How to know when your apartment market cycle is peaking…

Apartment Investment Cap Rate Vancouver BC

Quote: “[A] very active market that continues to give strong weighting to underlying land value and potential future use, even if this use is far off in the future.” – James Glen, VP, Colliers Vancouver, BC [Emphasis mine]

Any time you see future and potential in the same sentence referring to real estate, watch out…

Oh and another sign is when the average cap rate for a low-rise apartment deal is 3% while high-rises are at 2.5! Just for reference, a 2.5 cap is the equivalent of a 40x multiple (aka PE or Price Earnings Ratio) on a stock meaning that it would take 40 years of earnings (NOI in the case of real estate) to repay the purchase price and that is definitely “far off in the future“.

You can see all the Canadian Cap Rate reports from Colliers here: Canada Cap Rate Report Q1 2017

Happy summer everyone-

P.S. If you’d like a handy chart for converting Cap Rates to Earnings Multiples shoot me a message with Cap Rates to Earnings in the subject line.

Increase NOI at Your Apartment Building with Fannie Mae’s Energy Star Findings

Fannie Mae launched their Energy Star program for apartment building investors by releasing their study on utility use. The report, called Transforming Multifamily Housing: Fannie Mae’s Green Initiative and ENERGY STAR for Multifamily (PDF). It’s loaded with great info on reducing energy and water use as well as stats on use broken up by unit, square foot and region. They also talk about their Green Preservation Plus loans which combined with certified Green Buildings they have financed $130 million in loans on as of Q1 2014. But let’s cut to the chase, key findings [Emphasis mine]:

  • On average, a 100,000 square foot property spends $125,000 on energy and $33,000 on water annually.
  • If this property saved 15% on energy and water costs, it would increase asset value by almost $400,000, at a 6% cap rate.
  • The least efficient properties use over three times as much energy and six times as much water per square foot as the most efficient properties.
  • When owners paid for all energy costs, median annual energy use was 26% higher than when tenants paid for them.
  • High-rise properties use almost 10% more energy per square foot than low-rise properties
  • Properties in the West use almost 50% more water per square foot compared to properties in the Northeast.

Clearly reducing common area utility costs and getting tenants to pay for their own use are the two of the best ways to improve Net Operating Income (NOI) and they have a nice graphic showing  just how to do that:

Reducing Utility Costs on Apartment Building Investments raises NOI

It’s an interesting finding that buildings in the West use Continue reading Increase NOI at Your Apartment Building with Fannie Mae’s Energy Star Findings

5 Key Trends from the ULI Report for Apartment Building Investors and Commercial Real Estate Pros

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.

Emerging Trends Barometer for Apartment Building Investors and Commercial Real Estate 2014

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 Continue reading 5 Key Trends from the ULI Report for Apartment Building Investors and Commercial Real Estate Pros

Handy Apartment Building Investment Market Reports- interactive one-pagers from Reis Reports.

Reis puts out these really handy one page reports with all the major QoQ changes broken out by sub-market. Here’s the latest on Portland, OR:

Apartment Builiding Investment Metro Reports by Reis Reports

Click on the image above to go to a list of  markets then select Continue reading Handy Apartment Building Investment Market Reports- interactive one-pagers from Reis Reports.