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.

M&M tracks 40 metro apartment investment markets and delivers quarterly reports on occupancy, rents, absorption, new construction and permits (See list below). You may have to register with them to access the reports.

Apartment Construction Trends for Phoenix Q2 2012

If you have questions about a specific market use the contact form below and will find the information you need. M&M LOCAL APARTMENT REPORTS

M&M Reports are available for these markets, contact us for others.

… 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

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

Apartment building investment buoyed by job growth in Denver

Video via Property Management Insider: http://youtu.be/uFjpYSbVdRg

Apartment fundamentals are strong essentially across the board in Denver, which ranked among the nation’s best with year-over-year rent growth of 6.5%

Six lessons on crisis that help explain why we’re still in one:

1. When you don’t reinvent institutions at a time of systemic failure, the problems they’re creating don’t just magically disappear.
2. When you prop up (read: bail out) the institutions causing the crisis, instead of reinventing them, the crisis will deepen.
3. When dysfunctional institutions prop one another up, prosperity’s a house of cards. Crisis becomes stagnation.
4. When propping up failed institutions has drained your resources, you’ve turned a crisis into a catastrophe.
5. The longer it takes you to see a crisis for what it truly is, the disproportionately worse it’s likely to get.
6. When people who are prisoners of the

paradigm that caused the crisis are in charge of fixing it, bet on…more crisis.

Piqued your interest? Read the whole article by Umair Haque in the Harvard Business Review here: Market Correction? Try Perma-Crisis Or read his book- click on the the book image above to go to Amazon where the Kindle edition is only $2.69.

My take: We’re living in the polar opposite of “If it aint broke don’t fix it”- If it’s broke you can’t fix it by propping up the bad actors.

Big thanks to Barry Ritholtz once again for finding voices that lead to new thinking on subjects that seem to have been settled decades ago.

Greg Willett, VP of research over at Real Page wrote a nice piece on that which covers it nicely; take it away Greg:

Thanks to one sentence uttered by Warren Buffett and some major overplay by the media, single-family rentals are a hot investment choice now.  Thus, the analysts at MPF Research are fielding a constant stream of inquiries about whether the bulk sale of bank-owned single-family homes to investors who will operate them as rentals will impact the apartment sector.

Our take is that the world hasn’t changed much.

While apartments and for-lease single-family homes are both rental product types, they by and large appeal to different audiences. Urban core apartments feature mostly small units suitable for single-person households and childless couples who live in them in part for lifestyle reasons. Those apartment residents aren’t in the suburbs – where single-family rentals are clustered – by choice, and finances often don’t have anything to do with those decisions.

Once you get to the suburbs, there’s more overlap in the target customers for apartments and single-family rentals, but even there the number of common prospects isn’t especially large. Suburban single-person households for the most part still prefer apartments. Many households with children present opt for single-family rentals, but that’s not something that qualifies as any sort of shift in the marketplace. For-lease single-family homes always have been available to serve this segment of households in pretty large volumes across most suburban locations.

Childless couples living in the suburbs, then, form the key group that on the surface looks attractive to both apartment and single-family rental operators. Those customers aren’t completely insignificant to the apartment market’s overall health, but they also don’t play such a large role that losing some of them to single-family rentals would do much damage in the big picture.

Furthermore, when talking about the potential impact of homes coming out of foreclosure and into the rental pool, there are just a handful of metros where the flow could reach a magnitude likely to even be noticeable by apartment owners and managers. Right now, the only spots where MPF Research makes adjustments to forecast apartment market fundamentals in order to account for the effect of shadow market rentals are select areas of Florida plus Atlanta, Phoenix, Las Vegas, and the Inland Empire.

If your apartment portfolio is heavy on two- and three-bedroom units in suburban Atlanta or select other locales where single-family foreclosures are especially commonplace, the decision that banks will sell off some of their REO product in large chunks could be bad news. But for most operating in the apartment sector, don’t lose any sleep over this development.

The Most Important Thing

To get our Special Report on The Most Important Thing in Apartment Building Investment send us an email with ‘The Most Important Thing’ in the subject line.

My friend and fellow real estate investor Mei was asking about competition for single family REOs from big institutional players buying them at the courthouse as in the Bloomberg article here. The article profiles Waypoint, a Southern California real estate investing outfit that has developed some great technology to facilitate buying and leasing REOs. Check out Waypoint’s website, it’s the best example I’ve seen of the lease/option, credit repair, rent-to-own strategy for real estate investors.

It is a great question and one that I’d been wondering about too. Just so happens I was meeting with one of my private equity clients last week and we had a long conversation about that very subject. My client is the real estate/mortgage specialist at a 50B firm and they’ve been trying to crack this market profitably for about a year. Here’s the bottom line: Private equity needs to earn 15% IRRs unlevered to make their numbers and single family houses bought on the courthouse steps are not selling cheap enough to generate those returns, especially when the proper reserves are set aside for repairs, maintenance and vacancy. Even Waypoint with their bleeding edge tech is only 8 or 9% ROI.

… So unless Fannie and Freddie start selling in bulk and bundling the sales with cheap financing the big players aren’t really a threat to local investors, especially on the courthouse steps. Now Tom Barrack at Colony has an idea that I think might just work and that is take those bulk REOs and spin them into a REIT whose retail investors won’t demand private equity level returns. Colony has the expertise to buy pools of distressed mortgages as well and doing so may get them in the door cheap enough to make the numbers work.

I want to touch on something that the Bloomberg article totally missed the boat on… the worst is not yet over in the foreclosure mess. Yes foreclosures were down last year but that is because the TBTE banksters stopped their robo-signing mills while they bought off the Feds and 49 of the State Attorneys General for pennies on the dollar for their RICO level fraud and perjury. Now that systemic abuse of homeowner’s rights is completely legal expect to see significantly more foreclosure activity this year.

How much more? Depending on who’s numbers you believe the shadow inventory is between 9 and 15 million houses. Granted some of those will get worked out or short-sold but most won’t and that’s a lot of houses to get dumped on the market. Even if Tom Barrack, Sam Zell, Warren Buffett, Barry Sternlicht, Howard Marks and other big players start buying in bulk that won’t really put a bottom in prices because of what happens when you buy in bulk.

When you buy REO homes in bulk or in ‘tapes’ as they’re called, you get some gems, you get some decent ones that fit your model and you get some junk; and you dump the junk. That means the worst of the worst is still going to be coming on the market at lower than fire sale prices because every extra day that junk is on their books just hurts the portfolio returns and sucks energy away from executing the strategy.

So net/net/net I don’t think local real estate investors have to worry about the big guys muscling them out of the way on the courthouse steps.  If they do they’ll be over paying, right? It does however raise an interesting question for apartment building investors, will REO-to-rentals compete with us for tenants? See the answer in our next post: Will REO-rentals Really Compete With Apartment Building Investments?