Monthly Archives: September 2011

Clear & Concise: Housing Market vs. Apartment Market

Glendale Apartment InvestmentsBefore I get into this, I want to encourage you to throw in your two cents. Obviously, if you’ve found this blog, you’re involved in the commercial real estate industry in some way and have the ability to form your own intelligent opinion. Don’t be afraid to speak your mind and/or ask a question. None of this is really news, but rather an obvious concept that most passive investors don’t really look into.

All over the internet, you can find articles and blogs discussing technical data, showing graphs/charts and “forecasting” where the markets are heading. Some of the industry’s leading researchers and advisors – like Hessam Nadji of Marcus & Millichap in his blog “StreetSmart” (found here) – talk about the multifamily sector as a whole and how the general outlook is positive for the time being. 

If you’re like most of my clients, you don’t have the time nor the brainpower to sit there analyzing these things yourself. You have a direct question and expect a direct answer.

When a large number of homeowners are in foreclosure and the housing market is going down the drain again, every apartment investor wants to know one thing:

How will my apartment investment be impacted by the decline of the housing market?  

Answers:

Larger Tenant Pool.

  •  Older and more affordable buildings experience an increase in occupancy while newer construction buildings have to compete with the demand for more affordable housing by possibly reducing rents. People who are losing their home need a new place to live, even if it’s a major downgrade from the house they couldn’t afford anymore. Also, some are finding it more logical to rent until home prices bottom out so they can purchase a new home. In Glendale, for example, a family who is struggling to make the $5000/month payment on their large house in the hills wouldn’t mind short selling and moving in to a 3 bedroom apartment for $2,800 if it means saving their credit and financial strength.

What Credit Report? 

  • Landlords are faced with an influx of rental applications from non-creditworthy tenants with foreclosures and bankruptcies on their credit report. Some clients I’ve spoken to recently even mentioned that they no longer give credit reports too much attention. As long as the tenants are employed and seem trustworthy, they feel comfortable. One owner said he has received 20 applications for the same unit, all of which were from prospects who are coming out of a BK or foreclosure.

More Demand = More Dollars 

  • Major rent growth! In some cases, I’ve seen landlords go from having 50% of their building vacant to being 100% occupied and at full income potential within one month. Recently, we sold a building that was completely vacant. Within just a few days, we had the entire project rented out and cash-flowing nicely. This is mainly because of the high demand for affordable housing stemming from people losing their homes and/or downgrading in order to survive financially.

Ready. Set. Sell. 

  • Everyone loves a stable performing asset. Apartment owners who have been sitting on the sidelines waiting for their property to appreciate will finally have the chance to entertain reasonable offers on their investments with the help of brokers like myself. Although the “vultures” are out looking for distressed deals, most investors turning to multifamily from the stock market or commodities markets are actively seeking out stabilized assets that are cash-flowing from day one and don’t require much management/maintenance.

Refi Time!

  • Better fundamentals and occupancy generally translate to easier financing conditions. Property owners who have loans maturing or have bad interest rates will have the chance to refinance their mortgage and yield a higher return on their investment.

So, with all this being said, you can kind of see how this all works. Homeowners become prospective tenants for apartment buildings due to foreclosure and/or financial weakness. Apartment investors leverage the increase in demand by collecting higher rents. Because of this, their property values go up substantially and they have a chance to make some very lucrative moves in the market. Those owners who aren’t over-leveraged have the opportunity to sell their building and reinvest the equity into something more profitable.

I’ll even be so bold as to say that if you own an apartment building in the Los Angeles area today and haven’t at least checked with your broker to see what your building is worth, you’re doing yourself a huge disservice. While most investors are still in the “wait-and-see” mode, there is serious money to be made in today’s market.

Fortunately, I provide free property valuations and get a thrill out of helping investors strategize their investments. Feel free to get in touch with me if you want to know what your building is worth in today’s market and how much more money you could be making.