Commercial real estate finance professionals who concentrate on the multifamily market have enjoyed substantial success during the past two years. Apartment fundamentals have been very strong, rent growth has finally exceeded inflation (albeit slightly), vacancy rates are below historical averages, and renter demand is high.
So, it is no surprise that a nationwide correction in the residential market is a locus of concern for multifamily deal sponsors, intermediaries and lenders. Will the frenzied pace of residential development and condominium construction catch up with – and undermine – the strong performance of the multifamily sector?
Gleb Nechayev, vice president and senior economist with CBRE Torto Wheaton Research, notes that current single-family home inventories and sales might be troublesome indicators for the multifamily market's future, but the state of the condominium market warrants more attention.
His company, along with Real Estate Research Corp. and Principal Real Estate Investors, recently released a report – ‘Expectations & Market Realities in Real Estate 2007’ – that describes a slowdown in residential as a ‘mixed blessing’ for apartments.
On one hand, interest rates have risen and home prices remain high. Therefore, homeownership is less affordable, driving individuals and households into the rental market.
But if home prices decline, higher interest rates will likely not deter potential homeowners from purchasing houses or condos. In this scenario, renters will begin exiting the apartment market and turning toward homeownership.
‘The severity of the impact will very much depend on what happens to prices of condominiums and single-family homes,’ Nechayev says. In part, prices are driven by supply and demand, and there are indications that the supply of housing – particularly condos – is growing.
According to recent data from the National Association of Realtors (NAR), total housing inventory levels increased 1.9% at the end of October to 3.85 million existing homes available for sale. Single-family home sales are 11% behind year-ago levels.
Existing condo and cooperative sales have also fallen, NAR says. The seasonally adjusted annual sales rate was 741,000 units at the end of October – 14.5% lower than in October 2005.
These figures are well in line with a normalization of the residential market. But there is uncertainty among commercial real estate players regarding what kind of ripple effect these figures will have in the multifamily space.
NAR says new multifamily supply is matching absorption, which has kept vacancy rates relatively flat and promoted decent rent-growth gains. However, if condos continue to perform sluggishly and new product keeps dropping into the for-sale market, developers might have no choice but to rethink their strategies. The supply of multifamily units could increase substantially.
‘It's unclear at this point whether all the units intended to be completed as condominiums will actually be completed in such a slowing market,’ Nechayev remarks. ‘The housing market will force some people to change their plans.’
He notes that some developers will likely decide to forgo condo projects that have not cut ground and, instead, pursue their developments as multifamily properties. Developers with shovels and foundations in the ground will either complete their projects as rentals or face a difficult time selling the completed condo units.
‘In a market characterized by rapidly slowing buyer demand, many multifamily projects started as for-sale product will likely be completed as rentals, challenging the leasing trajectory and rental performance of existing apartment properties,’ the ‘Expectations & Market Realities in Real Estate 2007’ report states.
Despite the potential challenges that a slowdown in the residential market can present, the multifamily sector is still positioned to perform well during 2007.
‘We have a generally favorable outlook for rental-market fundamentals,’ Nechayev says. ‘But at the same time, we are not forecasting any major increases in rent growth or occupancies, because there is this cloud of uncertainty with respect to new supply.’
Next year, sponsors and intermediaries can expect some surprises from the residential supply side. For the first time ever, Nechayev explains, the number of condo projects in the pipeline has exceeded the number of apartment projects in developers' hands. But these condos might ultimately come onto the market as rental units, which could suppress rent and occupancy growth. CMI
Editor's note: Individuals interested in the full ‘Expectations & Market Realities in Real Estate 2007’ report can visit www.rerc.com or call CBRE Torto Wheaton Research at (617) 912-5226.
E-FYI
Launches New Client Service
Calkain Companies, a national investment brokerage firm composed of Calkain Realty Advisors and Calkain Institutional Advisors, has instituted Calkain Site Services (CSS), a due diligence and evaluation service that provides an independent assessment of clients' real estate.
CSS gives institutional investors, real estate investment trusts and private market investors that are not currently engaged in transactions with Calkain an impartial view on assets that they are considering purchasing by sending a CSS representative to the property, the company says.
The representative reports back to the client within three days with an overview based on the client's pre-determined needs, including demographic analysis, surrounding residential and commercial development, and tenant credit assessments.
Forms Real Estate Investment Bank
Guy Johnson, president and chief executive officer of Johnson Capital, and Jay Rollins, former managing director of GMAC Commercial Mortgage, have opened Denver-based JCR Capital.
JCR Capital is a real estate investment bank that provides direct debt and equity capital to real estate transactions. It will provide the market with customized financial structures and a broad array of financial products, the company says.
With a national platform, JCR Capital will also be actively involved in lending in Mexico, initially focusing on southern Baja and Cabo San Lucas. The newly formed company, which already has a staff of 10 employees, says it offers up to 95% LTV, floating-rate loans priced over the 30-day LIBOR for terms of one to five years.
E-Dealmakers
TX: LINCOLN CORNERS, HARLINGEN
WHAT: The property is a 180,000 square-foot neighborhood retail center. Completed in 2002, the property is 97% occupied by tenants including PETsMART, Ross Dress for Less, Hobby Lobby and Dollar Tree.
WHO: The Dallas office of Holliday Fenoglio Fowler LP (HFF) worked on behalf of USA Properties Inc. to place the financing with Goldman Sachs Commercial Mortgage Capital LP, a conduit lender.
$$$: $17.42 million.
TERMS: The 10-year loan, leveraged at 80%, has a 5.99% fixed rate with a 30-year amortization schedule.
HFF: (214) 265-0880.
OH: PARK PLAZA, CINCINNATI
WHAT: The property is an unanchored retail strip center with 43,759 net rentable square feet. The center is 96% occupied by a variety of local tenants.
WHO: The Washington, D.C., office of Capmark Finance Inc. arranged financing for the borrower, TZG III LLC, through JPMorgan.
$$$: $3.75 million.
TERMS: The 80% LTV loan has a 10-year term priced at a fixed rate. The first two years of the loan are interest-only, followed by amortization based on a 30-year schedule for the remainder of the term.
Capmark Finance: (215) 328-3200.