With the current state of the economy and especially with what is taking place in the housing market, I’m often asked the question, “Jo, why are you investing in multifamily housing?” Truth is I can’t think of a reason why not to be investing in multifamily housing. 

 

With single family foreclosure rates hitting record highs in the U.S. more and more people are being forced into a situation to rent. Where are they going to go? You guessed, right into my apartment units.

 

Also, for those who are in a situation where they can afford to buy a single family home, banks aren’t lending on single family purchases like they used to. With values dropping, no one knows how to appraise these properties which makes lenders skittish on wanting to provide a loan to a buyer, which means, there are fewer buyers in the market right now and once again their only option is apartment rentals.

 

Here are some numbers for you regarding the Homeownership in the U.S. Homeownership rates shot up from around 66 percent in the late 1990s to more than 69 percent in late 2004. Since 2005, however, the rate has declined to less than 68 percent, resulting in an additional 2.6 million renter households.

 

Another source from where demand will be created is in the echo boomers. The echo boomers, children of the baby boomers, are coming of age and are entering their prime renting years, a trend that will continue during the next 5 to 10 years. Here are the stats on the echo boomers.

 

-         Born between 1982 – 1995

-         80 million echo boomers are coming of age

-         Echo boomers represent 1/3 of the U.S. population

-         Currently echo boomers spend $170 billion per year on their own

 

 

Consider the strength and security behind investing in apartments. Apartments are considered one of the most conservative real estate investments anyone can make. They have outperformed all other real estate investments by 43 percent year over year, for the past 10 years. Fannie Mae’s delinquency rate on multifamily is .16 percent and Freddie Mac’s delinquency rate on multifamily is .06 percent. These numbers translate to record lows in our industry.

 

In addition, with the rising cost of construction and the challenges of securing construction loans fewer complexes are coming on the market in 2009 which is keeping supply at manageable numbers. The National Association of Home Builders forecasts that multifamily starts will drop this year to 188,000 units from 292,000 units in 2008, therefore, reducing the risk of oversupply. Only 80,000 apartments are scheduled for completion in 2009, down from 98,000 in 2008. New supply will fall to its lowest level since the mid 1990s.

 

Finally, many commercial loans are getting ready to come due, which will require many multifamily owners to either refinance or sell. This provides buyers an opportunity to buy from a motivated seller, which always leads to better purchase prices. This is like walking into a major department store and finding almost everything to be on clearance.

 

Investors often make the mistake of following the herd and buy when everyone else is buying. When this happens, the market is at a stage in its cycle where all the good deals at the right price where already purchased.

 

It’s the actions people take during times like this that creates millionaires and this stage in the market cycle comes only once every 8 – 12 years. Take advantage of what’s out there. Make sure to buy now and buy smart, and you will soon see your hard work payoff.  

 

Imagine the possibilities.

 

When the House of Representatives passed the Emergency Economic Stabilization Act (ESSA), everyone had hoped for an immediate positive impact, however, all it did was worsen already aggravated market. A large part of the rescue package was the Troubled Asset Relief Program (TARP), which called for the United States Government to purchase assets and equity from financial institutions in order to strengthen the financial sector. The assets that would be purchased are referred to as collateralized debt obligations (mortgage related assets that are difficult to price and trade) which were sold in the booming market until they were hit hard in 2007 by a record breaking number of foreclosures on the underlying loans. By freeing up these assets and providing the banks with cash, lenders would be able to begin making loans again therefore trying to stimulate the economy. Once the market is corrected and stable, the Government would then turn around and sell the assets. The Government will likely use a reverse auction to allow institutions to compete in their pricing and sale of the assets. Although TARP did not have the immediate impact on the market that the Government was hoping, we should expect to see relief in the financial sector in the months ahead.  

 

Although the single-family market took a hard hit in 2008 with record breaking foreclosures, commercial mortgage delinquency rates remain near record lows, but may rise due to a weakening economy. Should this happen, there will be additional distress in the market, however, if the financial markets begin to normalize in mid 2009, which many economists believe they will, the significance of the downturn should not drastically affect the commercial real estate market.

 

To mitigate risk, lenders are making it more difficult to secure financing for commercial purchases. Gone are the days of 100% financing with low debt coverage ratios. Lenders are now looking for debt coverage ratios beginning at 1.25 – 1.30 and down payment requirements are averaging 30 percent to 45 percent.

 

However, in the middle of all the uncertainty, the one thing that remains constant and optimistic is apartments. Apartments continue to be a bright spot in Fannie Mae and Freddie Mac’s portfolio and the agencies continue to lend regularly on quality deals. The current portfolio lender spreads for apartment properties range from 275 to 300 basis points over the 10-year Treasury. As of this writing, the 10-year Treasury closed the week at 2.31 suggesting commercial rate to range from 5.06 percent – 5.31 percent.

 

In my opinion the biggest challenge for consumers is to realize that a market recovery will happen. This is difficult to do because no matter where you are or what you’re doing the feeling is grim and it’s every where, the news shows, newspapers and magazines. Remember this is not the first recession this country has seen nor will it be the last. I have faith in the American people and our Government that we will come out of these times stronger than the recent economic boom.

 

 

 

 

Most are familiar with the famous real estate mantra, location, location, location.  For the purposes of real estate investing, the location is the second step in determining where to invest. At The Colonna Group our mantra is JOBS, JOBS, and JOBS. Job announcements are the first signs of a healthy and possibly emerging market. When a city is projecting job growth by 2.5% or greater, year over year, that is going to be your first indicator of a market that is getting ready to emerge.  

Don’t misunderstand what I’m saying, just because new jobs have been announced does not mean that we begin buying property, we have to do a little more research, for example we need to determine which area of the market is growing. Are city officials focusing their efforts in the North, South, East or West quadrants of the city? A lot of this information can be gathered during a 30-45 minute conversation with the city’s Department of Economic Development. Often times they can even provide you with a 3, 5 or 7 year projection for their city.

Next we need to determine if there is more supply than demand. Finding out a markets supply can be determined by contacting a local commercial broker and simply asking them how many units are on the market and how many are expected to be introduced to the market in the coming year. Most commercial brokers should be experts on their market place. Speak to several different brokers so see how consistent their answers are.

For a better understanding of emerging markets and how to identify them, read Emerging Real Estate Markets by David Lindahl. To quote Lindahl from his book, for every 1 job created 3 new service jobs must be created to support it. Just think about, if a city is going to produce 1,000 – 10,000 new jobs, those people are going to need places at which to buy groceries, go out for dinner, shop for clothes and household goods, hence the creation of service jobs.

Once we have all of the information we need, we can then make an informed decision on whether or not to move forward and begin looking for property.

So with that said, here is our first job announcement post on this blog.

Volkswagen Group of America, Inc has announced that it will build a U.S automotive production facility in Chattanooga, where it will produce a car designed specifically for the North American consumer and invest $1 billion in the economy. Here is a breakdown of the project:

·        $1 billion investment

·        2,000 new jobs

·        1,350 acres

·        Initial production capacity: 150,000 vehicles

·        Production will begin in early 2011

 

The city of Chattanooga is forecasting that the new jobs created by Volkswagen will bring in an additional 4,000+ jobs to the market.

According to the Commercial Real Estate Outlook published by the National Association of Realtors, all commercial real estate, with the exception of Multi-Family, are showing poor results for YE 2008 with not much to be excited about in 2009.

 

If anything multifamily is the bright spot in 2009 due in part to the large number of foreclosures that continue to take place. Remember, no matter what is happening in the economy people will always need a place to live.

 

In a recent interview with Multi-Housing News, George Ratie, economist at NAR Research stated that the Multi-Family is the bright spot for 2009. He continued saying that NAR forecasts multifamily vacancy rates for the third quarter of 2009 at 5.8%, unchanged from the third quarter of this year, which is still low compared with other sectors.

 

With it becoming more and more difficult to obtain a 30 year mortgage, coupled with the virtual stop of single-family construction, more and more people are becoming renters, which is a good thing for owners of multifamily properties. Because of this demand economists are forecasting a modest increase in rents by 2.8% in 2009 as opposed to 2.9% in 2008 and 3.1% in 2007.

 

 

 

Interest rates for 30 year fixed loans fell to another record low to 5.01%. This is due in part to the Federal Reserve’s recent purchase of mortgaged backed securities issued by Fannie Mae and Ferddie Mac. As for for Multifamily loans we can assume they have fallen as well. 

The interest rates for commercial properties are tied to the 10 year treasury note and the difference between the rate of the treasury note and the rate we are charged is referred to as the spread. In the past the spread averaged from 1.70 – 2.4 points higher than the treasury note. Conduit lenders where always a little higher than Freddie Mac and Fannie Mae due to the way they structured their loans. With the current lending market experiencing challenges, competition for Fannie Mae and Freddie Mac have nearly vanished, so they have been setting their spreads at 3 -3.2 points higher off the treasury note. Since 10 year treasury yields are at 50 year lows we should see commercial loan rates hover between 6 – 6.7.

As a side note, when analyzing your deals and calculating your NOI and cashflow, always go a little higher on your interest rate. This is sure to give yourself some breathing room when the lender locks in your rate. If you analyze your deals with your rates too low and your lender comes in higher than you forecasted you will not hit your numbers, therefore, taking an unexpected bite our of your cashflow. Remember, in this game cash is king, always error on the side of conservative practices.

The Colonna Group, LLC is a real estate investing company that sepcializes in Apartment Buildings. The company purchases and manages apartment buildings located in emerging markets around the country. The key phrase is EMERGING MARKETS. These are areas that are positioned for growth. Let’s go back to the year 2000, where it seamed like the entire country was an emerging market. No matter where you purchased real estate, it was sure to do well. However, in 2006 we saw values decreasing and time on the market getting longer and longer, everything hit it’s peak in 2005.

If you could go back in time, wouldn’t you have purchased everything you could in 2000 and then sell everything right before the “bubble burst” and then take that money and buy more in the next emerging market?  Of course you would have. Well that’s what we do at The Colonna Group. Contrary to what the news says, there are anywhere from 50-100 emerging markets in the country right now. The news has a bad habit of reporting on only about 12 markets.  

The first sign of an emerging market is job announcements. From jobs, everthing else follows suit. Our company keeps a close tab on various markets around the country and are in constant communication with key city departments. When we learn of actions being taken by a city to draw company’s to it’s area our ears perk up and we begin watching what’s taking place. After a little research, we begin building our team and go into the market and announce our arrival. What’s most important is that we are buying in the right place at the right time. The research doesn’t stop there, we continue to follow market information so that when we see those signs that suggest things are going to begin slowing down, we sell then use those profits to make other purchases in the next emerging market.

The purpose of this blog is provide you, the investor, with information on what’s going on around the country and what markets are poised for growth. We will provide information, on a regular basis, about job announcements, emerging markets, investment information and a lot more real estate insights that will help you plan when, where and how to invest.