Key Characteristics for Top Multifamily Markets

Strong Population Growth - Significant influxes of new residents are the best for locales for apartment investment.

Young Mobile Residents - Younger residents tend to be renters rather than home buyers since they want to maintain mobility for employment and avoid being weighed down by a mortgage.

Expanding Employment Base - Job growth plays a huge role in creating demand for the apartment sector.

Tight Sub-markets - Some of the most desirable investment markets are classified as having a high-barrier-to -entry markets.  Specific sub-markets are sometimes more attractive than the overall market.   

Education Attainment/Educated Workforce – Places that are home to a highly educated population are top performing markets for a an occupancy and rental rate growth perspective.

Source: National Real Estate Investor Magazine Jan/Feb 2013

Downtown Baltimore's Top Proposed Apartment Conversions

10 Light St.-  plans to convert 34-story office tower into 445 units. .
114 E Lexington St. - former Provident Bank building, 102 units & ground level retail.
301 N Charles St. - 92,500-square-foot office building, 92 apartments.
26-36 S. Calvert St. - 140 apartments & 30,000 square feet of ground level retail space.
344 N Charles St. - Carrollton Bank building, 18 studio apartments.
Former Hochschild Kohn building in Mount Vernon into 171 market-rate apartments.
300 Cathedral St., - former office Odd Fellows Hall, 59 1 BR and studio apartments.
Liberty & Fayette St. as well as Park Avenue, 92 apartments, planned $20 million project.
Proposed so-called superblock on downtown's westside calls for nearly 300 apartments.
Demolish the Mechanic Theatre and convert into two towers with 600 units. 

Source: Baltimore Business Journal 

Multifamily Investment is Hot

Apartment investors are actively on the hunt and moving into secondary and tertiary markets. According to Real Capital Analytics, in 1H2012, secondary markets posted a 30% year-over-year increase in multifamily transaction volume, followed by tertiary markets at 23%. Major metros saw only a9% increase during that period.  Investors are searching for yield in class B and C just like what is most common in core markets. This investor segment mostly includes private money, which compromise 65% of buyers in secondary and tertiary markets as of 2Q12. Equity funds represent a large percentage in tertiary markets.

Source: Real Capital Analytics   

  

Apartments Proposed for Vacant Baltimore City Buildings

Downtown Baltimore is expecting hundreds of apartments to open in the next few years. There are a number of underused office buildings with plans to convert to apartments.  With nearly 100% occupancy, there should be floods of development.  The latest announcement includes a 520,000 square foot office building in downtown Baltimore converting to 445 apartments at 10 Light St.  Historic tax credits and newly proposed apartment construction credits by the mayor is creating a flurry of adaptive re-use and opportunities to rehab older buildings.

 Source: Sperry Van Ness|RealSite Commercial Group

Apartment Builders Becoming More Active

Apartment developers are buying up land at a faster pace.  CoStar Group tracked nearly $11.9B in land sales, a 20% increase for over the same time last year.  It’s no where near the peak market activity in 2006 when land sales totaled $62B  year.  Large national publicly held single-family homebuilders and apartment developers continue to purchase land parcels spurred by strong multifamily market and a stabilizing single-family market.

Source: Sperry Van Ness|RealSite Commercial Group

Investor Appetite Increases for Retail Condos

Small and mid-size retail condos in up-and-coming markets like southern Soho, along Canal Street, and areas near Times Square in New York City are increasing in demand. Investors seeking to acquire multi-family investments are now looking to purchase retail condos. High prices and easy lending for multi-family buildings have driven cap rates down so much, it just doesn’t make sense for many investors in limited inventory markets like New York City. The $2-$18 million price range is attracting the private investors seeking alternatives to the low cap multi-family product. Another reason investors are attracted to retail condos is that stores tend to be lower-maintenance tenants than residences.

 Source: Sperry Van Ness|RealSite Commercial Group 

10 Submarkets With Biggest Multifamily Pipelines

Houston, TX , Montrose /River Oaks ,4,055 Units
 Seattle,WA, Downtown/Capitol Hill , 3,936 Units
Washington DC, Anacostia/Northeast DC, 3,238 Units
Dallas,TX, Plano/Allen, 2,958 Units
San Jose, CA, Northeast San Jose, 2,881 Units 
New York, NY, Midtown West, 2,564 Units
San Francisco, CA, South of Market, 2,526 Units 
Washington DC, Downtown/ Logan Circle, 2,337 Units 
Baltimore, MD, Central Baltimore City, 2,051 Units 
Santa Ana, CA, Irvine, 2,021 Units

Source: Axiometrics  

Timing to Invest in Commercial Real Estate

It’s a great time and not too late to invest in commercial real estate. Fear factor is keeping interest rates low. Private investors and high net worth individuals are seeking out class B/B- assets, not on the institutional capital radar screen.  Partnerships and private managed funds are ways to avoid direct investing and letting others with more experience invest your capital. Recovery markets to watch include Texas, Phoenix, Las Vegas and Florida. These areas are picking up great momentum!  

Source: Sperry Van Ness|RealSite Commercial Group  

Prime Manhattan development sites in demand for 2012.

Downtown development sites are predicted to trade at record levels, as new condo product is in high demand.  Prime Manhattan neighborhoods could see land sites trading above $600-$650 per square foot buildable. With only six months of standing inventory in for-sale product, condominium prices will substantially escalate.

Reference: Sperry Van Ness|RealSite Group  

Baltimore Multifamily Rent Trends

 

Baltimore's rent growth of more than 3% has been very impressive and was near the top of the 54 markets measured by PPR for 2010. Projected year over year rent growth is 3.5% through 2011, 3.4% in 2012, surging to 5.1% in 2013 and continuing through 2015, per PPR data. That impressive rent growth is a result of the Baltimore region's population increase due to job growth, coupled with the area's job market suffering less than national averages during the downtown. Also driving rents upward is the reduction in rent concessions. According to Axiometrics, concessions peaked in February 2009 at 5.1% of asking rent and had tumbled to 1.7% of asking rent by June 2011. 

Source; Justin Verner; Sperry Van Ness|RealSite Commercial Group Advisor

Small Multifamily Loans Return to Action

While capital for larger multifamily properties was quicker to come back, smaller loans have lagged behind. That phenomenon appears to turning around for loans less than $3 million.

Local and regional banks are by far the predominant lender in the small loan multifamily sector.  While the number of local banks in the market to make these loans has shrunk, those who are lending are proactively seeking deals.  A distance second is Fannie Mae (15 percent market share in 2009) who, conversely to Freddie Mac, has a small loan program. Fannie will lend mostly in primary markets and at times in secondary markets.  Credit unions are third and typically only lend to a very select group with whom they have strong relationships. The bulk of loans for all three capital sources are for the most part recourse in today’s market, but strong assets  with lower leverage and found in very sound markets can be non – recourse.

Both the regional banks and Fannie Mae will charge comparable interest rates. LTV on the small Fannie program can go up to 80%, but the stringent 1.25-1.30 debt service coverage ratio (DSCR) constrains the amount of loan dollars available.  Local banks will also go to 80% LTV, and can get DSC requirements to 1.15 for newer assets with borrowers that have good track records. Many banks will only lend to clients with whom they have existing relationships.

Lenders tend to see smaller multifamily properties as having more risk compared to their larger counterparts. One reason is the sheer number of units being lower and the subsequent risk with vacancy rates being driven up by a few open units.  The individual borrower(s) are also scrutinized on their own financial stability along with history of operating similar apartment assets. Lenders are looking for buildings with little to no deferred maintenance, stabilized occupancy, good historical performance and local, proactive ownership.

Small multifamily loans should continue to grow heading into the end of 2011. With other asset classes still lagging behind multifamily performance, along with development loans still being scarce, banks see multifamily as a safe place to deploy funds.

Source: Justin Verner ; Advisor with Sperry Van Ness|RealSite Commercial Group
Specializing in Multifamily Investment Sales

Less Risk Investing in Apartments

Across the nation, droves of people are giving up on the American dream of home ownership and electing to live in rented dwellings instead, said Stan Humphries, chief economist of the Zillow real estate company. Over the next year or so, between 1.2 million and 2.2 million people will be shifting from being homeowners to being renters, Humphries said.

With foreclosures still plaguing the housing market and consumers worrying about more declines coming in home prices, moving into rental housing is an appealing option. In addition, tighter lending standards at mortgage companies have been blocking a lot of consumers from being able to buy a home.

The fundamentals of the apartment market appear to be very solid for the next few years. Investing in apartments seems like a smart move for now.


Sperry Van Ness|RealSite Commercial Group

Baltimore Apartment Market Update Q2 2011

Baltimore Apartment Market Update Q2 2011- By Justin Verner; Sperrry Van Ness|RealSite Commercial Group
Local Demographic Factors - In our Q1 report we looked at local economic and employment trends. Let’s now focus on how those factors are affecting the Baltimore Metro area’s demographic outlook.

 

The local job market is moderately stong and is drawing people into the metro area. Baltimore, like many Northeast metros, has seen population growth lag behind US averages for the last 20 yrs. That phenomenon began to shift in 2009 with positive in-migration. Population growth of 1% over the past year ending in November is continued proof of the trend moving forward. Near term population growth is set to continue through 2015 with the steady influx of defense related jobs, but should begin to slow after that.

Baltimore will see a movement in demographics towards the young adult age group (20-34 yrs old) in the next five years. The 6.3% expected growth of the young adult sector is particularly important to the apartment market as the majority of this group are renters. The metro area also boasts above average education levels (35% above 25 yrs of age have a Bachelors Degree) along with higher than average median household income.

 Sources: PPR, Moody’s Analytics
 
Rent Growth – In many ways rental trends can give us more of a feel for the market than occupancy levels. Even in a down market, it is possible to see occupancy rates staying relatively flat, albeit with lower average rents.

 

The Baltimore metro area’s rent recovery is clearly underway and will look to continue in the coming years. Average rents moved up 6.2% for the year ending Dec 2010, near the top of 54 metros measured by PPR. Concessions as a percentage of rent peaked in Feb 2009 at 5.1% and had dropped to 2.3% at year-end 2010, according to Axiometrics. Nearly half of the apartments were offering concessions in Feb 2009 and that figure had decreased to 29% as of Dec 2010. Average annual rent growth of 3.5% is expected from 2011-2015, well ahead of the projected national average of 2.8% during that same period.

The aforementioned positive rental indicators can be attributed to the region’s better than average job market and population growth. With those, landlords have been given solid rental demand and able to hold pricing power while driving down vacancies. 

Sources: PPR, Axiometrics
Pricing Trends – Institutional Grade Class A Apartment properties in top markets have seen an increase in price per unit and decrease in cap rates through Q1 2011. The recovery has seen capital flow to the larger and more liquid markets (NYC, LA, DC, CHI, BOS) and at times even creating bidding wars. The most recent large apartment sale in Baltimore was the Munsey Building on 7 N Calvert. The 146 unit property traded for $13.8M or $94,178/unit and was a debtor controlled sale.

 

Apartments in the sub $5M range offer an advantage in that they are below the level that much of the institutional money will invest in, thus eliminating some competition. In contrast to their larger counterparts, sub $5M apartment deals are still seeing a small increase in cap rates and slighty lower price per units. Locally we are finding a majority of apartment sales in the sub $2.5M value-add category. Those transactions are in buildings that need upgrading, but are in very desirable rental areas. Typical cap rates for these value-add deals are 10% and above.

Sources: Real Capital Analytics- Chart Seen Below is National Avg Cap Rate

 

Baltimore Apartment Snapshot

Local Economic Snapshot 

The Baltimore Metro area's economy continues to lean on the defense, health sciences, education and government sectors. Fortunately, those are industries that tend to hold relatively steady in economic downturns. The December metropolitan area unemployment rate of 7.6% is tracking much lower than the national average of 9.4%. Factors negatively affecting the local economy are the region's above average cost of business and living costs along with decline in old-line manufacturing. The multifamily sector of commerical real estate reacts faster to market changes than other major segments. That can be mostly be attributed to the shorter lease terms of apartment rentals. 

Baltimore Metro's Top Five Employers

- Fort Meade
- Johns Hopkins University
- MedStar Health
- Johns Hopkins Health System
- Aberdeen Proving Group  

Baltimore Apartment Fundamentals 

The Baltimore Metro area, as of Q3 2010,  had a multifamily vacancy rate of 5.3%, which is 1% lower than the prior quarter. That rate compares very favorably to the U.S average of 7.1%. The latter part of 2010 is bringing the area its first signs of positive rent growth in a couple years. Through the first three quarters of 2010, YTD rent growth through Q3 2010 was .04%. Even that modest growth shows signs of rent stabilization and looks to further growth moving forward. 

Central Baltimore City Avg Rents

Studio

$735

 

1 BR

$1,036

 

2BR

$1,295

 

 

 

What's Moving

The Baltimore region has seen a major increase in large apartment transactions in 2010. Through Q3 2010, 15 properties totalling $520M have sold, resulting in a 200% increase versus prior year. All of those transactions were greater than $5M and involved mostly institutional players.  Also moving are value add apartments, priced to sell, in desirable rental markets in the city. Those are typically all cash purchases or financed with 30+% down. We have seen value add Class B/C apartments trading in the range of $33-60k/unit, depending upon level of work required and occupancy.  

 Looking Ahead 

The region's apartment market will continue to be primarily affected by the local economy. Economic reports have Baltimore Metro's local economy staying ahead of the national leading indicators, which will lend favorably to apartment fundamentals. Loosening of the lending markets and continued historically low interest rates will lead to a continued increase transaction activity. Buying a home is also not looked on as favorably right now, causing more people to look to rent. Demographic factors, including the children of the baby boomer generation hitting their prime renting ages, will look to drive rents and occupancies up.  

Source: Justin Verner, SVN Associate Advisor 

References: REIS, Real Capital Analytics, Delta Assoc, greaterbaltimore.org  

Tax Assessments Reflection on Real Property Value

Real estate values across property types, on average, have reduced.  Tax assessments don’t always track or follow local market valuations.  Property owners should be aware of the tax assessed value of their real estate. Excessive taxation and inaccurate assessments can be very costly. Lowering your property taxes is a sure way to increase your NOI without infusing additional capital. If values in your market have declined, it’s time to work with your broker to determine comparable recent sales. Build your case for a lower assessed value. It’s surprising how many times this is simple analysis is overlooked.  

Source: Sperry Van Ness|RealSite Commercial Group

Baltimore Investment Market Pulse

According to Loopnet, for the 12 months ended June 2010, commercial property sales in Baltimore decreased 27 percent from the prior 12-month period. For the most recent quarter, total commercial property sales were $242.8 million, a drop of 7 percent from the first quarter when the property sales volume topped $260 million.

Source: Loopnet

Vacancy Rates as Market Indicators for Investment

One quick test to determine which markets to invest in is to review vacancy rates vs the national averages.  Understanding  what’s behind the numbers and drivers for the low vacancy rates is very important to your decision process. This is also good starting point to prioritizing the markets you may want to invest in.

Lowest Vacancy Rates, Q1, 2010

                                  Vacancy Rate      National Average

Office, New York                8.4%                 16.9%
 
Industrial, Los Angeles    8.6%                 14.3%

Retail, San Francisco        6.6%                 12.6%

Multifamily, Pittsburgh       4.6%                  7.3%

Data Source: Commercial Investment Real Estate ( CIRE) CCIM Magazine June 2010 Edition

Sperry Van Ness|RealSite Commercial Group

Why Sell in Today’s Current Market Conditions?

In spite of pressures to lower selling prices, there remains good reasons to sell in today’s current market conditions:    

Lenders are increasingly forcing dispositions.  

Higher levels of risk and leverage institutional investors took on in the recent cycle has forced some liquidations.

Rising interest of foreign investors in acquiring US property. The foreign investors are raising large amounts of new capital.

Liquidity needs and portfolio allocations play a role in any decision to dispose of assets.

Corporate users and other owner-occupiers are finding sale leasebacks make sense.  

Private owners are selling due to death, divorce and partnership conflicts no matter the condition of the investment market.

Simply to pay off debt before the loan needs to be recapitalized.


Source: Tony Casalena, CCIM