Tag Archives: real estate investor

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

Multifamily Construction Starting Up Again

REITs and large developers are once again entering the multifamily market in select markets. According to Village Green Cos. CEO and chairman Jonathan Holtzman, “The banks are open for business for the right borrower with the right project in the right submarket.” His group recently broke ground on a 175-unit mixed-use project in Minneapolis. It’s projected to be built and leased up by early 2011.

Apartment Building on Magnolia Avenue, Fort Worth
Image by StevenM_61 via Flickr

“Anyone who has the financial wherewithal to start building today is going to face a great environment when they deliver that asset two or three years down the road,” says Highlands Ranch, Colo.-based UDR chairman and CEO Tom Toomey.

You can find out more about these and other upcoming apartment developments around the country.

Our group is on schedule to begin development of a 144-unit apartment in an emerging market along the North Carolina coast. Coming online in early 2011 seems to put us in the sweet spot.

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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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21 Reasons to Like Pueblo, Colorado

Pueblo, Colorado has 21 heavy construction jobs already in progress or in the pipeline through 2020, according to a recent Colorado Springs Business Journal article. The $4 billion allotted to these projects will not only produce many construction and ancillary jobs, but even more jobs once they’re built. More jobs is one of the key indicators of an economy on the way up, which means good things for apartment owners.
(I haven’t figured out how to paste a table into a blog yet, so these columns don’t line up. However, I think you’ll be able to figure it out pretty easily. If you know how to paste in a table, please let me know!)

Project Millions of $ Completion Date
Vestas Wind Turbine Plant 248.0 August 2009
Xcel Energy Power Plant 1,200.0 December 2010
DeRose Ranch Development 900.0 2020
CEMEX Concrete Plant 800.0 March 2009
Army Depot Chemical Clean-up 500.0 2015
Steel Mill Refit 100.0 2010
Police Headquarters 32.0 February 2010
Judicial Center 50.0 2012
Health Department Facility 15.0 September 2009
Parkview Med Center Expansion 33.0 2010
Ice House Condos 27.0 2012
University Village 100 Acre Project 24.0 2012
Walking Stick 170 Acre Development 35.0 2014
Cambria Suites Hotel 12.0 November 2008
YMCA 20.0 January 2010
Gateway Park 4.5 August 2009
Walter’s Brewery 3.0 April 2009
Herbert Paseo Townhomes 3.5 ?
Herbert Colorado Theater Building 4.0 2011
University Village Building 2.0 2010
Rudy Padula Building 3.0 2009

Some of these projects not only produce good jobs to build and run, but also improve livability of the town, such as the new YMCA, Gateway Park and the new theater. For all these reasons and more, I think Pueblo, Colorado is worth looking at as an apartment investor.

Buy Apartments Now Says Marcus & Millichap Expert

Hessam Nadji, managing director of research at real estate brokerage Marcus & Millichap, believes that now is a great time to invest in apartments, especially older ones. According to Nadji, during a recession people often choose older units with fewer amenities.

The echo boomer generation is just beginning to move out on their own, and they often start out renting in this type of apartment. Even though their unemployment rate is currently high, they should be the first ones hired when the economy starts to recover, says Reis Research Director Victor Calanog.

Nadji urges investors to buy while prices and interest rates are low. “There is a good chance that if an investor waits for a recovery to materialize, they’ll see prices go up again,” Nadji says.

To learn more, see the article at Realtor Interactive Magazine.