Category: Real Estate

Where Do You Turn for Capital When Rates Rise?

When rates rise, apartment building lenders are really concerned with two things: (1) Will rising rates depress the future value of the subject collateral? (2) How do I take advantage of higher future rates to increase my return on the loans I make?

As interest rates rise, property cap rates should rise with them. All things being equal, this will cause the value of an apartment building to go down. In an effort to mitigate the risk of a property’s value declining and ending up over-leveraged if NOI does not increase, many lenders are dialing back how much loan dollars they will give on any investment. If they were willing to give out 75 percent loan-to-value on acquisitions when rates were stable, now maybe they have moved down to 70 percent loan to value. Ultimately what this means for an investor is coming to the table with more upfront dollars and a lower return on the dollars invested. Coming in with an extra 5–10 percent may not be the end of the world, but for many properties that were being sold for top dollars and tight margins, that could make a big difference in whether or not the investment makes sense.

Shorter Terms Prevail

Many apartment building lenders are also looking at rising rates as an opportunity for them to capture more yield on their loans. This can be a difficult task, however, since most investors are going to demand a fixed rate. If a lender can offer a swap, it can be an attractive way for them to see upside as rates rise. But many borrowers do not qualify for them and some that do push back on doing swaps. What many lenders do instead is simply hold off on offering long-term fixed rates and instead offer short-term fixed rates in an effort to see short- to medium-term rate adjustments on their loans. What this means for investors is that they are going to find many more short-term fixed-rate options in the market as opposed to long-term, 10-year fixed products.

The lenders most likely to get conservative in a rising-rate environment are going to be banks and other depositories. They are heavily regulated and often need to be ahead of the curve in risk management or they can end up explaining themselves to the FDIC later down the road. Investors should be aware of this when looking for loans today and be certain to explore non-bank lending options, especially through government agencies. Investors with small property loans under $1 million may not have many loan options with these types of non-bank lenders, but investors with loan amounts over $1 million per property will be able to take advantage of much more competitive options.

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Savvy Strategies for Security Deposits

Within the residential leasing business, the security deposit has long been a vital tool that has allowed landlords to ensure their properties and rent rolls are protected. Figuring out what to charge and whether to return deposits after alterations have been made to the apartment, however, can be quite tricky. As a longtime specialist in landlord representation, these topics are ones to which I have given much thought.

Typically, tenants are required to pay a deposit that is equal to one month’s rent. For recent college graduates or those who have been at their job for less than six months, I will typically request a deposit equal to two month’s rent. I will make an exception if someone can prove that they’ve been previously employed in a similar industry for a significant period of time. If I’m dealing with someone who has no credit, often because they’re from a foreign country, I will likely require that a deposit somewhere from three to six month’s rent be paid upfront. Guarantors, whether individuals or companies, may certainly help to reduce the amount of security deposit that’s required, on a case-by-case basis.

Credit Counts

Many younger people in particular don’t have the credit score required to put down only one month’s rent for a security deposit. Due to faulty advice they’ve received, many recent college graduates have only one or two credit cards, which doesn’t bode well for their credit when it comes time to rent. I always advise young people to open as many lines of credit as possible and either pay them off in full every month or to not use them at all. The more cards one has open and paid off and the more available lines of credit that one has but doesn’t use, the better their credit looks to a landlord who is considering what amount of security deposit to retain. Other ways by which a potential tenant may establish credit include securing a mortgage or car loan.

When it comes to the traditional rule that a potential tenant’s salary must be 40 times the rent, I am definitely not religious about this requirement, and I would advise other landlords to not focus as much on salary. After all, the creditworthiness of a potential tenant is a much better indicator of how they pay their bills. In general, I find myself requiring a larger deposit for those with poor credit as opposed to those with lower incomes.

Damages Subtracted

In terms of returning security deposits to renters, the laws often favor tenants in this regard. In the state of New York, landlords have 30 days to return deposits. If they’re keeping part of the deposit, they must send a letter by certified mail within 30 days that includes an itemized list of damage done and the cost for each item of damage. If certain damages aren’t on the list, landlords must refund the non-itemized balance. If a tenant wishes to dispute charges, they may sue in court and the statutory maximum which they can be awarded can be as high as three times the initial deposit. A landlord can likewise be sued for triple damages if they fail to return the tenant’s security deposit within 30 days.

Situations in which landlords have the right to withhold part of the security deposit include a tenant leaving very dark paint on the walls or if a tenant uses faux paint or wallpaper. Holes in the wall and floor that require more than basic repairs such as plastering and sanding are also damages for which the tenant must pay. At times, I have noticed major damage of appliances beyond regular wear and tear. If a refrigerator door is falling off or a stove has stopped working due to being jammed, I will certainly add those damages to an itemized list. These scenarios can be even more frightening when dealing with furnished rentals where televisions, chairs and coffee tables are often destroyed. Water damage that either was the tenant’s fault or wasn’t the tenant’s fault but that they failed to report is also something for which I hold tenants accountable.

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Apartment Construction Begins to Slow Down

Apartment building developers may finally take a breather in their rush to build new units.

“Starts will begin to slow down soon, translating into more moderate development activity by late 2020,” says Jeanette I. Rice, Americas head of multifamily research for CBRE Research.

There are still hundreds of thousands of new apartments already under construction, scheduled to open over the next year or so. But rising interest rates, rising construction costs and already tough lending standards are making it more difficult for developers to keep building at the rate they have been. Developers took out fewer permits to build new properties in September compared to previous months.

“The shift is a mild pullback, rather than an abrupt move to lesser activity,” says Greg Willett, chief economist for RealPage, a provider of property management software and services.

Strong demand for apartments has kept developers and investors interested in starting new projects despite the growing number of vacancies in many markets. Rents are still rising, even if not as quickly as they had in recent past.

“Development, just like investment, is a lower return environment than in previous cycles. But the very strong appeal of the sector makes this acceptable to market participants,” says Rice.

Fewer permits and construction starts

Developers have been taking out fewer permits to build apartment buildings. Their seasonally-adjusted annual rate of permitting has been slowing down since March 2018—shrinking to 351,000 in September 2018. That’s well below the average rate of 417,000 permits per year for 2018 so far, according to data from the U.S. Census.

“One can expect the decline in permits to translate into a decline in starts in the coming months,” says Rice.

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Nearly 1.5 Million Vacant U.S. Homes in Q3 2018 Represent 1.52 Percent of All Single Family Homes and Condos

IRVINE, Calif. – Oct. 30, 2018 — ATTOM Data Solutions, curator of the nation’s premier property database, today released its 2018 Vacant Property and Zombie Foreclosure Report, which shows that nearly 1.5 million (1,447,906) U.S. single family homes and condos were vacant at the end of Q3 2018, representing 1.52 percent of all homes nationwide — down from 1.58 percent in 2017.

The report also found that there were 10,291 vacant “zombie” foreclosures homes nationwide at the end of Q3 2018, representing 3.38 percent of all homes actively in the foreclosure process. The number of zombie foreclosure homes was down from 14,312 a year ago, and the zombie foreclosure rate was down from 4.18 percent a year ago.

“The number of vacant foreclosures is now less than one-fourth of the more than 44,000 in 2013 when we first began tracking these zombie homes,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Policy solutions such as land banks designed to mitigate the ripple effects of vacant properties on neighborhoods and cities have had a substantial impact, and a booming housing market in many areas of the country is lifting all boats. There are still high concentrations of zombie homes and other vacant homes in some local markets and submarkets, but those high concentrations are becoming fewer and farther between.”

Markets with highest vacant home rates

States with the highest share of vacant homes were Tennessee (2.65 percent), Kansas (2.50 percent), Oklahoma (2.49 percent), Mississippi (2.47 percent), and Indiana (2.45 percent).

Among 153 metropolitan statistical areas analyzed in the report, those with the highest share of vacant homes were Flint, Michigan (6.99 percent); Youngstown, Ohio (3.80 percent); Beaumont-Port Arthur, Texas (3.71 percent); Myrtle Beach, South Carolina (3.70 percent); and Mobile, Alabama (3.69 percent).

Among 405 U.S. counties analyzed in the report, those with the highest share of vacant homes were Baltimore City, Maryland (7.83 percent); Genesee County (Flint), Michigan (6.99 percent); Saint Louis City, Missouri (5.93 percent); Bibb County (Macon), Georgia (5.73 percent); and Wayne County (Detroit), Michigan (5.60 percent).

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Identifying Lucrative Value-Add Multifamily Opportunities as the Cycle Lengthens

The appetite for value-add multifamily investments remains strong—and in light of this increasing competition, many investors are struggling to identify and secure assets that present high-reward opportunities.

While some investors have turned to extreme measures, including taking on projects that require extensive remediation and complete overhauls—or even repurposing entirely different product types for multifamily use—some of the greatest opportunities for growth and stability lie in strategically identifying and refreshing functional, yet under-managed vintage communities.

With a strong sourcing and repositioning plan in place, investors can still take advantage of opportunities to acquire ‘diamond-in-the-rough’ multifamily properties that present high potential for growth at this point in the cycle. We’ve included a few strategic approaches below:

Select submarkets with sustained growth and livability

Top-of-mind for many multifamily investors is the current point in the real estate cycle and impending market correction. The good news is that we’ve been in a slow growth economic cycle for several years, which has recently been bolstered by changes in policy and new employment opportunities.

Consequently, we anticipate continued upside for the next few years, and further, that many multifamily markets across the country will remain resilient even in the case of a downturn.

The key is selecting submarkets that are experiencing increasing population growth year-over-year, job growth that includes the influx of a diverse mix of employers and those that are located in regions that present a high quality of life—vibrant areas where today’s multifamily residents want to live.

For example, we recently added the eleventh apartment community to our Portland, Ore.-area portfolio in just over three years. The greater Portland market demonstrated strong fundamentals that brought it through the economic downturn of a decade ago relatively unscathed compared to many other markets, and we have been particularly bullish on Washington County submarkets, as in recent years the area has emerged as the tech hub of the Pacific Northwest, as well as expanded its presence as a sports apparel capital.

We expect well-positioned multifamily assets in continuously growing locations like Washington County to thrive, but as opportunities become scarce and competition high, it is also critical to keep an eye on newer emerging markets.

In the West, we are seeing that certain submarkets of Salt Lake City and Denver are demonstrating similar fundamentals that the Portland area has for the last several years.

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Single Family Rental Platform Puts Pedal to the Metal with Marketing Lists

Online single family rental marketplace OwnAmerica identifies and engages SFR operators with the help of targeted marketing lists generated by ATTOM Data Solutions from its nationwide database of more than 155 million U.S. properties.

The Power of Property Marketing Lists

The property-level marketing lists include not just ownership information for non-owner occupied properties, but also property characteristics and home value data, allowing OwnAmerica to also provide portfolio valuation services to the rapidly growing SFR market.

“OwnAmerica is operating on the assumption that the market is very strong and will continue to be,” said Greg Rand, CEO. Rand even posted a challenge on LinkedIn offering to place a $10,000 bet that there will not be a recession in 2020. “Predictions of a coming recession might be wishful thinking from some people. I will leave you to speculate on why anyone would root for a recession.”

Rand argued that the investor niche his company operates in — single family rentals (SFR) — will benefit even if home prices do take a hit.

“Remember that SFR is different than housing overall. When the market is strong, investors and consumers are confident and prices rise. Investors win on appreciation,” he explained. “When the market is weak, homeownership declines and renter demand increases. Investors win on yield. SFR is a two-sided coin because every house has two uses: owner-occupied or tenant-occupied/investor owned. No other commercial asset class gives owners two demand drivers and two exit strategies.

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Effective Strategies for Driving Multifamily ROI Growth through Property Management

The great “amenity decision” is on the minds of most of today’s multifamily owners. Which amenities will attract residents? Which will provide the best return on investment?

While these questions are important, it’s also important to first determine a property’s current and target renter demographic. This means understanding which amenities renters are expecting, which services to provide and prioritize and how to best secure ROI through them.

Western National Property Management specializes in attracting and retaining renters to boost the bottom line for multifamily owners—with 179 communities and 24,801 units, catering to new and long-time renters is a must-have quality and a fine-tuned capability. Below are strategies our firm uses to achieve strong results.

Anticipate and manage expectations

Multifamily property managers are aware all renters have expectations for their prospective living situation. Whether this includes laundry services or security systems depends heavily on the generation or community to which a renter belongs.

For example, millennial first-time renters will anticipate common areas, in-house laundry systems, easy food delivery and online rent payments. Baby boomers are more likely to expect high-tech security and smart appliances in their individual units. Generationally, millennials represent nearly half of all new renters, and apartment communities are increasingly implementing online options to meet the demands of this demographic.

Successful and efficient managers see the opportunity in installing renter-specific amenities.

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Self-Storage Investors Still Pay Top Dollar for Acquisitions, In Spite of Declining Yields

Investors are talking a good game as they negotiate to buy self-storage properties—but on average, they are still paying high prices and accepting low investment yields.

“I have seen some re-trading… maybe 1.5 percent of the purchase price,” says R. Christian Sonne, director of specialty practices for the national self-storage valuation group at real estate services firm CBRE. “Property assessment reports are being reviewed a lot more closely than a few years ago.

But deals are still getting done at nearly record low cap rates, with multiple potential buyers bidding for most properties, says Sonne.

Self-storage properties remain extremely desirable to investors. Investors are paying high prices despite rising interest rates and reports of overbuilding. Their enthusiasm to buy may be because the percentage of occupied space in the sector is at an all-time-high. Self-storage also earned a reputation for being resistant to recessions during the last economic downturn, giving even more comfort to potential investors.

“There is a great deal of capital pursuing deals and, in some cases, we’re seeing aggressive pricing—especially in high-density urban markets,” says Wayne Johnson, chief investment officer with SmartStop Asset Management, a diversified real estate company focusing on self-storage, student housing and seniors housing.

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The U.S. Cities Most Flooded with High-End Apartments

New data from RentCafe shows that more than 25 percent of apartment buildings in some U.S. cities are now high-end units.

Visit any urban center in a major U.S. city and you’ll see a similar view: cranes dotting the landscape and billboards advertising units in the latest luxury apartment projects. Has the focus on high-end units gotten out of hand?

New research from RentCafe found that luxury rental properties had accounted for 79 percent of all apartment construction in the U.S. And in the 2018 that number has grown to a whopping 87 percent. In many cities, a full 100 percent of projects completed in the first half of the year were upscale units.

Yardi Matrix tracks the data, with a database of more than 80,000 large-scale apartment developments with at least 50 units across more than 130 markets in the United States. The firm considers units class B+ or above as high-end or luxury projects.

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Sears Bankruptcy Likely to Inflict Pain on Mall Owners for Years

(Bloomberg)—As Sears Holdings Corp. goes through bankruptcy, retail landlords wondering how they could be impacted might want to look at a 2015 deal.

Mall owner Macerich Co. struck a agreement that year with the struggling department-store operator to redevelop a 300,000 square-foot store at Kings Plaza Shopping Center, a high-traffic mall in Brooklyn, New York. Three years and $100 million later, Macerich finished work on the space, which has been subdivided and leased to Burlington, J.C. Penney, Primark and Zara.

After Sears filed for Chapter 11 protection early Monday, Macerich’s lengthy — and expensive — process is worth keeping in mind. Other mall owners, who have been grappling with the retailer’s store closings and diminished ability to attract shoppers for years, must now contend with the possibility of a full liquidation, which would mean a glut of retail real estate in an already oversupplied market. For now, a majority of stores will continue to operate.

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