Welcome to Apartment Building Trader

The Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai has been preparing his country for an undoubtable crisis: the dissipating supply of it’s most precious and fruitful resource - Oil. With an inevitable economic disaster at hand, the strategy was to create an oasis in the desert. Thus far, that oasis consists of the Palm Islands - the man-made series of islands which includes residential and commercial development projects to be built over 10-15 years, an ultra luxurious hotel - Burj al-Arab hotel and the $4 Billion, 164-floor Burj Dubai, expected to be the tallest man-made structure in the world.

The Persian nations have been actively seeking other means of revenue to replace the current income they generate from oil. The investment of $7.5 Billion in the largest U.S. bank, Citigroup, is a prime example of how they are expanding their portfolios. They are using the wealth they have generated from oil and capitalizing on a weakening U.S. dollar. Dubai based companies have vested interest in various parts of the United States from the purchase of the luxury department store chain Barney’s New York, to the $5 Billion investment in MGM Mirage in Las Vegas.

Recently, various U.S. Investment firms and Brokerages have stated that they are receiving an increase of calls from Mideast investors looking to purchase U.S. real estate. Other foreign investors are following suit and interest is beginning to stir, the weakening dollar is enticing many to scour the U.S. for opportunity. Many speculate that foreign money will begin to pour into the economy and sustain the falling real estate market. With the pound and the euro overtaking the dollar, the U.S. appears to remain a land of opportunity.

Abu Dhabi invests $7.5 Billion for up to 4.9% of Citigroup.

Mideast Governments and Monarchies Buy U.S. Office, Industrial, Apartment and Hotel Assets.

“The chill spreads to commercial,” were the words printed in the Business section of the Los Angeles Times. The article discussed how the turmoil that plagues the credit market has slowed sales and softened prices for commercial office buildings.

“…with a falling stock market, a shrinking dollar and widespread concern about recession, real estate deals are getting dicer.” - Los Angeles Times, Roger Vincent. (Full Article)

There is a lot of talk about a coming recession and many would argue that the signs are all around us (myself included); higher gas prices, less equity in homes, tighter credit and a struggling dollar. It is evident that as consumers, we are cutting back. Here are the numbers for October sales and the trend is expected to continue.

Retail sales in October grew at a sluggish 0.2%; Furniture/furnishing stores posted a decline of 0.9%; Department stores suffered a 0.5% decline; Sporting goods, book & music stores fell 0.4%; E-commerce declined 1%; and clothing sellers gained a mere 0.1%.

“It is the real-estate equivalent of turning lemons into lemonade. Take a condo project that isn’t selling and turn it into a successful rental -apartment property.” - Dec. 5 2007 Wall Street Journal, Alex Frangos. (Full Article)

Despite the drastic changes that have been happening in the real estate market, there are still individuals out there who are waiting for their pot of gold. I’m referring to those individuals out there who want to get land value for their multifamily property. They believe a developer is going to come into the area and purchase their 6 units on a 10,000 square-foot lot for some “above market” offer that is well above any sales comparables. I always ask these owners if they have gold plumbing or fancy toilets that would justify such a price. Yet, there answer is always “No.” I then ask what justifies their price. The answer I always get is the same, “You can build 9 to 12 condos on this property!”

The days of condo conversions are gone! The Condo market is in distress! The mere word “conversion” scares several investors out there. Many have gambled on these projects and are now realizing a loss.

“Many condo developers are desperate as they fall behind on their payments to banks for construction loans at a rapid clip. Delinquencies increased from 4.1% of loans outstanding in the second quarter to 5.9% in the third quarter.” - WSJ

What we are seeing is a “Condo Reversion.” Reverting condos back into regular income producing apartment units is a strategy that is being implemented across the nation, especially in the hardest hit markets of Florida and Arizona. The Mozaic Apartments at Union Station in downtown Los Angeles are a prime example of this in our own backyard. The 278-unit, 500,000-square-foot complex was introduced to the market as Luxury Condos with prices in the $600K range. After being unable to secure enough deposits, Lincoln Property Co. switched strategies and decided to market the condos as luxury apartments. Mozaic now leases studio, 1 bedroom and 2 bedroom floor plans ranging from $1900-$2700 per month.

Now it appears that others are following suit.