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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...
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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.

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.

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New Apartments Leads Construction Surge

Digested From “Housing Starts and Permits Hit Nine-Month Highs”
MarketWatch (09/17/09)

In its latest report on residential construction, the Commerce Department reported that building activity jumped in August to the highest level seen in nine months. The pickup was led by a 25.3 percent surge in groundbreakings on new apartments, which more than offset a 3 percent slowdown in the single-family housing market. All in all, starts on new homes and apartments recovered from a 0.2 percent slide in July to gain 1.5 percent last month, which saw 598,000 units on an annualized basis. In another indicator that the housing sector is starting to recover, Commerce also said that building permits were up 2.7 percent in August.

Read the full report here: http://www.marketwatch.com/story/housing-starts-permits-at-nine-month-highs-2009-09-17

How to Pool Investor Funds Without Running Afoul of the SEC

Since commercial real estate often requires a larger down payment than most individuals can come up with, investors usually pool their funds in order to raise sufficient cash to cover the down payment and other acquisition costs. Doing this incorrectly can lead to huge fines from the SEC, not to mention potential liability from lawsuits.

Anytime money is pooled with the expectation of making a profit, a security is created. After the Great Depression, the Securities Acts of 1933 and 1934 were enacted to protect the public against fraudulent securities. It was at this time that the Securities and Exchange Commission (SEC) was created to oversee the implementation of these laws.

The person who pools investor funds creates a syndication and is known as a syndicator or a promoter. This person must be very careful to follow all the SEC regulations because the fines for violations are very stiff. The laws are not difficult to understand and follow, but claiming a lack of knowledge about them will not be a suitable defense.

The syndicator must ensure that all the potential investors are given enough financial and other important information regarding the security being offered for sale so that they can make an informed decision about the suitability of this particular deal.

In 1946 the Supreme Court heard a case called SEC v WJ Howey. The Howey Company sold land in citrus groves in Florida and also offered to plant, harvest and sell the fruit for the new landowners, who were mostly out of state people looking for a passive investment. When things went bad, it ended up going through the courts, and resulted in what became known as the Howey Test. This test determines what qualifies as a security and has four main points, all of which must be true.
1. There must be an investment of money, and
2. There must be a common enterprise, and
3. There must be the expectation of profit, and
4. This will be managed soley through the efforts of the promoter.

If all four of these are true, a security has been created which falls under the SEC guidelines. The most critical part of the law for our purposes is called Regulation D, usually just called Reg D. Reg D describes a private offering made only to accredited or sophisticated investors. When this is done correctly, it allows full exemption from registering the security with the federal SEC. Since registration can cost upwards of $250,000, avoiding it is a worthy goal for most of us.
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