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.

The Los Angeles Times recently posted an interesting Q&A. The expert answering the Q&A was Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University.

Nicolas P. Restinas answers several questions regarding the effects foreclosures will have on the rental market. Restinas states that the numerous owners are becoming renters and creating a high demand for housing, a restrained supply and thus causing a rise in rents.

He goes on to predict a steady rise over the next two to three years and believes that this may extend even further — possilbly into the next five years. He makes note of a slight offset due to the fact that some foreclosed properties will not be sold and converted as rentals. Nonetheless, his overall view is that rents will be on the rise as demand for housing increases! -L.A. Times (Full Article)

Since August of this year, when the sub-prime fallouts caused a ripple of fear felt by most real estate investors, many questions have come to mind. Is the market going to tank?  How long will it take to recover? How far will prices or interest rates fall or rise before it makes sense to invest again? What do buyers, sellers and investors do in the meantime?

Real estate markets by their very nature are cyclical. In Southern California in particular, we have benefited greatly from rapidly ascending property values and tidy profits on relatively short-term investments. How long can this last, is the question. As far as home prices go, here is an astounding statistic. The ratio of housing costs to household income in California is 8 to 1, as opposed to 4 to 1 in places such as Seattle. The national average is 2 to 1. This means that a California homeowner is paying eight times his annual salary for his home. One does not have to be a mathematician to conclude that such upside down economics have to change.

I recently had a very nervous client ask my advice about what she should do with the equity coming out of a property she had sold. Poised to do a 1031 exchange to defer taxes on the gain, she was hearing such horror stories from the prognosticators of doom that she was considering paying the capital gains tax and putting her money into stocks, bonds or even CDs. The fear of making a bad investment decision was beginning to outweigh her reluctance to pay the IRS.

In speaking further with the client, I learned that what she was hearing from her well-intentioned friends and associates had more to do with the downturn in the residential market than in commercial. Since she had sold a commercial investment property and would need to replace it with another investment property to satisfy her like-kind exchange, we started looking at her options and trying to decide which ones held the lowest possible risk, if in fact we are heading into a down market.

As real estate cycles are nothing new, it is helpful to look back and see what types of properties have traditionally held their value in good times and bad. Even in the worst of markets, such as that of the early 90’s following the tax law changes and the oil crisis, there are two property types that have weathered the storms with relative ease. They are well-anchored, multi-tenant retail centers and newer, well-located multi-family properties. Here are a few reasons why this is true.

When the economy is in a slump, consumers still need to shop, and do so more frugally. Whereas the higher-end, pricier boutiques and specialty centers may not be able to hold on, a newer regional or neighborhood center anchored by a grocer, a solid discounter such as Wal Mart or Target, and mid-priced soft goods retailers will fare well. As families become more budget conscious, they are more likely to shop at Target, buy clothes at Old Navy or TJ Maxx, and fix up their homes with products from Home Depot. My advice to the client was, if she is considering putting her money into a retail center, look for one such as the one I just described, where the occupancy is stabilized with creditworthy tenants on long-term leases.

Likewise, when the economy slows, many potential new home buyers will be looking at renting instead of buying a home. This is particularly true at this time with the uncertainty in the residential lending markets. Looking for newer, Class A multi-family properties in infill locations where the job market remains strong is a good investment strategy. As more renters come into the market and occupancy levels rise, rents will rise accordingly, creating greater value. Likewise, there will be fewer competing properties built /as credit remains tight. Therefore, well-located apartment properties would be an equally good choice.

I also reminded the client that one important thing to keep in mind is that real estate should not be considered a short-term investment. There are times when investors have been able to flip properties and make tremendous short-term gains, but these times are rare and probably not a safe bet for the future. A savvy real estate investor will consider the long-term benefits of owning exceptionally high quality real estate, such as retail and multi-family, and hold on to it until it reaches maximum appreciation. How long this might be is anyone’s guess, but a good rule of thumb is somewhere between 7-10 years.

Real estate investing is inherently risky, and never more so than in an uncertain market. Wise investors will look at mitigating the risk, however, rather than pulling out and missing opportunities for future profits. Almost anyone can make money in a boom market. It is more challenging to make money in today’s market, but it can be done.

Written By
Jane Hope, CCIM
Vice President - Sales and Marketing
Contact AptBldgTrader Investment Group for further information about Jane Hope and SCI

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. 

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Released by : 2007 Monetary Policy Releases

The Ventura County Star reports a large condo project in Simi Valley has stopped in mid-development, “Citing slumping market conditions, a developer has abruptly halted construction of a 66-unit condominium development near what is known as Happy Face Hill in Simi Valley, city officials said Tuesday.”

More: “After several months of grading work, Encino-based Larwin Co. told City Manager Mike Sedell in an e-mail that construction of the housing development on 10 acres near Kuehner Drive would be stopped for at least six months.” - Los Angeles Times (Full Article).

“The foreclosure crisis is increasingly claiming the homes of people who never made the mistake of taking out an unaffordable mortgage: renters. Hundreds of tenants in foreclosed buildings have been evicted or are facing eviction by mortgage companies that do not want to be landlords. Tomorrow, US Representative Barney Frank said he plans to introduce federal legislation on foreclosures that includes a provision that tenant leases remain in effect after foreclosure, and that tenants without leases must receive 90 days notice before eviction.”

“Banks will no longer be able to put their convenience ahead of people’s ability to live,” said Frank, who chairs the House Committee on Financial Services. “We have asked lenders, saying, ‘You really shouldn’t do this.’ Now the next step is to make it mandatory.” - Boston.com (Full Article)

In my “Real Talk” posting earlier this month, I talked about how the multi-family sector of real estate remains strong and how the slow residential market has created an influx of “Tenants,” thereby increasing the demand for rental housing and increasing the average rents.

Owners of multi-family properties are reaping the benefits of current market conditions. High prices and tight restrictions are forcing people to rent, while foreclosures and condo-conversions have displaced many occupants. The vacancy rate in Los Angeles is lower than ever and the cost to rent has continued to increase. Multi-family owners are in a great position.

This morning I came across an article in the Los Angeles Times, entitled “Rents on the Rise as Housing Prices Slip.” This article reinforces what I said in my posting “Real Talk.” If you can afford to purchase more multi-family units, do it! If you do not own multi-family units, you should!

“While homeowners were being stung by shrinking property values, renters across the state found themselves having to dig deeper into their pocketbooks in the third quarter, according to a report to be released today.”

“The average rent at larger apartment complexes in California increased 5.6% to $1,413 compared with a year earlier, according to a survey by Novato, Calif.-based research firm RealFacts. Los Angeles and Orange counties remained the state’s most expensive market for rentals, while the San Francisco Bay Area posted the highest rent increases — as high as 12.2% in Santa Clara County.” - Los Angeles Times. (Full Article)

Construction of single-family homes fell 1.7 percent to a 963,000 rate, today’s report showed. Work on multifamily homes slumped 34 percent. The National Association of Home Builders/Wells Fargo index of builder confidence plunged to a record low 18 in October, the Washington-based association said yesterday. Levels lower than 50 mean most respondents view conditions as poor. The index averaged 42 last year. This has been the lowest record since the monthly survey began some 23 years ago.