Property Taxes can be one of the largest fixed costs in apartment building investing. Properly accounting for them when running the numbers on a potential purchase (called the ‘underwriting’ process) can make the difference between a nicely cash flowing property and an expensive headache. Multi-Housing News has a good article with the five key questions investors should have answered before making an apartment building investment:

1. How often are values reassessed? Is there an automatic reassessment triggered by a transaction?
2. What is the exact millage rate? How are they set? How often do they change?
3. Are there limitations to the increases in assessed values during the hold period (a la Prop 13 in California)?
4. What is the timing of the assessments and when exactly are bills due?
5. What is the appeal process and how long does it typically last?

Don’t let this happen to your deal: “We recently had a client call us one week before closing and ask us to verify what they had in the underwriting for property taxes. They had neglected to reset the assessed value upon acquisition, and thus underestimated their obligation by roughly $200,000. This equates to $4,000,000 in value. Unfortunately, I had to be the bearer of bad news, and the deal never closed.”

Properly accounting for property tax expenses after purchase is part of our due diligence process for every acquisition. If you are considering an apartment building investment and want to make a profitable, successful purchase contact us for very thorough due diligence that shows the real costs and benefits of the property.

Hat tip: Andrew Holowetzki

In the aftermath of the worst housing crisis in a generation, more people are eschewing the American dream of homeownership and embracing apartment rentals in the still-fragile economy.

Surging demand for apartments, particularly by younger consumers, has given a boost to the nation’s apartment landlords. Multifamily properties represent one of the few corners in the commercial real-estate industry where rents are rising rapidly. As such, lenders are giving the green light to multifamily construction projects even as development grinds to a halt in other property sectors.

“People weren’t buying homes anymore, but they still needed shelter,” says Tom Mitchell, the Miller Tabak & Co. analyst who claimed the No. 1 spot in the Best on the Street survey’s real estate category. “This created an imbalance that is still going on, where apartments are still able to raise rents”.

See the whole WSJ article here: Surging demand for apartments Hat tip: Joseph Bernard Investment Real Estate

See the video here: http://bit.ly/JpqMck Sorry, couldn’t figure out how to load their video directly into this post. Any suggestions? Thanks.

With so many online ad sources to choose from, how can you be sure which is best for your apartment building investment? Below Jason Velazquez, VP of Strategic Initiatives at Colliers of  offers 5 tips for choosing a great ILS:

Does their traffic measure up? Most Internet Listing Services (ILS) will happily provide you with their web statistics. Take the time to thoroughly review any report offered to you before you sign on the dotted line.

Check whether they’re popular in your city. Simply because an ILS is nationwide, doesn’t necessarily mean they have high web traffic in your city. A simple way to gauge an ILS’s regional market penetration is to google the keywords – apartments in city name, and then scroll through the search results until you see their site. Don’t just search using the city you are located in; type other city names that your prospects move from.

If the ILS isn’t on the front page of Google, you may want to find an alternative ad source. Studies have consistently shown the majority of renters look for their apartment using search engines.

Before you run a Google search: If you are signed into any Google account, logout. Also, consider clearing you search history. Both steps are important to do before running the search because Google ‘remembers’ your previous searches, which could skew the results.

Don’t fund their market penetration efforts. What if your ILS rep. assures you that her boss is pushing for more exposure in the city(s) you are interested in as soon as more apartment communities sign up? While it may be good that a popular ILS wants to expands to your city, it shouldn’t mean you have to front them the dough to do it.

Don’t let them keep all the SEO-goodness. Most ILS sites have a bad habit of blocking potential SEO (Search Engine Optimization) benefits that come from listing with them. If an ILS does not display your website link somewhere on your listing, don’t bother. Furthermore, if they do link back, find out if they use no-follow links.

Don’t ask around. What? You don’t want me to ask other colleagues if the site is worth the money? For Jason’s interesting take on this subject read his explanation here: Don’t ask around.

… small and Large. Sunday was the 2nd anniversary of the May 6th Flash Crash of 2010. High Frequency Trading (HFT) insiders have hacked the stock markets so they get a sneak peak at your, and everyone’s trades before they’re executed. Think of it like one player at the poker table can secretly see your cards, and everyone else’s before they bet- Want to play in that casino?

When the HFT trading robots all lock onto the same pattern they can take a major market like the Dow Jones Industrial Average down 700 points in 10 minutes and thus we all remember the Flash Crash. Now it so happened that that time the market recovered about 70% of the loss shortly after but the damage to confidence was done.

Once bitten, twice shy. Or as Joe Saluzzi and Sal Arnuk at Themis Trading (a specialty company that trades equities for large institutions and hedge funds- stock traders not OWS supporters) put it: ” traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous ”stock market watering hole”. Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what’s beneath the surface. And they are deciding that the drink they crave is just not worth the risk.

It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world, into one where:

- 13 stock exchanges cater to hyper traders who game the system, chasing exchange rebates, and leveraging speed for the purpose of a nanosecond scalping dance.
- More than 40 dark pools together trade more than 1/3rd of all shares.
- Conflicts of interest abound as exchanges own stakes in dark pools, and HFT firms own stakes in exchanges.
- Brokerage firm internalization of trades feeds the HFT financial modeling of investor orders.
- Exchange data feeds act as a veritable DVR of investor orders and behavior, the recording of which is then sold to HFTs.
- Rogue exchange traded products break down, trap unsophisticated investors, and only enrich the issuers, exchanges, and HFT firms that make markets in them.
- HFT firms in the last decade have achieved wondrous profitability (double-digit Sharpe ratios) while investors at best have clawed back to even.
- More than $1 billion in customer-segregated monies goes missing from MF Global, with not a single prosecution, nor a hope of redress.”

Investors are voting with their feet: “More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.”

At Ashworth Partners we believe there is a sensible alternative; apartment building investment. Properly selected, purchased and managed these properties produce good current income and have inflation protection with upside potential. To find out how to put apartment building investments to work in your portfolio contact us here.

To read Sal and Joe’s whole piece on their blog: The Flash Crash of 2010: Happy 2nd Anniversary

To read their Barron’s piece that includes a more detailed explanation of how HFT works: Happy Flash Crash

To reserve their book on the dangers of HFT (to be released June 3rd) on Amazon: Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio.

Hat Tip: Barry Ritholtz

As the next building cycle for the Portland area is still another year out, vacancy rates are expected to fall to historic lows across the metro. The overall vacancy rate will match the lowest on record at 2.7 percent, while the area’s lower-tier vacancy will fall to as low as 2 percent.

Marcus & Millichap notes that a lack of multifamily construction and the expansion of jobs in the region will be the prime factors behind the extraordinarily high rates of occupancy. Job growth is expected to rise 3.1 percent—from 20,500 positions created in 2011 to 31,000 positions created in 2012. Of particular significance will be the development of a new Intel facility, which is expected to create thousands of construction jobs and spur large demand for Class B and C apartments.

Cap rates for trophy buildings are likely to average in the high 4-percent range, with Class A and B assets in the suburbs falling in the mid 5- to low 6-percent range.

Investment is also expected to take off this year, as owners with maturing debt will likely sell while demand is high. The types of portfolios sought by investors will likely be across the board, with well-located and mid-sized Class B and C assets ranking alongside the more commonly sought Class A deals.

See the complete MultiHousing News piece here: Lack of Construction in Portland to Send Vacancy Rates to Historic Lows

The April 2012 National Multifamily Housing Council’s Quarterly Survey of Apartment Market Conditions was conducted April 16-23, with 91 CEOs and other senior executives of apartment-related firms nationwide responding.

Capital availability lacks uniformity. Only 17 percent of multifamily firms reported that capital is available for all property types in all markets. By contrast, 36 percent said it is constrained in secondary and tertiary markets and 34 percent said it is constrained for all properties other than top-tier ones – even in primary markets.

The Debt Financing Index declined to 65 from 74. As the only index that dropped below 50 in the past nine quarters (48 in Q4 2010), borrowing conditions continued to improve for the industry. Just four percent believed conditions worsened from last quarter, compared to 34 percent who reported improving conditions.

The Equity Financing Index grew slightly to 62 from 60. One third of respondents reported quarter-to-quarter equity financing as more available, compared to nine percent reporting less availability.

See the excellent exec sum on Joseph Bernard Investment Real Estate’s blog here: Market Conditions Improve For Apartment Industry

My Exec Sum: Seattle apartment building investment results from Essex Property Trust Q1 call:

• Seattle demonstrated exceptional same-store NOI and revenue growth of 11.2% driven by very limited supplies of housing and job growth that exceeds national averages
• On operating expenses we expect a 2.3% increase for the second quarter ’12 over the second quarter in ’11
• Seattle rents were up 6.5% compared to the first quarter of 2011. So depending on the submarket, we are now 4% below to even with our prior rent peaks.
• renewal offers for June and July averaged +6% to 8% in Seattle
• As of April 30, its occupancy was 96.1% with a net availability of 5.1%.
• We view this turnover activity (50-55% YoY) as healthy because it provides us with more opportunity to grow rents. Additionally, we only saw a nominal increase in move-outs due to home purchases and affordability.
• Cap rates continue to be aggressive in the coastal markets, ranging from 4% to 4.5% for A props in A locations and from 4.5% to near 5% for B props in A locations.
• Seattle multifamily deliveries, estimated for 2012 to be 0.5% of stock, or 1,800 units, growing to 1% of stock, 3,800 units, in 2013 and 1.1% of stock, 4,400 units, in 2014

Job picture continued to be strong at Seattle. We saw more jobs than expected added during the quarter and have raised our forecast for 2012 to 2%. Property managers continue to report strong demand from employees of Microsoft and Amazon. Office absorption remains positive as another 650,000 square feet were leased during the quarter. We also saw a surge in industrial demand at the south end of the region.

[1,800 + 3,800 + 4,400 = 10,000 new Seattle apartment units in next 3 years]  The other housing supply risk relates to for-sale housing production. We continue to believe that affordable for-sale housing is a significant threat to apartment rent growth. Our for-sale supply expectations remain muted in our coastal markets, largely due to high median home prices and restrictive lending practices, which should be beneficial to Essex. Seattle single-family deliveries are estimated to approach 0.9%, or 6,300 units, in 2014.

See more on Essex’s Q1 apartment building investment results including Northern and Southern California on Seeking Alpha: Essex Property Trust’s CEO Discusses Q1 2012 Results

This was an eyeopener for us in the apartment building investing business: Large US cities with falling rents. The table is from TransUnion, I wonder what their sampling methodology is- And I wonder how that breaks out by asset class.

Yes of course there are cities with rising rents but Denver rents down almost 9% in a year? In 2011? Even Chicago down almost 5%? And DC the apartment hotbed has falling rents? Supposedly their data comes from managers supplying info for tenant screening and if that’s the case it seems like there are some serious concessions being given.

Don’t blame me, I’m just the messenger- See the Whole MFE article here: TransUnion Lists 10 Major Metro Rental Changes in Q1

At a Seattle apartment building investment conference recently one of the main speakers was saying that everyone who’d ever held a hammer, and their brother was trying to build apartments. That really struck a nerve in my market cycle conscious brain and was looking to get some perspective on that when a CBRE piece crossed my desk with this chart on it:

So while new unit construction starts are up significantly from the 2009 lows they are still well below the 89-08 average of about 250k. More importantly in relation to demographics we will be seeing increasing demand from growth in two of the prime renter groups, my exec sum from the piece below:

Three trends will be particularly relevant to apartment building investment and construction:

• Growth in the population aged 25-34 (“echo boomers”)
• Decline in the population aged 45-54
• The transition of “baby boomers” into the over-65 demographic.

Changing age demographics will also have a major impact on income distribution and subsequently the price profile of the product.

• About 80% of future household growth will be driven by the seniors and the young.
• The two groups account for almost 60% of existing apartment demand but less than 40% of single-family demand.
• Households aged 45-54 will likely be shrinking for the first time since the 1980s. This group was an important contributor to single-family demand growth for years.
• The sheer size of the aging “baby boomer” cohort is such that even with its relatively low propensity to rent, this group will yield more new renters in this decade than will the young.

These demographic trends also carry two implications for the income profile of future housing demand:

• First, seniors and the young have lower incomes.
• Second, among seniors and the young, income is less evenly distributed than it is among the middle-aged.

The overall impact on future apartment demand growth is the bulk of it will be concentrated in the lower end of the price spectrum and the share of high-end product will be higher than in the past.

About two-thirds of these households earn less than $50K a year and 12% have incomes greater than $100K. A scenario where multifamily demand stabilizes near its long-term trend of 250 thousand units implies that the portion of high-end product should be about 30,000—including units for rent and for sale. If indeed most of the recent apartment building development is represented by high-end product, and this trend continues, it will become a reason for concern very soon.

See all the charts and the rest of the paper here: http://www.cbre-ea.com/default.aspx?_title=AboutRealEstate&_id=3097