10yr #Multifamily Investment Loan Rate Comes Back to Life, Rises 7.9 Basis Points

The 10 year apartment building investment loan rate we track moved up to 4.454% from 4.375% yesterday after flatlining at the old rate since the middle of January:

10 year treasury vs. apartment building investment loan rate May 2015

Even so it is still below what we used to think of as the 4.5% floor for this rate. Meanwhile the ULI rate has been tracking the 10yr Treasury, rising from 3.37% April 20th to 3.76% yesterday, a climb of almost 40 basis points.

Is this the beginning of the long anticipated (The 3rd or 4th year in a row that everyone’s known rates were going to rise) rate hikes? It makes sense that the Fed would like them to get up off the floor if for no other reason that they would have room to lower them again when they needed to. But is now the time to do that when China, Europe and the rest of the world are slowing down?

While the US economy has been Continue reading 10yr #Multifamily Investment Loan Rate Comes Back to Life, Rises 7.9 Basis Points

Will Apartment Revenue Management Systems Drive Residents To Homeownership?

Handing the keys back? Will apartment Revenue Management Systems drive tenants to homeownership?
Who’s handing who the keys?

Property Management Insider had a piece out last week How Revenue Management Systems Make Leasing and Renewals Easier that talked about how RMS took all the emotion out of raising rents on renewing residents.

…a community manager may occasionally resist a rate increase for a long-time resident or one who has become valued over the years.  Business is business, however.

“When they start to say, ‘Oh, Mrs. Johnson has been here six years,’ we try to get them away from the emotional aspect of pricing,” he said. “We say if we really wanted to lift our rents and maximize our revenue, we have to make some tough decisions, and some people who can’t afford it may have to move out.” [Emphasis Mine]

As owners, operators and property managers who doesn’t love getting top dollar rents?

The math behind RMS (if done correctly) can definitely drive rents higher if it’s backed up by enough data to draw statistically valid references. At its Continue reading Will Apartment Revenue Management Systems Drive Residents To Homeownership?

How to Prevent Politics from Causing ‘Black Swans’ in your Apartment and CRE Investments

As apartment building investors it’s easy to get so deep into the trenches of our market sector that we get blindsided by political events that don’t make any sense from an economic or investment perspective. With every market being so local and at the same time now subject to institutional interest it’s a stretch just to be able to track what’s happening in the lending environment at the same time. But this is the biggest risk we face; how to avoid Nassim Taleb’s ‘Black Swans’ that could destroy our investment plans. As an options trader  Taleb could very easily have been overtaken by black swans if his vision was limited to the distance from his eyeballs to the trading screens he stared at. How wide is yours?

How to avoid black swans in apartment building investiment

Short of an asteroid strike from another time dimension there really aren’t as many black swans as there are limited perspectives. Many people considered the mortgage meltdown a black swan but there were also quite a number with wider vision who understood how it would all end and some of them made fortunes putting their insights to work. Since we’re multifamily and CRE investors, not leveraged derivative traders we probably don’t spend a lot of time thinking about how to go short the apartment building in that bad neighborhood but how do we develop that wider perspective and still have time to do any investing?

The easy answer is Continue reading How to Prevent Politics from Causing ‘Black Swans’ in your Apartment and CRE Investments

CA Retirment Plan Commits Additional $2 Billion to Apartment Builidng Investments.

Updated 1:46pm Correction: Updated to reflect that CalPERS is only shutting down its hedge fund investments, not its private equity placements. See Calpers Is Done With Hedge Funds; Paid $135 Million in Fees Last Year for 7.1% Return at Bloomberg.com

Was just on a call this morning with Peter Linneman, Chief Economist at NAI Global where they were discussing CalPERS’ decision to eliminate their investments in hedge funds. That hasn’t had any effect on their apartment building investments however [Or has it in a positive way?]. While I was on the call I received a note from PERE announcing that the California Public Employees’ Retirement System (CalPERS), the largest public pension plan in the US has committed more than S2,000,000,000 additional funds to multifamily investments during meetings this past July:

  • $1.33 billion to Institutional Multifamily Partners, seeking multifamily acquisition and development opportunities throughout the US.
  • $412.79 million to a partnership with Invesco Real Estate for core apartment properties in the West and Midwest.
  • $200 million went to a joint venture with Pacific Urban Residential for Class B multifamily assets in the western US.
  • Note that the 200M was in addition to the 214M committed when the JV was formed in January this year.
  • A less than $100M commitment to apartment lender and asset manager Centerline Holding which is now owned by Hunt.

All this was part of a 6.6B commitment to commercial real estate joint ventures, one of the largest single month investments made by the $300 Billion retirement plan. For the details see CalPERS commits $6.6bn to RE on PERE. Note: registration may be required.

Apartment investors and residents (can be) big winners in office building repurposing. Part II.

Apartment Residents love living close to work and transportation options. More at www.ashworthpartners.com
Click to see Apartment Investors And Residents Big Winners In Office Building Repurposing Part 1.

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..


Show Me The Apartment Building Investment Markets, part II. (Skate to where the puck is going)

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:

High wage growth for apartment markets. More at www.ashworthpartners.com
Click for full size image. Source: Atlantic Online.


And then looking forward into Continue reading Show Me The Apartment Building Investment Markets, part II. (Skate to where the puck is going)

Phoenix population to add 2.6 million by 2040, housing supply not keeping up. Good for apartment building investment.

According to the ASU W.P. Carey School of Business’ Phoenix Housing Market Explained presentation, PHX will have to add housing equal to the current size of the Denver metro area over the next two or three decades to hold all the people who will move there. This presentation was done in March of this year but the demographics are powerful and still operating. Watch minutes 5 to 25 for the market demographics, after that they dive into the specifics of the single family sector recovery.

PHoenix transportation corridors will drive drive housing development
Click for full size image.

Transit corridors and public lands will shape where development takes place says Mark Stapp, Director of the Real Estate Development program at ASU’s W.P. Carey School of Business. ‘Densification’ will happen around the transit hubs which means these will be good locations for apartment building investment but Continue reading Phoenix population to add 2.6 million by 2040, housing supply not keeping up. Good for apartment building investment.

Good News and News: Apartment Q3 update web conference replay now posted from Marcus & Millichap

Good presentation on the current national apartment building investment sector from Marcus & Millichap. New supply remains constricted except for a few cities, they didn’t mention any names *cough Seattle cough* but if you’re in one of them and tracking the pipeline it’s easy to read between the lines.

Apartment Building Investment Market Improvement Expected to Continue

Another interesting trend is that Continue reading Good News and News: Apartment Q3 update web conference replay now posted from Marcus & Millichap

PIMCO calls bottom in housing, but likes REOs-to-Rentals over apartment building investments?

In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.

Shrinking shadow supply but still more renters

One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.

While they do acknowledge the challenge of REOs-to-Rentals:

However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.

… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-

Hat tip: The Big Picture blog

The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE

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?

Banks avoided writing down commercial mortgages by renegotiating with their borrowers

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