Filed under: Apartment Finance, Apartment Markets and Demograhics, Commercial Real Estate, Multifamily Investments
The Urban Land Institute/PriceWaterhouseCoopers annual report on Emerging Trends for Real Estate 2014 was released last week and apartment building investors and commercial real estate pros have some good things to look forward to next year. Note that this post refers to the Americas version of the report with separate sections on Canadian and Latin American markets but they also publish Asia-Pacific and European editions as well. This is the 35th edition of the report is it’s based on individual interviews or surveys from more than 1,000 investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.
Here are the 5 key trends we should all be aware of with my comments:
- Survey participants continue to rank private direct real estate investment as having the best investment prospects. Pretty expected from this group but the National Council of Real Estate Investment Fiduciaries (NCREIF) recently released its property performance index for the third quarter of 2013 and on a trailing 12-month basis, the index’s return was 11.0 percent, split about 50/50 between income and appreciation. A pretty nice return compared to fixed income rates and a much safer looking bet than buying equities at their all time highs.
- Dependence on cap rate compression to drive value is being replaced by an emphasis on asset management. Especially in the 24 hour gateway markets apartment building cap rates are about as low as they can get (well until you look at Vancouver BC) so property performance has to come from actually making the property perform. You also have the problem of what to do with your proceeds if you do sell, as you would be reinvesting right back into the same cap rate market that you sold in… unless you changed to a higher cap rate sector, suburban strip centers anyone?
- Opportunities to develop property are finally appearing in sectors other than multifamily. CBRE Econometrics had a piece out last week showing that large (> 350k sf) warehouse properties are being snapped up as fast as they’re being built. Maybe developers who moved over to doing apartments the last few years will move back to their home sectors and ease off on the new supply of multifamily units.
- Value-added investment ranked highest in terms of investment strategy; distressed properties and distressed debt ranked last. We were licking our chops a few years ago waiting for RTC 2.0 fire sales to begin and while we were able take down some bank owned inventory, the anticipated tsunami of defaults on commercial loans never materialized. At this point most everything has been extended and pretended into performing status or sold off and so it’s back to making money the old fashion way: Finding and/or creating value.
- Both equity investors and lenders are widening their search for business to include secondary markets and niche property types. This will be a double edged sword for investors who are focused on those secondary and tertiary markets as debt financing will be more available but there will also be more competition from sophisticated outsiders with deep pockets. The key will be to make them your buyers so dig in, find the right properties and tie them up quickly.
As always with real estate, sectors and markets are so distinct from one another it’s almost pointless to generalize as the chart above attempts to do so next week I’ll dive into the apartment sector to see what gems they’ve unearthed. Meanwhile for the Read more
Senior living consultants Accent have published a whitepaper on the emerging trends their clients are searching for when selecting an independent living, assisted care, skilled nursing, memory care or other type 0f retirement community. The paper is available for free download on their website (registration required).
- Health & Wellness Programs
- Lifelong Learning Programs
- Energy-Efficient Design
- Technology-Enabled Health Monitoring
- Enhanced Memory Care Programs
One example of the lifelong learning trend is: “Wi-fi hot spots are becoming commonplace in addition to computer lounges, while computer labs with technicians and classes and online courses and activities are expected on the lifelong learning front.”
Filed under: Apartment Finance, Multifamily Investments, The Economy and Current Affairs
In more good news for apartment building investors, both the 10 year Treasury and apartment loan rates have moderated since the Fed’s “non-taper” announcement in mid-September. The spread between the T10 and the 10 year apartment loan rate we track has come in as well. Since 9/16 the Treasury has drifted down from 2.88% to yesterday’s quote of 2.53% while the loan rate has moved from 5.282 down to 4.921, bringing the spread in to 2.381 from 2.402. The average spread for 2013 has also narrowed to 2.573%:
Notes about the apartment Read more
Filed under: Multifamily Design & Development, Multifamily Investments
Earlier this week I posted on statistics that generated this chart from CoStar showing that 56% of office buildings that are converted or demolished make way for apartments and/or mixed use. These type of projects do come with their own set of risks and rewards however. Fortunately that same day Globe St. posted an interview with Jim Grauley, COO and president of Columbia Residential on the down and dirty details of repositioning buildings for residential. Columbia does a lot of LIHTC (Low Income Housing Tax Credit) projects but they started up Columbia Ventures LLC to focus specifically on repositioning existing buildings for market rate housing. In a two part interview (part 1 and part 2) he laid out the requirements, risks and opportunities.
One project they currently have underway is the Imperial Hotel in downtown Atlanta. It required a complicated financing transaction for a complete historic and LEED Gold renovation that will create 90 state of the art efficiency apartments. “Columbia also is taking on an adaptive reuse of another historically significant building in Downtown Atlanta converted to market rate apartments” said Grauley.
Their objective is to create “a sustainable urban lifestyle [that] is achievable when transit, occupation, services and entertainment are all in close proximity to home, making car ownership an option rather than a necessity.”
Here are my bullet points from the how-to knowledge he shared:
- Target a building that has unique/non-replaceable characteristics.
- That is located in a strong, hard to replicate, location.
- The acquisition cost of the building structure must be significantly lower than replacement costs.
- Market rents are a big driver of what can be done. higher rents drive acquisition, land, and construction costs higher, so in many cases reuse can be more feasible than new construction.
- Often reuse projects will have a larger portion of capitalization via equity sources, given the renovation risks or uncertainties and lender tendency to be more conservative with the unknowns in underwriting (= lower LTV or LTC).
- The biggest risk is dealing with the unexpected in design, construction, and operations from older buildings. You must plan for this to happen with contingencies and very substantial up front due diligence on the building.
- The building must have a layout that will allow the creation of desirable living spaces, with good light, volume, character, and connectivity (Ties in with the 22k floor plate ideal that was mentioned in my first post).
- Creativity and knowing the market are key challenges in building out the kind of living spaces that will find market acceptance.
- In older cities or districts, there are often more incentives for preservation and reuse and redevelopment.
- In historic buildings, projects can utilize historic renovation credits and incentives to allow for feasibility.
- It’s optimal when there are incentives and subsidies for renovation—such as state/federal historic tax credits, new markets tax credits.
- ROI can be very good, but the often necessary subsidies for renovation or preservation can limit the re-sale timing and in some cases return..
Filed under: Apartment Markets and Demograhics, Multifamily Investments
Just after I hit Publish on the top markets for population and job growth piece called: Skate to where the apartment building investment puck is going I found a great Richard Florida Atlantic piece for this month’s edition called The Boom Towns and Ghost Towns of the New Economy looking into the changes of fortune for US markets since the crash five years ago.
The recovery has been good (What crash? good in a few) in some areas, seemingly non-existent in others and in many a slow grinding process that has yet been unable to return to pre-crash levels. The first thing that everyone should look at is job growth but Florida looked deeper into High Wage growth around the country:
And then looking forward into Read more
Filed under: Commercial Real Estate, Multifamily Design & Development, Multifamily Investments
In many top US markets the supply of office space has not just been stagnant, it’s actually been shrinking and apartment building investors have been the beneficiaries.
In a CoStar piece out today entitled Didn’t That Used to Be an Office Building? they list a couple big advantages of converting office space to apartments: Office working residents are close to work, and there’s great access to public transportation. How many people who spend hours a day sitting on the freeway would like the option to park the car all week?
If you combine the residential and mixed use portions of the chart below, 56% of the office conversions/demolitions are going to apartments:
An interesting fact Read more
Skate to where the apartment building investment puck is going: Top US markets for future population and job growth.
Filed under: Apartment Building Investment Cycle, Apartment Markets and Demograhics, Multifamily Investments
A lot of the usual suspects when it comes to multifamily markets have moved pretty far into their cycles and if your home area is like ours ti’s getting pretty fully priced. With our value investor mindset that means we’re looking for the next markets to do well over the coming 10-20 years. As apartment building investors we say:
Fortunately two different sources provided data and maps to answer Jerry’s demand. The first is from the NAHB (the National Association of Home Builders) in an Eye On Housing piece called Uneven Aging. The report actually has two maps, the first showing the 2000 to 2010 growth in the Read more
Filed under: Apartment Finance, Multifamily Investments, The Economy and Current Affairs
10 year apartment building loan rates had been in a range the last few weeks until Ben Bernanke ‘failed to taper’ last Wednesday causing the bellwether 10 Year Treasury to fall about a dozen basis points to today’s quote of 2.72%. This is good news for apartment building investors, home buyers and builders, stock market speculators, just about everyone except savers, retirees and the people running retirement plans. The upside is that loan rates may head lower but the downside is the economy and particularly employment haven’t improved enough to ease off the money printing pedal.
Here’s the latest chart showing the T10, the 10 year fixed apartment rate we track and the spread between the two:
This week’s quote for a 10 year fixed rate, 30 year amortization apartment loan is 5.131%. (See below for more detail on this loan). The other thing noticeable on the chart is that the spread between the rates has been below the yearly average consistently since the beginning of July. In fact the average spread has fallen to 2.602 from 2.661 over that period. Partly because 4.5% was about as low apartment rates were going to go no matter how far down Treasuries went but also I think that lenders are getting more aggressive, especially in the multifamily sector.
Filed under: Apartment Technology and Management, Multifamily Investments
Cliff Hockley over at Bluestone & Hockley has the details on upcoming changes that apartment building investors should be aware of regarding their Oregon properties. A few bullet points, changes affect:
- Screening of Section 8 and Section 42 tenants.
- The establishment of a fund to offset damages caused by Section 8 tenancies.
- Renter’s insurance can be required but…
- Limits on tenant screening for evictions and arrest records.
- Timing of notice periods.
- Temporary occupancy.
- Plus: a good definition of ‘Person Crimes.’
See Cliff’s whole report here: A Review of the Legislative Changes to the Oregon Landlord Tenant Act and to Section 8 Tenancies
After two weeks of holding at 5.068% the apartment loan rate we track rose to 5.274%, pushed higher by the 10yr Treasury moving up 31 basis points in the last week and a half. The spread between the two remained below the 2013 average of 2.628, coming in at 2.394:
This means that the monthly payment on a $1,000,000 apartment building investment loan with 30 year amortization would rise from Read more