M-F Investment: Are Cap Rates Best Indicator in Today’s Market?
By Paul Daneshrad, CEO, StarPoint Properties
During the boom in multi-family housing, we have seen a large compression in what we consider very aggressive cap rates. Why is this happening? The Fed continues to keep rates artificially low in an effort to stimulate the economy and promote growth in gross domestic product (GDP). Many investors are left to wonder what all of this means for them, especially as it relates to multi-family property investment.
That said, these low rates make the multi-family market – which currently yields a much better return on investment (ROI) than almost any other product – attractive to investors. Not only will low interest rates make multi-family real estate the favored product, but in select markets, the high demand and low supply will also give investors better operating fundamentals and returns. The key will be, picking the “right” markets.
However, cap rates are not the only consideration. Capital gains tax rates are also a factor to evaluate when investing in multifamily properties. Even with the recent revision to the capital gains tax rubric, it is still preferable to the higher income tax rates. Couple this tax benefit with the low cap rates and investors will be more economically satisfied when investing in multifamily assets.
Will that stimulus – the artificially depressed cap rates – last forever? No. Because of its inflationary nature, the stimulus is not sustainable in the long term. Our ability to continue printing greenbacks and adding to the debt cannot be maintained. Interest rates will eventually go up and cap rates will follow.
As a result, investors must be particularly sensitive to the interest rate movement over the next five years. The fundamentals of this current market require investors to be on their toes, hedging their investment portfolio while watching rates as well as supply and demand. Nevertheless, those who watch, then wisely invest, have the potential to be rewarded greatly. While the Fed can print greenbacks, they cannot print real estate – this is the ultimate fundamental.
Moving forward, I would caution investors to keep an eye on interest rates, lock in rates for the long period and, if you are going to exit over a two to five year term, make sure you have some type of cap rate and interest rate increases in your baseline underwriting. As a result, when those fundamentals are carefully monitored or hedged, the investment will be a success.
Forbes: Jacksonville third-best city in the country for finding a job
By Roger Bull
Forbes Magazine has put out another list with Jacksonville looking pretty good. This one lists the 10 best cities in the country for finding employment. Using data from Adecco Staffing U.S., the magazine has Bethesda, Md., at No. 1, followed by Austin, Texas, and then at No. 3: Jacksonville.
Here's what it has to say:
"No 3. Jacksonville is another example of a city with a diverse and highly educated labor force. With unemployment at 6.5 percent, Jacksonville is seeing the heaviest hiring in higher education, healthcare, IT, food services, transportation and logistics, and government work from the city’s three military bases.
“'Jobs are being added in Jacksonville because of the recent addition of several companies and headquarters that are new to the area including finance and manufacturing companies,' says Sam Gillespie, an Adecco branch manager. 'The IT job market has been hot throughout the city with the addition of these companies.'”
Auctions Take Off in Current Environment
By Ian Ritter
IRVINE, CA-Auctions for some bring to mind a rapid-speaking announcer liquidating property, cars and any other items of potential value that belonged to once-fortunate people that are now in a bad place. Those days are over in commercial real estate, if they ever even existed.
For Auction.com, a GlobeSt.com Thought Leadership firm, commercial real estate property auctions are booming. The company is putting on three auctions in March alone and the same amount in April.
Auction.com currently has more than 100 institutional clients right now, according to Ken Rivkin, co-chief executive officer of the locally based company. There are also nine Fortune 20 corporations selling excess real estate on the site. The typical Auction.com event has 50,000 visitors, with 1,250 visits per asset and 65 entering the “data vault,” which has detailed bidding information on a property.
There are a couple of reasons so many high-profile institutions are taking part in auctions right now, Rivkin says. Since the recession, banks are becoming more constructive sellers. Additionally, CMBS special servicers have learned that the longer they hold onto an asset, the larger loss they are liable to take.
The first auction kicking off the month starts today. Auction.com’s quarterly multifamily event will last through Wednesday and is offering more than $700 million of assets. The properties are located across the country, and bidding for some of the apartment buildings starts north of $10 million.
Similar to the overall commercial real estate market, multifamily is the hottest property sector offered in Auction.com’s programs. Lodging assets are the second-most sought after.
“There is more interest in markets that have seen the greatest price depreciation,” Rivkin says.
Buyers are from all over the country and Rivkin generally groups them in three categories. Assets valued at $2 million and below will tend to see local buyers. In the $5-million to $7-million-range institutional players start to step in. For high-priced assets, say at $25 million, there is a strong mix between local and national player, Rivkin reveals.
“There are lots of wealthy people sprinkled around the country, and if it’s next to one of their properties, they’ll often be aggressive,” he says.
Coming up later in the month, from March 12-13, is Auction.com’s monthly auction, which sells all commercial real estate assets in all regions of the country. The firm holds the monthly auctions “to give our clients on the sell side an opportunity to sell,” Rivkin says.
After that, on March 19-21, Auction.com will have an even focusing on the Southeast, an area of the country getting a lot of attention right now. “We’re even seeing land in Georgia begin to move more positively,” Rivkin remarks.
Shadow Demand Will Keep Multifamily Bubble at Bay for Years
By Erika Morphy
WASHINGTON, DC-Multifamily, it is clear, is currently the rock star asset class for commercial real estate with new statistics from NAREIT bearing this out. The industry association reports that apartment REIT price returns are up 225% through February 2012 since the REIT market’s trough in March 2009.
What is particular telling about NAREIT’s research, however, is not just how well apartment REITs have done to date—but how long that performance can continue. A lot longer, it turns out, than many in the industry currently realize.
“If anything I don’t think the market appreciates how many people are bunking up with somebody and waiting for the chance to move into their own home,” NAREIT vice president of research and industry information Calvin Schnure, tells GlobeSt.com. NAREIT finds there is a record level of pent-up demand for apartment space, with an approximately 2.5-million unit supply-demand imbalance in apartment inventory.
Certainly this story has been told and retold in the commercial real estate industry over the past two years. Schnure, though, says that the demand will be unfolding for years, at least until 2017. The process of the unemployed getting jobs and moving into their own homes will take at least that long to work through the system, he says.
While supply is entering the system, it is not doing so at a fast enough pace—at least not fast enough to accommodate demand. According to NAREIT, between 2008 and 2010, construction of multifamily units fell as much as 70% from its trend growth rate over the past decade. Multifamily construction starts have increased since the beginning of 2010, but the number of units under construction remains at nearly 60% below its long-term average.
This long-term supply-demand imbalance will also keep cap rates from collapsing—especially as more renters enter the market. Cap rates have been trending down recently, in what is obviously a very hot market. They, however, are based on current income streams. As more people get jobs and look to move out of their parents’ or inlaws’ basements, Schnure says, income will go up. “We foresee see a lot more growth and apartment demand ahead than what we have seen so far,” he says.
Housing Crisis to End in 2012 as Banks Loosen Credit Standards
By Krista Franks Brock
Capital Economics expects the housing crisis to end this year, according to a report released Tuesday. One of the reasons: loosening credit.
The analytics firm notes the average credit score required to attain a mortgage loan is 700. While this is higher than scores required prior to the crisis, it is constant with requirements one year ago.
Additionally, a Fed Senior Loan Officer Survey found credit requirements in the fourth quarter were consistent with the past three quarters.
However, other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability.
Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.
In contrast to a low of 74 percent reached in mid-2010, banks are now lending at 82 percent LTV.
While credit conditions may have loosened slightly, some potential homebuyers are still struggling with credit requirements. In fact, Capital Economics points out that in November 8 percent of contract cancellations were the result of a potential buyer not qualifying for a loan.
Additionally, Capital Economics says “any improvement in credit conditions won’t be significant enough to generation actual house price gains,” and potential ramifications from the euro-zone pose a threat to future credit availability.
CREC Closes 15 REO Deals Worth $100M
By Jennifer LeClaire
MIAMI—Call it yet another sign that distressed assets are flushing through the Florida sales cycle. Continental Real Estate Companies (CREC) brokered the sales of 15 lender-owned assets valued at nearly $100 million in the four quarter of 2011.
The deals come after three years of market instability that saw the value of Florida’s distressed real estate top $12 billion while asset values dramatically declined. During those 36 months, CREC's distressed asset practice managed 35 court-appointed receiverships, ultimately positioning the firm to maximize asset value and dispose of the properties via sale.
“There is no slowdown in sight as it relates to transactions this year,” CREC chairman and co-founder Warren Weiser tells GlobeSt.com. “For us, 2010 was a good year, 2011 was a robust year and right now, our pipeline for 2012 will be equally as strong, if not stronger."
In one of the most recent transactions, CREC represented BACM Forum Way Office in the $15 million sale of the Sabadell United Bank Building and the Horizons Building, both in West Palm Beach, to an affiliate of Pebb Enterprises. The two office buildings total 177,000 square feet.
CREC also represented CS Pines Plaza in the $9.6 million sale of Pines Plaza, a retail shopping center totaling 68,170 square feet in Pembroke Pines. Morris Pines Associates purchased the property, which is home to Office Depot, Buy Buy Baby, and Aldi Supermarket. CREC was previously charged with leasing the property on behalf of the lender and achieved 100% occupancy, maximizing asset value and paving the way for the eventual sale.
CREC also executed seven multifamily and land transactions in recent months representing $50 million in closed sales. The transactions have been broadly represented across Central, North, and South Florida including Duval, Monroe, St. Lucie, Seminole, Miami, Broward and Palm Beach. CREC has executed vacant land, partially completed, fractured condominium, and negative cash flow transactions.
“We’ve reached a point of stabilization in underlining rents for these assets, we continue experiencing capital interest in Florida real estate, which boosts pricing, and there is willingness in the lending community to transact on these properties,” Weiser says. “So far, the first quarter of 2012 for the company looks similar in volume to the fourth quarter of 2011.”
As Weiser sees it, the market is taking its first steps toward a long-term recovery. He expects 2012 to witness increasing volume as loan maturities increase and distressed properties continue to work their way through the system. CREC has an additional 15 lender owned assets valued at nearly $100 million currently on the market and sees no signs of a slowdown in its transactional pipeline.