Apartment Building Vacancies Plunge to 2001 Levels
Main bullet points from Reis Report’s Q2 Apartment Highlights:
- National vacancies continue to plunge, ending Q2 at 4.7%.
- There was a slight moderation in vacancy compression, following 10 quarters of vacancy declines.
- With such low vacancy levels, landlords have been accelerating rent increases.
- Effective rents increased 1.3%, the fastest pace since Q3, 2007.
- Inventory growth remains restrained with just 10,000 units coming online.
- Developers are starting to build more properties to take advantage of the tight market conditions.
How are vacancy and effective rents trending in your market?
“Even compared to a healthy and expanding nationwide market, multifamily in the Pacific Northwest is seeing exceptionally strong gains. A growing renter population and accelerating job growth have helped solidify cities like Portland and Seattle as cornerstones of the apartment industry, and the positive trends show no sign of letting up.” So begins a glowing report in the latest digital edition of MHN Magazine (On page 22). What’s not to like about an article like that, especially one with a cover shot as beautiful as the one in this article? Below is just a portion of it and Photoshopped or not it is something to behold.
The glowing words and photos are accompanied with a pretty good looking chart too, showing the declining vacancy and rising rents in those two markets as well: Continue reading What’s not to like about the Seattle and Portland Apartment Building Investment Markets?
Forbes put out a piece with a slide show of the best and worst places to rent an apartment; my question is wouldn’t you want to own an apartment building investment in one of the top 10 cities? How about in any of the other cities listed?
One of the factors they used was the cost of renting vs. owning but the ownership cost is lowballed because it only includes the house payment (mortgage, taxes, insurance), ignoring the true cost which also includes maintenance, repairs and reserves for capital improvements… not to mention coming up with 20% down payment and qualifying for a loan. Even still renting comes out looking pretty good in those places.
Then in a WSJ piece in their Smart Money section there’s this: “On the national level, it is cheaper to buy than rent, according to a March 2012 report by Deutsche Bank – even after taking into account the down payment and property taxes. But in some areas, including California and the Northeast, renting remains more affordable than buying. The report identified 13 cities where renting costs less than the after-tax mortgage payment (that’s the mortgage expenses the owner incurs, along with the mortgage interest deduction they get come tax season).”
Once again ignoring the true cost of owning which includes keeping the place up, yardwork, painting plus fixing things that break like appliances, furnaces, hot water tanks, and setting aside something for things that wear out like the roof and the driveway. They list five markets where even lowballing the cost of owning it is still cheaper to rent:
- Northern NJ
- Long Island, NY
In my hometown of Seattle they picked some interesting neighborhoods for examples but found on average that even without factoring in repairs, maintenance and capital improvements renting averaged $377 per month less than owning.
Net, net renting is a better deal in many places even if you could afford the downpayment and qualify for a loan.
Heidi N. Moore was talking with a investor who specializes in buying distressed commercial mortgage-backed securities (CMBS) and I was reminded of something Warren Buffett said back in 2007:
“When people start dropping shoes you really don’t know whether they’re a one-legged guy or a centipede.”
The investor was saying that the commercial real estate (CRE) market has been under the same pressure as the housing market but the CRE market hasn’t crashed. Why hasn’t that shoe dropped… and why won’t it?
The investor said that CRE was “rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, but when it came [time] to mark down the value of the struggling commercial real-estate loans, many banks simply refused. They inflated the values of the loans to make their balance sheets look good.” [And therefore could keep all their bailout funds at work speculating in derivatives and jacking their bonuses instead of being set aside to cover losses.]
There are two other reasons that the CRE market and the CMBS tied to it didn’t crash: 0% interest rates, which means commercial borrowers weren’t punished with higher interest payments; and more importantly Continue reading The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE
M&M covers 39 major apartment building investment markets in the US and have just published their Q3 reports. Here’s a list of the metros they cover:
They also provide snapshots of the Office, Industrial, Retail and Self-storage sectors in many of those markets, accessible from the tabs on the page. Note this information requires registration at the website to view.
MHN Online has a nice piece out this morning talking about what institutional and private equity equity providers are looking for in their apartment building investment deals. According to Brian Ward, CIO of TCG Capital Markets, the requirements are much tighter than just a few years ago. Here are the high points:
- Align the style and needs of the capital source with the operator. A long term operator shouldn’t be matched up with private equity that needs short term holds to clear their return hurdles.
- Equity capital today generally comes in two two types: preferred equity or joint venture (See the table linked in the article for a good breakout of when to use each).
- Blind pools are very difficult to get funded today —even the best and most sophisticated operators have had trouble executing this type of equity raise.
- There must be local knowledge on the management team, both lenders and investors want their operators close by.
- Operators must have Continue reading How to Structure Apartment Building Investment Partnerships by Brian Ward of TCG Capital.
ALB Commercial Capital has a nice guide for small balance (<$5 million) apartment building investment loans. In it they cover the three most important ratios investors have to clear in order to get a deal funded:
- Loan-To-Value Ratio (LTV) = Total loan balances (1st mtg + 2nd mtg) / Fair market value (as determined by appraisal). For Multifamily mortgages, LTVs seldom exceed 80%.
- Debt Service Coverage Ratio (DSCR, aka DCR, DSR) = Net Operating Income / Debt Service. Most lenders insist that this ratio exceed 1.2 with a few a allowing 1.15.
- Personal Debt Coverage Ratio (PDCR) = Monthly Personal Debt / Monthly Personal Income. The Personal Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of income they earn. Personal Debt Ratios seldom are allowed to exceed 50% in practice.
In addition the guide covers other items that need to be addressed such as Continue reading The 3 Most Important Things You Need To Get an Apartment Building Investment Loan
In May we posted an article Top 10 US Cities for new apartment building permits where Seattle came in sixth in new apartment building units permitted. Now a new list is out from Axiometrics with a breakdown by submarket and Seattle’s Downtown/Capitol Hill/Queen Anne submarket lands at number two with almost 4,000 units due to come on line in the near future.
And that’s on top of nearly 6,000 units (3,500 in the last two years) that have already been delivered downtown since 2005. Plus there are several other hot neighborhoods such as Belltown and South Lake Union that Continue reading UPDATE: Top 10 US Submarkets for new apartment building units in the pipeline.