Tag Archives: commercial property values

Marcus & Millichap Apartment Forecast January 2011

In a webinar presented on Jan. 11, 2011, the Marcus & Millichap team gave an upbeat report on the current state of the U.S. apartment industry.

As usual, Hessam Nadji began with an economic state of the union address. After acknowledging nine different problems the economy is now facing, he presented another nine positive indicators. Among them is the fact that retail sales are now higher than they were before the recession. The GDP is back to 2007 levels. The rate of job growth is higher than both of the last two recessions. Worker productivity is at an all-time high.

There are 2 million young adults living at home with their parents. Many of these will move out in the next few years. Their confidence is bolstered by the fact that 65% of all new jobs created in 2010 were filled by those in the 20-34 year old category. Most of these new households formed will be renters, not owners.

Apartments in St Leonards, New South Wales

Image via Wikipedia

On that note, he moved to a slide entitled, “Apartments Entering Rapid Recovery.” Here he mentioned that 2010 was a very good year for the industry. The vacancy rate plunged a full percentage point. He expects another full percentage point drop in 2011, followed by a strong 2012. This is because there is almost no building going on at a time when demand is coming back so strongly. Given the difficult environment for developers, he predicts a good 4 to 5 year run for apartments.

Next up was Bill Hughes, who spoke about the capital markets. Commercial real estate financing got better through 2010 with apartment fundamentals providing the boost. Apartment values went up, lenders started showing more confidence, and Fannie and Freddie continued to provide most of the funding to the industry.

Looking ahead to 2011, Marcus & Millichap believes that in addition to the current sources of capital, insurance companies will once again start to loan on apartments. Several new commercial banks will begin to lend, and the CMBS package will start to reappear.

10-Year Treasuries should stay in the 3.5%-4% range. As the economy starts to rebound, expectations of inflation will push the rates up.

Lastly, he listed sources of debt for three groups of investors. The smaller investor, working in the $1-10 million range, will rely on Fannie and Freddie, commercial banks and some life insurance companies. They will find LTVs in the 70-75% range. Some lenders are taking the DSCR as low as 1.15 to accommodate the smaller investor. Most of the loans will be recourse loans.

Medium investors, looking at deals in the $10-20 million range, will find a wider array of financing options. This is where finance companies come in with mezzanine and bridge financing, and CMBS starts to play a role as well. The debt service coverage ratio will be around 1.20 and the LTVs once again in the 70-75% zone.

Investors needing over $20 million will find the larger banks will work with them on both recourse and non-recourse loans. DSCR and LTV will match the medium group. With more data available in the marketplace now, lenders are growing in confidence. Continue reading

Marcus & Millichap U.S. Apartment Outlook 1st Quarter 2010

Just updated! Be sure to see the new version for January 2011.


Marcus & Millichap is one of the nation’s largest real estate investment firms. Nearly every quarter they webcast a summary of the current and near future conditions of the multifamily market. The most recent one was released  on May 13, and included the numbers from the first quarter of 2010. Following are a few of the highlights.

Seal of the United States Department of Housin...
Image via Wikipedia

The first section was on the U. S. economy as a whole. Most of their comments were positive and upbeat. Employment is neutral or better, retail sales are coming back strongly, the employment trends are becoming positive and inflation is not a major concern. However, the housing recovery is still volatile. Thanks in part to the tax credit for first-time home buyers, the housing inventory is dropping and sales are rising. However, it’s too early to tell how the end of the tax credit will affect these trends, but it probably won’t enhance them.

People who are 18-34 years old make up the largest cohort of potential apartment residents, and 20 million of them are living at home, with that number still rising. Also, the unemployment rate for that age group is substantially higher than the not-so-great national average. Once the job market returns to full throttle, many of these people will be looking for a place of their own. That’s good news for apartment owners, but it does lie a year or two in the future.

The middle section was on capital market trends. It started off on a positive note, saying that confidence is returning, as shown by a recent rise in the number of multifamily property sales.

Deals are getting done. Freddie, Fannie and HUD are major lenders, and some local and regional banks are lending. It looks like insurance companies are starting to get interested in the multifamily market again, as well.

On the other hand, investors are up against constrained underwriting standards. Lenders are dealing with three major concerns. First of all, it’s difficult to determine values with so few sales to look at. Also, property fundamentals are still going down in some markets. Plus, they are concerned about the shadow market.

And lingering over everything is the current Euro debt crisis. The U. S. hasn’t been hit much by it yet, but as we’ve recently learned, all the markets are intertwined to a certain extent.

The final section was specifically about the apartment market.

For several cycles now, Marcus & Millichap has divided apartment investors into two camps. On the one hand are those who believe in the long-term inherent value of apartments. Most of these are would-be sellers and are hanging on to their properties if they can, believing good times are just around the corner. Forced to sell, they price their properties to reflect their belief in its value.

On the other hand are investors who are interested in buying now, but are dealing with hard-to-get loans, high vacancy and falling rents. Some are still anticipating a wave of foreclosures that could bring deep discounts. So you can see why there is a wide gap between sellers and buyers, resulting in infrequent sales.

However, there are signs that 2010 will see an increase in transactional velocity. In the first quarter of 2010, there was a 60% increase in dollars paid for properties worth at least $10 million, compared to the year before.

Another sign is the shift in who is buying now. More sophisticated groups are getting back in. In 2009, REITs made up only 5% of the multifamily buyers. But in the first quarter of 2010, they made up 18% of the buying pool. Similarly, institutional buyers grew from 5% to15%.

They concluded with a slide listing the seven reasons Marcus & Millichap is bullish on the apartment market for the next ten years.

  1. The population will continue to grow.
  2. The echo-boomers will start getting places of their own.
  3. Apartments are a good environmental housing choice.
  4. Budget and expense factors.
  5. No new stock coming online
  6. Apartments are more affordable than houses.
  7. Many will decide home ownership is no longer their dream.

The Marcus & Millichap team plans to put on another session roughly every 90 days, so look for the next one in August. To see the entire presentation, click here.

And here is where you can see the apartment forecast for 2011.

Economic Forecast Breakfast Report

Yesterday, Vectra Bank gave us the Colorado Springs version of their traveling show. Featuring two prominent PhD. economists, it was both educational and entertaining. Offering a free breakfast buffet at the Cheyenne Mountain Conference Center guaranteed a full house for the 7:30 start.

George Feiger spoke first. He is a former Stanford associate professor who is now CEO of Contango Capital Advisers. He had three main points to make:

  1. The economy is recovering but volatility will persist for years
  2. By balancing long-term opportunities with cautious planning, “good”portfolio outcomes are possible
  3. Be mindful, however, of the implications of the fiscal crisis

Dr. Feiger’s talk was enhanced by several graphs and charts that were striking in their messages, but also so easy to understand instantly from the back of the room. The first one had four red lines scrolling across the page until October 2008, when they all dropped rapidly. Then in about March of 2009 they all moved upwardly very fast and in unison. The lines represented the leading economic indicators for the US, the “Euro Area,” China and Japan. This, he said was, “an unambiguous recovery.”

View of Pikes Peak from the University of Colo...
Image via Wikipedia

However, because of personal, corporate and government debt, volatility will mark the economy for at least ten years. Americans have lost ten years of their net worth in a very short time, and household debt is at an all time high. Although houses are again affordable for more people, more people than ever are walking away from their mortgages. In fact, you might guess that unemployment, a subprime FICO score, or a rate reset might be the top reason for foreclosures, but they’re not. Most foreclosures now are on people who have a job and can pay their debts, but just don’t want to continue paying a $300,000 mortgage on a house that’s now worth $200,000. They’re called “walk aways.”

Continue reading

U.S. Commercial Property Values At Lowest Point Since August 2002

Commercial property values have dropped 36% in the last year alone, according to Moody’s Investors Service and are 44% below the October 2007 peak. This bad news followed the prediction by Grubb & Ellis that office vacancy may approach 20% in 2010.

Foresight Analytics of Oakland, CA estimates that 53% of commercial loans due to mature in the next five years are underwater (valued at more than the property). The total due in that period is $1.4 trillion. Almost 8% of commercial mortgages may become delinquent next year, up from 5.6% for the fourth quarter of 2009. Compare that to the .75% delinquency rate a year ago.

Nathan Mayer Rothschild, 1st Baron Rothschild.
Image via Wikipedia

With all this bad news coming at us, many are retreating to the sidelines to await rosier days. But if Baron Rothschild was correct when he said, “Buy when there’s blood in the streets,” this may be a good time to get in. During the Panic of 1871 in Paris, he was buying when everyone else is selling, and I think his family is still doing alright.

Reblog this post [with Zemanta]<