for commercial real estate investments? And the implications of Stuyvesant Town fiasco in New York?

NREI Online recently posted an article by Dr. Victor Calanog entitled "Profiting from Record-Breaking Distress in Multifamily Properties." There are few apartment developers increasing the supply of rental housing in the market, so as demand for rental housing is expected to rise, landlords can benefit from charging higher rents and filling vacant units. Low pricing provides incentive for buyers to search for "good deals" as the market begins to recover and turn up. Calanog reinforces the idea that "with pricing at attractive levels and financing still somewhat available via government-sponsored enterprises, today might be the time to invest in multifamily properties."

Calanog closes with the sentiment that "multifamily buildings have endured much distress in 2009, but Reis as well as other data providers generally expect apartments to be one of the first sectors to rebound in commercial real estate." Indeed, though the market appears bleak and slow to recover, there are still advantages to be found and a sense of tempered optimism for 2010.