The multifamily housing market has shown good performance during the first quarter of 2007, and while caution is merited in certain areas, the overall outlook for the remainder of the year is relatively favorable, says Mark Obrinsky, chief economist of the National Multi Housing Council.
Â Â Â Though apartment transaction volume has dropped slightly in 2007 – following 2006's continued record-setting numbers despite a relative slowdown – current levels are far from weak, notes Obrinsky, adding that when comparing recent transaction statistics to other years' figures, "You have to try to keep a little bit of perspective."
Â Â Â A shift in the multifamily market may be partially responsible. With once-popular condo conversions now much less frequently performed and "effectively out of the market," he explains, the focus has been altered to create "a market that's more devoted to long-term apartment transaction buying and selling."
Â Â Â At the same time, the end of the condo conversion boom has led to the emergence of new possible issues. "There's certainly some concern in the industry about reconversions, or – as some people call them – "repartments,'" Obrinsky remarks. "It is something everyone is aware of and keeping an eye on." Whether a failed condo conversion reverts to an apartment building with professional management or its units are partially sold to investors, reconversions add a growing element of uncertainty to the rental market.
Â Â Â In more promising news, after a slight climb last year, cap rates are currently low and not expected to significantly rise in the immediate future. "I think what that says is what everyone believes: that there's still a lot of institutional capital trying to get reinvested in real estate generally and apartments as well," states Obrinsky.
Â Â Â While the capital flow might now be characterized as "substantial" rather than a "flood," he adds, "nonetheless, there's still a very strong market" that shows signs of further improvement.
Â Â Â National-scale recovery from 2001's recession and the down job market in 2002-03, according to Obrinsky, were initial keys to vacancy and rent improvements and the ensuing cap rate change. "But it really wasn't until the second half of 2006 that, on a national average, rents began to increase at a level slightly higher than the overall rate of inflation," he points out.
Â Â Â Obrinsky warns that even high rents and high demand provide no guarantees – only potential – for developers, as rent levels may not justify an excessively high property purchase price in some situations. "That's true at any time. It's probably more true now," he says.
Â Â Â Another recent source of worry for multifamily developers has been the single-family mortgage market, whose increasing struggles have had a mixed effect on the multifamily market. On one hand, the domino effect may be unavoidable to a certain extent. "It's not really good for the rental market, either, when you have an economic downturn," Obrinsky says.
Â Â Â And in states facing particularly high rates of foreclosure and overall economic troubles, "Anyone in the housing market, anyone in the rental market, has to be careful," he adds.
Â Â Â However, a slowdown in residential can benefit the rental market. Unlike during recent years, when high home appreciation and anticipation of future price increases drove many consumers to buy, "Now we have basically flat price appreciation nationally," Obrinsky notes. "What that means is that people who plan to become homeowners don't feel an urgency" and may opt to rent for a longer period instead. "So that also provides a short-term boost to rental demand," he says.
Â Â Â Â Two notable demographic trends have also fueled rental demand, according to Obrinsky. "We've got the so-called Echo Boomers, children of the Baby Boomers, who are moving into their 20s, getting out of high school, getting out of college, getting into the housing market for the first time," he observes, predicting that this group will continue to rent in large numbers.
Â Â Â Similarly, the immigrant population's contribution to a strong rental market is expected to remain sizeable. Regardless of financial status, "Most immigrants don't come to the country and immediately buy a house," Obrinsky says. And in spite of recent government attention, "The reality is, so far there hasn't been much change in the flow of immigration."
Â Â Â Supply and demand dynamics have been kept in check as these groups and others drive market growth, adds Obrinsky. Construction numbers, which have been relatively consistent over the past few years, currently vary according to individual markets but present a generally sound picture.Â Â Â
Â Â Â "I don't see signs that the industry is ramping up production just because it looks like the market's doing well," he notes. An increasingly attentive industry that understands the cyclical nature of the multifamily business, he says, recognizes that "what you want to be doing is moving properties that are going to make sense long-term instead of trying to time the market."
New Denver Site
InterBay Funding LLC, a financial organization that specializes in small commercial lending, has opened a new office in Denver. According to the company, the new branch was spurred by high growth in small commercial lending opportunities in the West.
Â Â Â "Due to the fantastic economic development the area has been experiencing over the last year, and the sheer numbers of small business owners and commercial property investors that we feel are being underserved by traditional lending institutions, there is definitely great potential for Colorado mortgage brokers," says Tom Brubaker, InterBay's vice president of marketing.
Â Â Â Twenty full-time employees will initially staff the Denver office with plans to triple in size in the next year to support the new transactions, the company says. In addition to relocating its associates to the office, Interbay plans on recruiting new members as well.
Jacksonville, Fla.-based EverBank has expanded its commercial lending capabilities in the small-balance commercial real estate marketplace with its recent acquisition of Apartment Lending Group (ALG).
Â Â Â Through the acquisition, EverBank will create the new EverBank Commercial Real Estate Lending Group, which will develop small-balance commercial real estate loan products. Clay Reese of EverBank and William Sonsma of ALG will manage the group, the companies say.
Â Â Â "This acquisition will result in over $1 billion in immediate origination volume, annually, with incremental volumes upwards of $1.5 billion," states Jamie Buckland, EverBank's commercial and community banking senior vice president.
FL: CHAIN O' LAKES, WINTER HAVEN
WHAT: This 95,000 square-foot retail center on 8.47 acres was 88% occupied at the time of closing. Major tenants include Big Lots, Jo-Ann Fabrics and Family Dollar.
Â Â Â WHO: The Hartford, Conn., office of Tremont Realty Capital arranged financing through a regional bank.
Â Â Â $$$: $2.5 million.
Â Â Â TERMS: A five-year, fixed-rate, nonrecourse loan was secured. LTV: 59%.
Â Â Â Tremont Realty Capital: (860) 548-9289.
LA: 1201 CANAL APARTMENTS & CONDOMINIUMS, NEW ORLEANS
WHAT: This conversion project will consist of 122 rental units and 25,000 square feet of ground-floor retail space in the Krauss Building near the French Quarter of New Orleans.
Â Â Â WHO: The Atlanta office of ARCS Commercial Mortgage Co. originated the deal.
Â Â Â $$$: $18,556,000.
Â Â Â TERMS: The loan will be for a 10-year term on a 30-year amortization schedule. The fixed rate was locked at 6.405%.
Â Â Â ARCS: (678) 565-9271.