Apartment builders could have to construct more parking spaces

Developers will have to add more parking at apartment projects under a proposal headed to the Portland city council.

KOIN Local 6 reports the Portland Bureau of Planning and Sustainability voted 7 to 1 Tuesday to support a zone amendment that would add parking requirements for new multifamily projects.

The thorny issue of parking emerged as developers took advantage of exemptions and raised the hackles of neighbors in the Southeast Hawthorne district, who complained of clogged on-street parking.

Existing codes, which were developed in the 1980s, required no parking in certain areas as well as sites less than 500 feet from a transit stop with frequent bus service.

The proposed change requires a minimum of one parking space per four dwelling units in new projects with 40 or more units.

Developers can eliminate two parking spaces for every one space dedicated to a car sharing vehicle. They can also eliminate one parking space for every five extra bike parking spaces or for every four motorcycle parking spaces.

Secondary Markets: Multifamily’s New Frontier

Secondary multifamily markets are ripe for investment for smaller players, while the larger institutions continue to focus on class A assets in gateway markets. That was one of the main messages from our conversation with Morgan Ferris, senior vice president income property lending, at BofI Federal Bank. His firm is one of our Thought Leader partners on Multifamily Leader, as part of our coverage of MBA’s CREF/Multifamily Housing Convention & Expo earlier this month.

Globest.com: Were there any surprises about the market at MBA’s CREF multifamily conference, or were your prior impressions reinforced?

Morgan Ferris: There weren’t any surprises to what we see in the marketplace or where things are going. It kind of solidified our overall thoughts. There appears to be some very buoyant mood for the next year. A lot is very positive.

Globest.com: Do you see that momentum going into secondary markets as well?

Ferris: I’m hoping that excitement moves into the secondary markets and what all the banks have been doing in regards to providing liquidity for the market opens up in the secondary market. We’re definitely hoping to see that.

Globest.com: Do you have any insights on GSE reform or did you gain any at the conference?

Ferris: I haven’t heard anything new or definitive. Obviously, it’s in everybody’s cross hairs. Everybody thinks that something is going to happen. I don’t think it will be definitive any time soon. I just read that their overall market share came down and most likely will continue to come down. Their original charter for multifamily was put into place for low-to-moderate-income housing to make sure there was a liquid market there. Over the last 10 or 15 years they have moved into the class A product and out stepped their bounds. They’ve tried to step back in at different points into the small balance, and that’s where the GSE’s could add a lot of liquidity into the market. It would really help open it up if they were to step in strongly.

Globest.com: Have you seen you client base change much lately as far as who is interested in investing in multifamily?

Ferris: There is a massive pent-up demand for the product in regards to our investors, being specialists in the small-balance arena. Our investors tend to be smaller, anywhere from having 10 to 1,000 units, and although they can be very sophisticated, they are more small businesses. The typical investor is mostly in the market they play in and add value to that local marketplace. Most of our clients are not broad, national players. They are very market specific. There is quite a bit of money sitting on the sidelines waiting. There is a discrepancy between what the sellers are willing to take versus what the buyers are willing to offer. That hasn’t equalized yet, so the purchase market hasn’t caught up to where it will be until there’s more grounding in the overall marketplace.

Globest.com: So you don’t see multifamily overheating any time soon?

Ferris: In regards to the GSE and the class A-type properties, there is a possibility of that overheating. For the small-balance players, I do not see that blowing up or overheating because the underwriting standards that most small-balance lenders underwrite to typically are getting a little higher yield. They’re not chasing the class A towers. The small balance tend to rent to people that need to rent and are going to continue to rent and are long term. That’s a great place to be.

We do not see our space overheating and blowing up to the extent that the larger class A product may. Right now the government is artificially pushing down the rates, and that in turn pushes down cap rates, and right now those big players that are buying $100 million to $300 million at a time have got no place else to put their money. They can put it in a bond making 1% or 2% or they can buy a class A apartment building making 3% or 4%, plus appreciation, and they’re going to go in that direction. But that’s artificial. Those rates can not hold, and as soon as those change, what’s that going to do to cap rates and what’s going to happen to those buildings.

The 4 Multifamily Trends that Will Make You Wealthy

by Kieran Donohue (Director, Communications and Education)

The Historic Trend toward renting

A recent Harvard University study released highly promising information for commercial multifamily investors. Four key trends are driving the multifamily sector to historic levels and investors are receiving superb returns as a result.


1) Homeownership Plummets while Renters Increase. Dramatically.

Homeownership levels (the percentage of households that own vs. rent) fell at record levels last year. This is the 7th straight year of homeownership decline and this trend will continue for the forseeable future.

In 2012, the percentage of Americans who own a home was at its lowest level in 15 years.

At the same time 1,000,000 new renter households entered the market.

The multi-year view highlights an even more dramatic shift in homeownership. Since 2006, nearly 4,000,000 new households have shifted from homeownership to renting.

This is a historic trend that shows no sign of reversal.

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2) The two largest generations in history are driving the rental surge

The two largest generations in US History are driving the dramatic shift in renting versus owning. The Baby Boomer generation is beginning its expected trend of decreased homeownership. The Echo Boomers, or Generation Y, are not becoming homeowners as quickly as previous generations and in many cases are walking away from homeownership altogether.

This demographic surge is fueling record growth in the multifamily sector of commercial real estate.

3) New Apartment Construction Lags

Last year, only 225,000 new rental units were completed. Yet, current demand requires more than 800,000 rental units every year for the next 10 years and beyond. This significant supply/demand imbalance is driving up occupancy and rents in almost all markets across the United States.

4) Shrinking Vacancy, Rising Rent

Increased demand coupled with shrinking supply has caused vacancy rates to fall by 2% in many major markets in the past year alone. As a result, rent is rising by nearly 5% in many areas. This is double the rental rate increase from 2011.

No End in Sight

It is no surprise multifamily investors are seeing excellent appreciation and increased cash flow from their assets. As a result of the long-term demographic trends and the behavioral shift away from home ownership, multifamily investors can expect a decade or more of safe, dependable returns

Experts Say ‘Apartment Bubble’ a Myth

PALM SPRINGS, CA-Despite talk of an “apartment bubble” at conferences on each coast and in closed-door investor meetings, the multifamily market is in no danger of being overbuilt, according to research from Jones Lang LaSalle and other industry experts. JLL’s Jubeen Vaghefi, international director and leader of JLL’s multifamily capital-markets group, spoke to GlobeSt.com during last week’s NMHC Apartment Strategies Conferencehere and reassured us that the so-called apartment bubble was not likely to burst any time soon.

JLL’s research shows that development of multifamily space across the US has been unabashedly robust over the past year, leaving many anxious about the impact it will have on market conditions, and with nearly 200,000 multifamily units delivered nationwide in 2012, it’s a legitimate worry. But the number necessary to sustain demand fell short by 100,000 units, and a study of historical delivery levels points to a healthy outlook for 2013 and well into 2016.

“The multifamily market is still playing catch-up, as supply remains depleted,” said Vaghefi in a prepared statement. “Development will continue to grow at a solid pace in 2013, with approximately 260,000 units expected to come online, while demand requirements outpace the supply pipeline. This year, expected deliveries of new product will be 12% below historical average delivery levels.”

David Young, managing director of JLL’s capital-markets group, added that multifamily transaction volume last year was “incredible; for the first time, the US sector outranked every other asset class. We can expect the 2013 investment landscape to remain about the same with a moderate uptick in multifamily transactions this year. There is definitely an opportunity for the investment community to capitalize on this stable asset class in the coming years.”

Other industry research supports this finding, showing that demand that has been pent-up for years is far from being satisfied. In fact, Urban Land Institute’s “Emerging Trends in Real Estate 2013” report projects room for new supply. “Some fallow development years have further tightened many markets as developers are only now beginning to catch up,” the report from PwC and ULI said. “In high-barrier-to-entry places, particularly metropolitan areas along the coasts, new projects may have trouble keeping up with demand, resulting in mid-to-low single-digit vacancy rates and rent spikes and extremely solid appreciation. So long as these trends continue, over the long term apartments should continue to outperform all other property types on a risk-adjusted basis, with excellent cash-flow components.”

In addition, GSEs Fannie Mae and Freddie Mac continue to fuel the market as a source of lending for the exit of development projects, while construction lenders have stepped up at the dirt level, JLL reports. Favorable interest rates and attractive capital made development in the wake of the downturn possible for this sector. As the multifamily market continues to expand in 2013, the NMHC expects that most markets will adjust to the changing landscape of needs.

“Development activity continues to increase in most markets, with just over half reporting a substantial pickup in land acquisition, lining up financing and getting building permits, though not yet much in the way of actual construction starts,” reads an NMHC statement from 2012. “An additional 20% said that developers have been breaking ground on new projects at a rapid clip.”

JLL’s research shows that phenomenal multifamily growth may be on the horizon in some metropolitan areas where development was suppressed due to the recession. The firm surveyed 28 metropolitan areas and found that nearly 70% of regions will have triple- or quadruple-digit supply growth this year over 2012 due to some metro areas in desperate need of new development.

Markets that are supported by economic job growth will draw the Millennial and Baby-Boomer generations back to the urban core and surrounding suburban pockets. South Florida, Las Vegas, Phoenix, Chicago and Los Angeles will be some of the top markets for supply deliveries in 2013.

“While markets like South Florida will experience outsized deliveries in 2013, in reality those numbers are a fraction of what we’ve seen in the past—just 40% of the historical annual average,” said Vaghefi. “After several years of meager deliveries, the sector is finally starting to respond to demand in the marketplace. We’ve got a long way to go before we cross that ‘bubble’ threshold.”

As GlobeSt.com and Real Estate Forum reported earlier this month, this year has started out strong for apartment investment, what with Equity Residential and AvalonBay Communities’ $16-billion buy of Archstone Inc.’s assets. The deal not only quenched long-circulated rumors and speculation of a potential Archstone IPO, but it also marks the largest deal in the sector since 2007.

12 CRE Predictions for 2013

The last few weeks of 2012 revealed a lot about what 2013 could hold in store for the commercial real estate sector, and it appears to be shaping up to look a lot different (i.e., better) than the last couple of years.
Deal flow increased notably after the presidential election as the uncertainty ended over what policies would shape the U.S. economy for the next four years and as the housing market recovery seemed to take hold.
Also, the fiscal cliff proved to be a political hallucination – a compelling hallucination, but a cliff that nevertheless that could be pushed off in time rather than us being pushed over the ledge.


So, with the prospect of another Washington-induced recession seeming more imaginary than authentic, it also appears that 2013 will be a year when the CRE markets see a return to more normalcy.
Following are a dozen outlooks for 2013 encapsulated from forecasts offered by respected industry participants and observers.

Investment Market Will Be Up 20%

The commercial real estate industry’s measured and steady recovery is expected to bolster further growth in the United States, with the greatest demand amidst the multifamily, office and industrial sectors, according to respondents of Jones Lang LaSalle’s 2013 Cross Sector Survey.
While unemployment and Eurozone fears remain top of mind and an uncertain United States political picture is introducing more cautious action, 56% of industry respondents to the Cross Sector Survey expect their investment activity to rise by as much as 20% in 2013, compared with last year.
“This year, we’re likely to close 2012 with only a 10% improvement over last year in investment trades for all sectors, excluding hotels,” said Jay Koster, president of Jones Lang LaSalle’s Americas Capital Markets. “While the growth rate has slowed, the investment transaction market is still markedly above the 2009 floor, and transactions are still improving in the face of significant economic headwinds. The record-low Treasuries are also giving the transaction market a boost as an attractive lending market should continue to pave the way for a strong fourth quarter and an increase in investment transactions in 2013.”
Investors still prefer multifamily as their investment property of preference for 2013, with 43% of respondents ranking multifamily as the most appealing product type followed by 27% who chose office as their secondary preference. Industrial ranked in third at 14%, retail fourth with 12%, and hotels with 4% of respondents ranking it as the fifth most appealing product type.

Earliest Buyers Will Be the Sellers in 2013

Blackstone Group LP, which has been a major buyer of commercial real estate since the economic collapse in 2007, will shift to being a major seller in 2013, harvesting some of the gains from its 2007 and 2008 investments, Tony James, president and COO of Blackstone, told Goldman Sachs Financial Services Conference attendees last month.
In fact, the shift has already begun. Blackstone did about $1.8 billion in dispositions in 2011 and will do about $3.7 billion this year.
Blackstone believes it’s an opportune time to be disposing of stabilized properties right now because cap rates and interest rates are so low.
“Cap rates are really, really low because so many investors in the world say, ‘I’m tired of taking risk, I want to go buy hard assets,'” James said. “I’m not saying we’re calling the top here. It’s just that what we do is we buy it when it is usually a distressed property or distressed owner. We fix it and we sell it. That’s all we do. It’s a very simple formula. Once we fix it, we don’t play the market, we push it out there. We’re converting property from distressed real estate to core real estate. We sell into the core buyers because that is where you get these very low cap rates.”

More Sellers Will Emerge, But May Be Discouraged

“2013 will likely begin with a large pool of sellers pondering whether or not they are indeed still sellers depending on the current tax environment,” said Geoffrey Faulkner, managing partner of NNNet Advisors. “(We) expect to see more sellers motivated only by the ability to complete a successful 1031 exchange. These sellers will continue to face the challenge of limited quality supply on the up-leg of their exchanges, which in turn, will likely hinder and altogether discourage many sellers. Artificially low interest rates will continue to push caps lower on high quality properties, while cap rates on lower-quality properties that are difficult to finance will continue to rise. Overall, with interest rates likely to hover close to where they are today, we expect transaction levels for 2013 to mirror those of 2012.”

Strongest Markets Will Be on the West Coast

Commercial real estate will be a big beneficiary of an improving U.S. economy in 2013, according to the respected Kiplinger Letter.
Among the major predictions for the coming year, Kiplinger sees Boston, Minneapolis, Dallas, Oklahoma City, Denver, San Francisco and San Jose, Portland, OR and Seattle as being among the the strongest markets for office space.
Demand for warehouses is heating up in Seattle, Denver, San Diego, L.A., Houston and Philadelphia, while the much-battered market for retail space is brightening, with rents headed a whisker higher on average in 2013, after bottoming out this year.
From an investor perspective, apartment buildings – where vacancy rates continue to slide and rents will climb higher next year – retain the most appeal. Standout markets include Orlando, Houston, Phoenix, Denver, Salt Lake City and the San Francisco Bay area.

Shift to Secondary and Tertiary Markets Will Continue

As the real estate industry continues to recover from its multi-year slump, prospects for 2013 look stronger, particularly so for real estate investment trusts looking to raise capital by going public and a pickup in secondary and tertiary market activity. The real estate banking team at the investment firm Robert W. Baird is looking to 2013 with an eye to the following major investment themes.
As values for multi-family, industrial, and office developments rise in and around major cities, investor interest is likely to move to the secondary and tertiary markets where pricing is more favorable and demand is strong. These include markets such as Charlotte and Raleigh-Durham in North Carolina, San Antonio in Texas, and Seattle.
Interest in mergers and acquisitions will remain muted, with the possible exception of lodging. “Many of the public REITs are trading above NAV [net asset value], so they can acquire companies in transactions that are immediately accretive,” said Steve Goldberg at Baird. “At this point in the cycle, those companies that have been able to raise equity in the public markets have a significant cost of capital advantage.”

After Slow Star, Pace Will Accelerate Through 2013 and into 2014

2013 is expected to be a turning point for the economy and the commercial real estate industry, according to Cushman & Wakefield’s Global Economic Pulse Forecast. While 2013 will get off to a slow start coming as it does at the end of the slowest economic recovery on record, however, C&W beleieves the stage has been set for a significant turn-up in market sentiment by year end, setting the stage for a strong global rebound in 2014 and beyond.
“We believe in 2013 there will be more clarity to political and economic challenges plaguing the global economy,” said Glenn Rufrano, president and CEO of Cushman & Wakefield. “As we see solutions evolve, confidence should return, demand will accelerate and lead to a much healthier economic climate.”

Greater Acceptance of Slow Growth

Others believe that slow growth is here to stay. According to findings of the PwC Real Estate Investor Survey, investors in the office sector are showing a greater acceptance for slower growth and less apprehension about moving further out on the risk spectrum. Although core trophy assets remain the preferred target of both domestic and international investors, aggressive pricing and improved fundamentals have resulted in certain investors looking to buy either core in strong secondary markets or less-than-core in primary markets.
“The commercial real estate industry continues to show its investment durability as assets command attractive spreads over fixed-income investments and offer more stability than stocks, while most property sectors continue to post occupancy gains and rental rate growth,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC.
“Foreign investors are particularly bullish on U.S. commercial real estate as they look for stable investments during uncertain times abroad. In 2013, Survey respondents expect to see an uptick in sales activity as property owners cull portfolios to take advantage of the low cap rate environment. And as investment capital continues its trend of matriculating beyond just apartments, cap rates are expected to compress across the entire asset class.”

Recovery Will Require New Technology To Keep Pace

The U.S. commercial real estate (CRE) recovery, although slow, is visibly improved in fundamentals, capital availability, asset pricing and transactions, according to Deloitte’s Commercial Real Estate Outlook. While the global economic slowdown continues to hinder development, CRE players are finding growth in alternative mechanisms such as technological innovation.
“Overall, we are seeing recovery in commercial real estate activity; however, the pace of recovery is likely to be more modest across several property types until the broader economy picks up,” said Bob O’Brien, vice chairman and Deloitte’s real estate sector leader. “Sustainability is gaining a lot of traction in the real estate industry, and there is renewed interest in foreign investment, especially in emerging markets. In addition, investors from emerging countries like China are looking to the U.S. for stable investments.”
“It is critical for CRE players to aggressively adopt technological innovation, like cloud computing, analytics and social media, to spur growth and maintain their competitive edge,” O’Brien continued.
Cloud computing drives operational efficiency, mobility improves the customer experience and social media helps CRE firms gather pertinent data around consumer behaviors. For an industry that has traditionally been slow to adopt new technologies, it is more important than ever that CRE players re-strategize and adapt to maintain their competitive edge, Deloitte argues.
CRE players need to address new business challenges and simultaneously improve operational performance and effectively manage enterprise risk. Analytics can help CRE players address these needs by integrating capabilities in data management, statistics, technology, automation and governance into a potent catalyst for making better and faster decisions. In the long-term, the level of analytics implemented will likely be a key differentiator in assessment of tenant mix and retention strategies across real estate sub-sectors.

2013 Will Be Good for Equity REITs

Equity REITs will continue to have solid access to capital, improved liquidity and improving fixed charge coverage and property-level fundamentals
Absent fallout from the fiscal cliff, Fitch Ratings said it expects modest growth in GDP in 2013, which will contribute to slightly positive property-level fundamentals. Retail, industrial and central business district office REITs should have modestly positive same-store NOI (SSNOI) growth. The suburban office sector will continue to face challenges in maintaining SSNOI.
Fitch said it expects issuers will continue to have liberal access to historically low-cost debt. Leverage, long a concern for Fitch with respect to equity REITs is likely to remain elevated. Fitch said expects REITs to fully move away from reducing debt and instead use proceeds from follow-on common equity offerings for development and other growth opportunities.
Apart from negotiated off-market transactions, Fitch said expects REIT acquisition volumes in 2013 to remain relatively unchanged from 2012 levels. Health care REITs may buck this trend and continue to pursue property, portfolio, and entity acquisition opportunities.

CMBS Performance Could Fall Off

“As we head into a new year, we see value in CMBS but do not anticipate the sector will deliver the outsized returns achieved in 2012,” said Marielle Jan de Beur, managing director and head of CMBS and real estate research for Wells Fargo Securities.
“We anticipate the market will overcome the regulatory hurdles facing the new issue market and forecast $50 billion of private-label issuance and $65 billion of agency CMBS issuance in 2013,” Jan de Beur said.
“The 30+ day delinquency rate for fixed-rate conduit CMBS is currently at 9.38%,” she said. “As we look ahead to 2013, we only expect a modest decline to around 9% by year-end 2013.”
“The large amount of liquidations in 2012 has helped to decrease the balance of loans in special servicing, but even with the reduction, there is still a sizable loan pipeline that needs resolution. As a result, we do not expect liquidations to let up much in 2013. (Rather,) we expect to see a substantial decline in the number of extensions in 2013 as the most of the maturing loans will be from the pre-2005 vintages.”
The securities analyst is expecting to see continued improvement across all property sectors through 2013 with the apartment sector expected to outperform the other property types.
“Minimal new supply should allow modest demand to continue keeping downward pressure on office, retail and industrial sector vacancy rates,” said Jan de Beur said. “Hotel occupancy gains likely will slow in 2013, limiting increases in property revenues. Based on the revenue outlook for the core property types, we forecast property prices will increase 3% on average.”

Bricks and Mortar Retails To Focus ON “Sure Thing”

The impact of e-commerce on bricks-and-mortar retailers will continue to expand. This long-term trend will gradually redefine shopping center tenant mixes (look for more dining and entertainment uses) and retail development, according to the Chainlinks Retail Advisors 2013 retail outlook.
Retailer expansion in 2013 will be about “the sure thing;” urban over suburban, Class A and B over Class C and locations with greater population densities and higher income demographics still winning out most of the time.
Retail categories expected to expand in 2013 include: New smaller grocery concepts and niche players ranging from discount to luxury and ethnic to organic; Fast food and fast casual lead the way in restaurants, but growth expected across the full spectrum — fitness/health/ spa concepts, drug stores, dollar stores, thrift stores, automotive service, discounters, off-price apparel, pet supplies, sporting goods, hobby stores/arts & crafts, wireless stores (limited growth driven mostly by a few new concepts)and some banking/check cashing/financial services growth. Restaurants will account for about 40% of all the new tenancy in the marketplace in 2013 (unit counts, not square footage).
Contracting retail categories in 2013 include: Traditional larger format grocery stores – especially unionized smaller or regional chains; Video rental and video game stores; Bookstores; Do-it-yourself home stores (though these will rally by 2014); Stationary/gift shops; Office supplies will continue to shift more to e-commerce; Shipping/postal stores; Certain casual dining concepts (the old and stale will lose out to new and fresh).
Housing-related retailers ranging from home goods to furniture to do-it-yourself home improvement stores will rally by 2014 thanks to the return of the housing market.
Retail development in 2013 will still dominated by urban redevelopment projects, outlet malls and the occasional long- planned regional mall going forward. There will only be limited suburban development throughout 2013, though this will be slowly changing as now home starts rise over the course of the year.
Speaking of which…

Slow and Steady Housing Recovery

Upward trends in recent months among a number of housing indicators point to a slow and steady growth in the nation’s housing market in 2013, but several challenges remain, according to David Crowe, chief economist for the National Association of Home Builders (NAHB).
“Consistent, positive reports on housing starts, permits, prices, new-home sales and builder confidence in recent months provide further confirmation that a gradual but steady housing recovery is underway across much of the nation,” Crowe said. “However, stubbornly tight lending standards for home buyers and builders, inaccurate appraisals and proposals by policymakers to tamper with the mortgage interest deduction could dampen future housing demand.”
Stating there is no consistent national trend, Crowe noted the housing recovery is local but spreading.
“We are transitioning from a very low demand level, where most people hold themselves out of the marketplace, to a case where supply will start being the problem,” he said. “As we begin to build more homes to address that supply, the new home stock will be a much more important element of the recovery.”

Survey Finds CRE Investors Refocusing On Strategy as Fog of Uncertainty Begins to Lift

With the distraction of the U.S. elections disappearing in the rear-view mirror, more investors are again ready to focus on the opportunities they see in commercial real estate, even though uncertainty remains about the looming fiscal cliff and the political solution to address the nation’s rapidly growing debt.
According to the fourth-quarter 2012 PwC Real Estate Investor Survey, investors expect to see an uptick in sales activity in 2013 as property owners cull portfolios to take advantage of the lower capitalization rate environment. Survey respondents expect cap rates to continue to compress in the multifamily sector and begin to dip in sales across all property types.
“The CRE industry continues to show its investment durability as assets command attractive spreads over fixed-income investments and offer more stability than stocks, while most property sectors continue to post occupancy gains and rental rate growth,” said Mitch Roschelle, partner with the U.S. real estate advisory practice leader for PwC. “Foreign investors are particularly bullish on U.S. commercial real estate as they look for stable investments during uncertain times abroad.”
The real estate industry and corporate America adopted a “wait-and-see” attitude as the U.S. presidential election drew closer and investment demand and the industry’s recovery both noticeably slowed at the start of the second half of 2012.
But going into 2013, survey respondents say they see a bit more clarity and optimism even though the nation is still grappling with the fiscal cliff, next year’s debt ceiling debate, a choppy housing recovery, tepid demand for office space and a weak manufacturing sector.
At the same time, most property sectors continue to post occupancy gains and rental rate growth and an era of zero to low new supply is starting to give way to new construction starts in most property sectors.
“We’re starting to see good news eclipse the bad news, and that makes us want to invest more capital in CRE assets,” noted a participant.
Among office investors, more are starting to accept slower rent growth and have less concern about moving further out on the risk spectrum. Core trophy assets remain the preferred target of both domestic and international investors, however, aggressive pricing and improved fundamentals have resulted in certain investors looking to buy either core properties in strong secondary markets or “less-than-core” in primary markets, according to respondents.
At the same time, overall cap rate compression and assertive bidding are providing incentive for office building owners to sell.
“It’s a good time to cull portfolios,” noted a participant.
Even the retail sector, not as popular among investors for some time, is seeing cap rates compress. Due to limited new construction, moderate spending on the part of consumers, and stabilizing housing markets, many investors are starting to revisit strip shopping centers and even power centers.
“As yields for well-leased shopping centers have compressed too much, we are considering buying value-add in great locations due to a lack of new supply,” said an investor.
Lack of new supply combined with rising tenant demand have caused investor interest in the warehouse sector to surge over the past year, creating both buying and selling prospects. In addition, new construction is occurring in certain warehouse hubs where overbuilding is usually less of a concern, like Miami and Chicago, and in select apartment metros.
However, disciplined CRE construction lending and an overall slow-growth environment are expected to temper thoughts of adding too much new supply to a healing CRE industry, where buyers and sellers may soon be on equal footing.
The CRE recovery remains uneven and very location and sector specific. Still, real estate remains a prime target for investment capital as it continues to perform well relative to alternative investments. The largest percentage of respondents, 34.6%, believe that equity real estate capital will be moderately oversupplied in 2013, while 26.4% feel it will be somewhat undersupplied.
At the same time, interest rates are not likely to shift anytime soon as investors continue to “jockey for position in the capital stack to achieve the best risk-adjusted returns,” in the words of a participant.

Wall Street Sees Promise in Multifamily Loans

Fannie Mae FNMA -2.61%and Freddie Mac FMCC -1.98%are finally getting some private-sector competition in the business of financing loans in the debt market, at least in multifamily housing.

Wall Street lenders are getting more aggressive bidding on multifamily loans to securitize in recent months, helped as the demand for their commercial mortgage-backed securities has cut their costs to the lowest in more than four years, getting closer to those of government-advantaged programs of Freddie Mac, Fannie Mae and the Federal Housing Administration.

Congress has urged private capital to take over as the primary source of funding for real estate, after the housing bust left taxpayers shouldering billions in losses from the single-family portfolios of Fannie Mae and Freddie Mac. With CMBS recovering faster than private residential mortgage bond issuance, that shift may be seen first in multifamily housing, analysts said.

“Multifamily loans lead the pack in terms of how aggressive the lenders will get” within commercial real estate, said Christopher Haynes, president of Broadacre Financial, which advises commercial real-estate borrowers.

The drive for more multifamily loans comes as CMBS lenders seek to regain a foothold in a sector of commercial real estate that has evaded them since the financial crisis. Multifamily loans made up just 6.6% of CMBS deals this year, down from the 10-year average of 19%, so any change to the “practical monopoly” of the agencies is significant, according to Harris Trifon, head of asset-backed and CMBS research at Deutsche Bank DBK.XE +2.18%.

CMBS lenders are capitalizing on a five-month rally in their bonds to regain multifamily share lost to the agencies. This is diversifying CMBS loan pools to the liking of rating firms and investors uneasy with concentrations in riskier real-estate sectors, like retail. CMBS lenders could see another $10 billion in multifamily if the agency market share is cut even a small amount, Mr. Trifon said.

The growth comes as CMBS risk premiums have dropped as low as 0.83 percentage point this month, from about 1.6 points at midyear. Tighter spreads let CMBS come closer to lending packages offered by Freddie Mac and Fannie Mae, whose similar bonds demand yield premiums of about 0.5 point.

“We’re seeing them nibble around the edges a bit more,” said Kimberly Johnson, Fannie Mae’s senior vice president for multifamily capital markets.

CMBS have a way to go before making a dent in the market share for multifamily debt. Led by portfolios and securitizations, agency and FHA multifamily debt outstanding grew by 2.6% in the third quarter to a record $368.9 billion, the Mortgage Bankers Association said. That tops an increase at banks and compares with a 3.2% decline in CMBS multifamily debt to $74.3 billion, the lowest in nearly eight years.

David Brickman, senior vice president of Freddie Mac’s multifamily program, said Fannie Mae, insurers and banks are still his main multifamily loan competitors. But CMBS lenders are finding areas where they can compete, especially where Freddie Mac is “not terribly aggressive,” Mr. Brickman said.

“If it was really in our strike zone, it would be hard to see where a loan would go to [CMBS lenders] over us or one of our primary competitors,” he said.

One area that could be favoring CMBS lenders may be interest-only loans, where Freddie Mac has been “tightening up,” he said. Fannie Mae has tightened its standards “a little,” including less access to interest-only loans, Ms. Johnson said.

In addition, there could be growth for CMBS lenders in student housing, a sector that can be a challenge to agency criteria, said Mr. Brickman. That may be panning out, as student housing made up nearly half of the $82 million of multifamily loans in a J.P. Morgan Chase JPM +0.90%$1.1 billion CMBS last week.

Rental boom cools in Eugene

Caroline Strek and Jaclyn Jennings got to spread out in the fall term, just the two of them — in Lane Community College’s new downtown apartments — in a place built for four.

The project’s roommate matching service put them together but left the remaining two bedrooms in the apartment empty.

Sixty percent of the 75 units in the college’s six-story Titan Court project are vacant. The college is offering a free month’s rent for new arrivals to try and turn the tide.

Local apartment managers say the rental market in Eugene has definitely “softened” especially for student housing. Some are offering move-in concessions to keep their properties filled.

Go to the websites of the Courtside and Skybox apartments near Matthew Knight Arena, for example, and a bright yellow or blue box glides onto the screen, saying “click here to receive 1/2 off your first month’s rent and a waived deposit.”

Amid a high flying multifamily construction boom in Eugene that saw permits for 1,789 new units approved in the past half dozen years, the rental market is cooling.

“There has been quite a bit of student housing built in the university area,” LCC President Mary Spilde said. “You see these small six-, eight-, 12-unit places springing up where there used to be an old house.”

And the numbers don’t include the 90 units in the second phase of Capstone’s 13 & Olive project, the 589-unit Goodpasture Island project and other big student developments in the works for Moon Mountain by Landmark Properties Acquisitions of Athens, Ga., and in downtown Eugene by LG Development Group LLC of Chicago.

While supply is growing, the demand side of the student rental equation isn’t keeping pace. For the first time in years, enrollment at the University of Oregon and Lane Community College has tapered off. UO enrollment was flat this fall, and LCC’s student body was down 8 percent. The UO is forecasting continued flat or declining enrollment through 2021. LCC has strategic plans to “make sure our enrollment is at least stable and isn’t crashing,” Spilde said.

The collision of trends could mean real trouble for Eugene’s rental market, said Bellevue-based developer Martin Seelig, who owns The Collegian on Alder Street.

National bubble?

The problem of a potential oversupply of multifamily housing — including student housing — has been a hot topic among investment analysts and real estate brokers across the country in recent months.

While single-family housing construction virtually dried up during the recession, developers turned their efforts to multifamily projects. They were spurred on by Federal Reserve policies that kept the cost of construction money unnaturally cheap.

A group of student housing developers began specializing in projects built within 1½ miles  around flagship universities across the United States, according to industry sources.

“It’s much like how McDonald’s or Wal-Mart decides to set up a store. They just look at it all by numbers and population data and what have you. They look at it from a big picture, 10,000 foot elevation,” said Dolf deVos, commercial broker and property managers with IPMG, Inc., a Eugene-based real estate firm.

When a strategy works for one builder, others aren’t far behind, said Gerard Mildner, an associate professor of real estate finance at Portland State University. “There is a herd mentality in real estate,” he said. “There is a risk they will overbuild. It’s hard to say in fact they have until it happens.”

Multifamily starts jumped 54 percent from 2010 to 2011 — and grew by 36 percent in the first quarter of 2012, according to Harvard’s Joint Center for Housing Studies.

October saw the highest multifamily construction start rate since July 2008, according to the Census Bureau and the U.S. Department of Housing and Urban Development. Starts reached 300,000 nationally, up from 268,000 the previous month.

Developers spend a year or more — and spend hundreds of thousands of dollars — getting conceptual plans, arranging financing, hiring a builder. So, on big projects, it’s hard for developers to put on the brakes.

“Once they get started, they keep going. The momentum carries them through, so that, even if the market changes, they keep going,” Seelig said. “The larger the project the more the lead time, and once things start, it just can’t stop even though it makes no economic sense by the time people start building.”

Lane Community College was fortunate to finance its $20 million project with stimulus-subsidized bonds. The federal government provides 45 percent of the interest payments, and payment on the principle doesn’t begin until December 2016, so managers have some breathing room to get the project leased up.

“We’re going to be fine financially,” Spilde said. “We’re not going to have to use general fund money to bail the project out or anything like that. We’ve been very careful and intentional in how we funded this.”

Bubble doubts

Some analysts and brokers don’t see a multifamily housing bubble on the horizon. Some of the units on the drawing board for Eugene and elsewhere may never materialize, Seelig said.

“If there’s all these units under construction and two other projects are making announcements, another one comes along and says, ‘What do I want to go into Eugene for? It’s too tough.’ Maybe they’ll get built; maybe they won’t, but that’s the reason for the announcements.”

A generation weighted down with student loans won’t be buying houses any time soon, analysts and brokers say, young people who’ve waited out the recession at their parents’ house will rent before they buy. Others, after watching the foreclosure debacle will be gun-shy about signing a mortgage. All will be renters for the foreseeable future.

“You own a building and a guy builds 200 units next door to you, you might have some issues with vacancy for a while,” said Greg Frick, broker with HFO Investment Real Estate in Portland. “There’s no doubt about it. But over a long term horizon, are you outpacing where the market’s going? That’s the question.”

Already, landlords are adjusting to a new market reality.

“A year ago, if we were having this conversation, things were tight, rents — from the landlord’s perspective — were moving in the right direction. They were going up,” deVos said.

Today, “we have a number of vacancies as we speak, which we typically would not this time of the year. We are having to start offering concessions.

“Frankly, we’ve been slow in some cases to offer concessions. It’s the problem of first persuading ourselves that it’s necessary and then persuading our clients that its necessary,” the property manager said.

At The Collegian, a venerable dorm-like property a few blocks southwest of the university, occupancy is lagging for the first time in at least four years. Out of 44 rooms, 10 remain empty, operations manager Jeff Sather said.

“You can definitely tell there’s a pretty big downturn in the market overall. I’m kind of waiting for the bubble to burst,” he said.

Drive to full

Student housing owners aren’t taking any chances with occupancy. Alabama-based Capstone, which is building 230 units in downtown Eugene targeted to students, has been handing out swag — T-shirts, tote bags, sunglasses, $50 gift certificates  — to UO students since early October to market apartments that haven’t yet been built.

The builder got the permit to pour the foundation last week. Move-in is set for fall 2013.

Capstone hired about a half dozen marketing students from the Lund­quist College of Business to do promotions, which have included a contest that gave $500 to the student group that generated the most “likes” and “shares” on Facebook and a tailgate party at a football game.

“Marketing is our No. 1 thing — marketing and customer service,” said Jackie Minite, Capstone leasing start-up specialist. “We’ll be fully leased when it’s time to move in.”

In late November, Lane Community College hired a new management firm — switching from Blanton Turner of Seattle to Campus Advantage of Austin — and has plans to crank up its marketing efforts this week, Spilde said.

Then Capstone and LCC will go head to head. The Capstone project is more luxurious, with granite counters, faux leather sectionals and private bathrooms, plus a pool, steam room and tanning. “We’re definitely a different product,” Minite said. “They’re more dormy.”

At LCC’s Titan Court, students get all their utilities paid, including cable and wi-fi, for the price of just rent on rooms in some Capstone apartments.

“One check covers everything,” Titan Court leasing agent Katie Ewoniuk said.

A room in a four-bedroom unit at Titan Court would be $620 a month, inclusive; the same at Capstone’s 13th & Olive would be $639, and the electric is paid separately.

In addition, students who want a furnished bedroom at 13th & Olive would pay an additional $25 per month.

Spilde, meanwhile, said that Capstone’s marketing expenditure also will help fill Titan Court because “they’re going to be marketing downtown as a good option for students to consider,” she said.

“We’re very competitive. Over time, we’ll show we’re a preferred place to live. We’re hoping to be at 85 or 90 percent (occupancy) in the coming year.”

So, Caroline Strek and Jaclyn Jennings will have to make room for two new roommates in their Titan Court apartment. Strek said it would probably be OK, as long as managers match them as well as they did the two of them.

“We’ll probably adjust just fine,” Strek said.

Downtown condos to be converted to apartments

Most of The Meridian building’s condos will soon become upscale apartments, on par with those found in Portland’s tony Pearl District.

Killian Pacific, a prominent developer in Portland and southwest Washington, purchased 85 condo units at The Meridian building in June. The six-story building is at 777 Commercial St. SE, near downtown Salem.

Killian Pacific has a different concept for The Meridian than its original developer, Dan Berrey, who pushed resident-owned condos that needed to be completed with interior finishes. Instead, Vancouver, Wash.-based Killian Pacific is building out the units and renting them.

Renters will enjoy hardwood floors, high-end appliances, and large balconies with natural gas hook-ups for barbecues. Concierge service will be among the amenities.

But tenants of The Meridian will have to reach deep into their pockets. The units will rent from $1,500 to $2,500 per month, Killian Pacific officials said Monday.

“Salem has a good, robust enough economy that it can support 85 high-quality rentals,” said Noel Johnson, a Killian Pacific official.

Potential occupants of the rental units include contractors working in the Salem area but not planning to stay, empty nesters who don’t want the responsibility of home ownership, and faculty of Salem Hospital.

The project is unique for the Salem market, which makes it an attractive investment for Killian Pacific, Johnson said. Within a couple of months, the condos-turned-apartments will be ready for tenants.

Killian Pacific might have the cash and long-term vision to make The Meridian live up to expectations.

Opened in 2009, The Meridian was supposed begin a new era of condo living near the downtown core. Much of the building remained unoccupied, however, and it ultimately was taken over by a bank.

The building is now owned by Meridian Investors LLC. That group consists of Killian Pacific, Cascade Cardiology, which has a 9,936-square-foot medical office on the ground floor, and four residents who own condo units.

Ankrom Moisan Architects Inc., which has worked on many projects in Portland’s Pearl District, has re-designed the building’s interior. Greens and browns have been replaced with lighter tones to give the building more of a residential feel.

Of the 85 units purchased by the Killian Pacific, 48 were shells that had to be completed with interior finishes. The remaining 37 units came with interior finishes and had been rented when the property was under the bank’s control.

Killian Pacific has invested “many millions of dollars” in The Meridian, Johnson said. He declined to be more specific.

Several commercial condos are available in The Meridian. Coldwell Banker Mountain West Real Estate in Salem is the real estate broker for the property.

Soaring Rents Drive a Boom in Apartments

Houston is better known for urban sprawl than dense apartment living. But as part of a national rush to capitalize on rising rents, developers there are building thousands of apartments like those south of downtown at Camden City Centre, where 268 units will open early next year in a complex that also has two swimming pools, billiards tables, a coffee bar and a fitness center.

As residential building recovers from a near standstill after the housing crisis, much of the momentum is coming not from subdivisions with green lawns and two-car garages but from rental apartments. Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.

The multifamily construction recovery, fueled by young people who are striking out on their own, is strongest in the South and West, particularly in markets where job growth is picking up. Last month, the Commerce Department released data on new construction that showed new apartment complexes were going up at the fastest rate since July 2008.

That has led to a fear of overbuilding. While rents are still rising, analysts say the steep increases between 2011 and 2012 are unlikely to be repeated as a surge of units are completed in the latter part of this year and will continue to come on the market early next year. Nationally, residential rents rose 4.2 percent in 2011, but only 3.6 percent so far this year, according to Axiometrics, a Dallas-based apartment market research firm.

Much depends on the fortunes of the job market, which industry analysts said would determine whether higher rents were sustainable.

“The real test is going to be what happens between now and April or May as we see all these new units introduced to the market,” said Jay Denton, the vice president for research at Axiometrics.

Still, vacancies remain extremely low and the pace of building in recent years has not been quick enough to replace obsolete, decrepit or demolished units, said Mr. Crowe of the homebuilders group. He projected that it would be several years before supply was back to normal.

In Houston, from January to September, construction permits for multifamily housing increased by more than 70 percent over the same period a year earlier. Shares of Camden Property, the real estate investment trust that is building Camden City Centre, were up about 20 percent over a year ago.

“The demand for building is all over the country, really,” said Ric Campo, Camden’s chairman and chief executive. “We’re seeing higher rents, faster lease-ups, lower construction costs — everything you want to see. Part of it is there’s just a pent-up demand for new product because we didn’t build anything during the downturn.”

In Houston, where low housing prices have traditionally kept the cost of living down, Camden can rent a one-bedroom apartment for $1,450.

Houston is far from the only market where demand for rentals is at a fever pitch. Denver, Oakland, Seattle, Miami and Charlotte, N.C., where many of the condo projects that went bust have been converted to rentals, also appear at the top of lists by data collectors like Trulia, Zillow and Axiometrics.

The bulk of the apartments are not going to families who lost their homes to foreclosure, many of whom are renting single-family houses. Instead, the apartments are being rented by young people who had moved in with their parents during the recession, or simply had not yet moved out.

People in their early 30s, the age when many might look to buy a first home, are renting for longer periods of time, partly because mortgages are difficult to come by and partly because they have been unnerved by the turmoil in the housing market.

“That portion of the population is starting to grow again, but I think a lot of them, seeing what has happened, are not particularly enthralled with the idea of going out and buying a house,” said Steve Blitz, the chief economist at ITG Investment Research.

Michael Hoffman, a 26-year-old electrical engineer, said he moved into a two-bedroom apartment in Camden City Centre a few months ago after living with his parents to save money.

“It was easier,” he said of the rent-free arrangement with his parents. “But I felt like I was missing out on my 20s.”

New household creation, for example when people move out on their own, slowed to a virtual halt during the recession, but it has begun to grow once more. Even so, there are still roughly the same number of homeowners as there were in 2004, Mr. Crowe said.

“All of the net addition to households since 2004 has been in rentals,” he said.

There are still some two million doubled-up households waiting for the opportunity to split into two.

To cater to those younger customers, Camden and other apartment builders are developing smaller apartments in buildings with more lavish social spaces, Mr. Campo said.

Where once 60 percent of the units in a given complex had two bedrooms, now 80 percent have one bedroom, and some units are as small as 500 square feet, he said. Cities like New York and San Francisco are going even smaller, experimenting with microapartments between 200 and 300 square feet in an attempt to meet demand and curb rents.

Singles represent a large slice of new demand, said Doug Bibby, president of the National Multi Housing Council, which represents owners and developers. “They don’t want a single-family home with a picket fence in the suburbs,” he said.

In fact, Mr. Bibby said, married couples with children make up under one in four households today, and will be under one in five households by 2020. Experts estimate that rental growth will continue to drive construction for at least a couple of years, though those increases will be tamed a bit as more supply becomes available.

Andy McCulloch, the head of residential research at Green Street Advisors, a real estate analysis firm, said it was a misconception that growing momentum in the single-family housing market would hurt the rental market.

“If the single-family market gets better it could help jobs, it could help incomes and you could see rent continue to rise,” he said. Constraints on lending, Mr. McCulloch said, will also keep

“If I was an apartment landlord, the only thing that would really freak me out from the buying side is the return of easy credit,” he said. “But that doesn’t seem to be coming back anytime soon.”