2008 September | MHN Blog

House Rejects Bailout Package

"Foong on Finance" with Keat Foong No Responses »

Sep 292008

By Keat Foong, Executive Editor

We are going from crisis to crisis. The House voted down the $700 billion bailout plan, and the Dow Jones Industrials plunged by 777.68, or nearly 8 percent—its worst drop in two decades. In the immediate aftermath, it looks as though banks’ short term interest rates are spiking. That means higher benchmark for short-term, LIBOR-based multifamily borrowing. On the positive side, Treasury yields have fallen further. This is a plus for longer-term, fixed-rate loans, provided spreads do not widen further—which is a big if. If the bailout plan should eventually pass, that should have a calming effect on markets and perhaps spreads as well. But even then, lenders will continue to be conservative, says Bill Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp.

In the Shadow of the Financial Crisis

"Foong on Finance" with Keat Foong No Responses »

Sep 262008

By Keat Foong, Executive Editor

Phew! What a week! Our very own event Multi-Housing World 2008
Conference and Exhibition was held in Denver last week. Within less
than a week—a week—prior to the conference starting, the following
happened: The government took over Fannie Mae and Freddie Mac, Lehman
Brothers collapsed, and the sale of Merrill Lynch was announced. And on
the day the conference began, on Wednesday, the newspapers were filled
with reports of the government bailout of insurance giant AIG. The next
day, the stock market plunged. And by the end of our three-day
educational and networking get-together, the Administration had gotten
together with members of Congress to announce what is now its proposed
$700 billion financial securities purchase plan.

In a mere three days, Multi Housing World was literally tracking
the fast-moving events as they were happening. It felt as though each
day during the conference brought another earth-shaking event, which by
itself may have been big enough be the subject of conversation for the
rest of the year! One conference speaker passed the comment that this
Multi Housing World may well have the honor of being the very first
conference of the new real estate cycle!

The multifamily financing and investment takeaway from the
conference? Some opening session speakers were concerned, very
concerned. “Today, it is really hard to be optimistic,” said Richard
Green, professor and Lusk chair of the University of Southern
California Lusk Center for Real Estate. The spiking LIBOR rates, he
said, were “reflection of people being scared.” He said that on
Thursday, morning.

Since the conference, the crisis has continued to evolve. Congress
is at press time tussling over getting the gigantic $700 billion asset
purchase proposal passed. For now, the multifamily market is still
chugging along. Multifamily fundamentals are strong. On the equity
side, the word is that investors have pulled back, or are sitting on
the sidelines, especially the institutional joint venture players,
though mezzanine and preferred equity is still available. On the debt
side, Fannie Mae and Freddie Mac are still active in multifamily and
their official pronouncement is that it is “business as usual.” The two
agencies are now providing as much as 90 percent of the permanent
financing for our industry. All-in interest rates, despite the turmoil,
are still generally favorable and holding steady. If you want
construction or bridge financing, however, banks have reduced their
lending.

In the investment market, cap rates are rising, though there is
still a gap between what sellers are willing to sell at and what buyers
want to pay given the leverage that they can no longer obtain. And if
you have the money, this may be the time to buy. As panelists said, at
the session “Apartment Investment Cycle: Is it Time to Sell, Hold or
Buy?” “this is not the time to sell.” Maybe it is a time to obtain debt
financing, though, where you can, while capital can be obtained on
favorable terms–and is still available…

“Capital Insights” with Jack Kern

"The Accidental Economist" with Jack Kern No Responses »

Sep 252008

I’m Going With Mickey on This One…

There are a lot of economists and frequently quoted business commentators who are out there forecasting the recession, or their view that we’re not in one yet…

Even venerated Sam Zell, senior scion and master of the multifamily industry commented recently that he thought we might slip into a recession next year.

Jack Welch, former General Electric chief is saying he thinks we’re headed for a deep recession with the first quarter of 2009 being the toughest.

The President said without the bailout package, we’re going to suffer. This just in on the housing front:

The rate of existing home sales decreased 2.2 percent to an annualized pace of 4.91 million units with the median home price declining a record 9.5 percent to about $203,100, the National Association of Realtors reported Wednesday.NAR also said as many as 2 in 5 home sales were by borrowers who have seen their property lose value or are facing foreclosure.

Now let me show you something. My colleague and one of the best known market watchers, Bob Bronson of Bronson Capital Markets (check out his website at this url, http://www.financialsense.com/editorials/bronson/main.html and tell him that Jack sent you) has followed markets for lots of years and tons of cycles. To the best of my knowledge, Bob hasn’t been wrong yet, not only about recessions, but about stock markets. Here is one of his charts that is pretty convincing:

The chart shows that the levels of economic activity that usually indicate fiscal stress are definitely trending down. Without a doubt, we’re already in a recession, but for a lot of reasons, professional forecasters don’t want to admit it. That’s why I checked in with the most accurate forecaster I know.

Mickey Mouse.

I believe that there is a powerful force on earth, one that cannot be ignored and has the capacity to move markets. It’s made up of little kids who cajole and nag their parents and beg and plead to go to a Disney property. Disney is, after all, a rite of passage and a favored vacation spot. Disney’s latest quarterly results showed an increase year over year results, but the real figures I’m interested in showed a decline in theme park attendance. With a drop in people taking this national vacation ritual, it clearly shows the recession has taken hold. We don’t need powerful pundits and scholars to tell us that 2 consecutive quarters of declining GDP are the technical definition of a recession. We have the mouse. I did try to contact Goofy, but he was unavailable for comment. Apparently he was planning to run for the chair of the Republican Party in Orlando

“Capital Insights” with Jack Kern

"The Accidental Economist" with Jack Kern No Responses »

Sep 242008

Sooner or later everyone comes to Rick’s Place…

Woman: What makes saloonkeepers so snobbish?
Banker: Perhaps if you told him I ran the second largest banking house in Amsterdam.
Carl: Second largest? That wouldn’t impress Rick. The leading banker in Amsterdam is now the pastry chef in our kitchen.
Banker: We have something to look forward to.
(c) Casablanca – 1942
–
The Federal Government is about the embark, one way or another on one of the largest taxpayer led bailouts of the century. I was going to wait to really comment on this until the dust settled because as of today, the Feds haven’t decided what to do or how to manage all of this. I do think several things are pretty clear to me, and will become clear to you regardless of how this all turns out. First, consumers are terrified about their personal finances and jobs right now and bailout or not, they aren’t going to rejoice, run into the streets tossing dollar bills into the air and start bragging about buying houses again. Next, the National Association of Realtors will use this as an excuse to push home purchasing again, despite overwhelming evidence that it wasn’t a good idea for everyone and lastly, apartment renters are probably going to stay put even longer. Recently, the head of a very successful property company told me that this is going to be one of the greatest times in history for apartment ownership. Thinking about it for a while, I agree with that assertion. There just isn’t enough good news on the housing front to justify anything but optimism for apartment rentals. It simply comes down to an inventory issue. Most of the excess inventory, unoccupied houses, and foreclosures are usually located outside of prime apartment investment areas, so usually the professionally managed units win, based on location. Until the levels of employment grow outside of traditional commercial corridors and into far flung suburbs, well located properties are going to continue to see reasonable occupancy levels.

I have heard that many former realtors and brokers are working in restaurants, tending bar and doing other jobs. As for me, well, I’ve always wanted to become a pastry chef…

“Capital Insights” with Jack Kern

"The Accidental Economist" with Jack Kern No Responses »

Sep 222008

The Taxman is Hungry

For a long time now, commercial properties, especially apartment owners have had a peaceful relationship with most taxing authorities. The cities recognized that apartments were good housing for their residents and wanted to appear to have a balanced housing policy. Apartment developers obliged by adding units and taking advantage of local subsidies or other incentives. It appears that all bets are off. Acccording to a recent report by the National League of Cities detailing "City Fiscal Conditions," home price declines, increasing expenses at the municipal level and decreasing assessments have wrought havoc with city budgets. In 2008, property tax revenues declined by 3.5 percent, year over year, inflation adjusted and weak housing markets aren’t making it any easier. Apparently sales tax receipts declined on average a little under 5 percent and even income tax revenues dropped by roughly 4 percent, year over year, inflation adjusted.

So what’s a city administration to do?

They’re raising fees about half of the time, adding new fees a third of the time and almost 25 percent of the time, they’re increasing the levels of impact and development fees. Et-tu Brutus?

So much for cautious optimism.

Apartment developers and operators need to start documenting changes in values, increases in apartment operating costs and and risk factors if they’re going to beat back some ill-conceived attempts to raise cash from the rental community. Problems have become particularly acute in the West, followed by the Midwest, Northeast and South, according to the survey. Underwriting just got tougher, not that the capital markets are all that much fun these days.

The best bet, tell your residents to get into the community and spend, spend, spend. Sale tax revenues count and maybe it will be just enough so that they don’t notice all of those apartments in their town.

Just maybe…

Conclusion: Do Not Sell

"Foong on Finance" with Keat Foong 1 Response »

Sep 192008

By Keat Foong

Speakers at a panel at the Multi-Housing World 2008 Conference and Exhibition held in Denver came down squarely against placing apartment properties on the market.

The session was titled Apartment Investment Cycle: Is it Time to Sell, Hold or Buy?

"Do not sell unless you have to," said Ronald Brock, president and CEO, Pierce Eislen Inc. "This is not the time to be selling."

"Do not sell. This is not the time to be a seller," said Keith Rosenthal, co-founder and president of Phoenix Realty Group, echoing Eislen.

Brock, a market researcher, said rental apartment conditions are "darn good." The fundamentals are excellent, and there will be continued slowdown in development, he noted.

If anything, Rosenthal said developers should buy. He said he expected apartment prices to continue to go down. But because they cannot time the market precisely, developers can "buy on the way down" and "buy on the way up."

"We are still buyers, and we think others should be too," said Rosenthal.

He said there will be a wave of overleveraged and other pressured sellers bringing apartment properties onto the market soon. There is a "tremendous amount of money to be made in repositioning" for players who have development and operating skills and who can deleverage the properties, he said.

Is there a consensus that despite the sense the U.S. may be on the brink of financial meltdown, developers should be buying apartments now? If not, when?

Good News From Multi-Housing World 2008

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Sep 182008

Good news about the real estate market has become less and less frequent. While most in the industry still paint a fairly positive picture for the multi-housing industry, truth is that debt and equity capital is becoming more and more scarce with each new devastating headline coming out of Wall Street. And there are plenty of other concerns in the industry, which we will cover on our website. But we think we have found some good news to share with you…

Multi-Housing executives still have a great deal of enthusiasm when it comes their businesses and certainly when it comes to a good old-fashioned networking party. Case in point: The Meet and Greet on 16th Street, the opening party hosted by the Multi-Housing World Conference last evening at the Sheraton Hotel in downtown Denver. I confess, I have only one metric to measure this level of enthusiasm. After a long day—which many spent traveling and then attending workshops—executives stayed at MHW’s evening event well beyond its end time. Developers, property managers, architects and others were overheard sharing ideas and concerns—perhaps the best antidote to the woes of the current crisis.

Keeping up that spirit of enthusiasm, several industry experts agreed to go on camera to discuss their thoughts on the Fannie Mae, Freddie Mac and AIG bailouts. We rounded up six industry people for interviews with Multi-Housing News TV (MHN TV), which is all set to premiere on our website on Sept. 19. Each of them had a different perspective, but most agreed that the bailout, while not the best thing for taxpayers, was the only action that could be taken to prevent an even bigger economic crisis. A necessary evil, one said. Not bailing them out would have had bigger repercussions, said another.

We urge you to tune in to MHN TV to hear in detail what your colleagues and thought leaders had to say. In the meantime, we’ll bring you more good news from the Multi-Housing World Conference, where executives continue to remain anything but pessimistic.

“All Aboard” with Erika Schnitzer

Miscellaneous No Responses »

Sep 172008

Financial crises…soaring gas prices…How does transit-oriented development fit into the bigger picture?

As a native of the metro New York City area, public transit is nothing new to me. But perhaps I’m naïve. As I sat listening to Bill Sirois, manager, TOD for the Regional Transportation District RTD) in Denver this morning, I began to realize just how crucial TOD truly is in today’s society and how far some of our nation’s cities have come in recent years.

The large turnout for Multi-Housing World’s Denver TOD bus tour clearly reflected this importance, as well as an eagerness to see what can actually be accomplished.

Here in Denver, public transit ridership was up 13 percent in the first quarter of 2008. With FasTracks, RTD’s 12-year plan that includes 122 miles of new light rail and commuter rail, in addition to 18 miles of bus rapid transit service, this figure will only continue to rise.

And at the heart of this plan is the development of Denver Union Station. Much like New York’s Grand Central Station of which I am accustomed, Union Station will become Denver’s transportation hub by the time it is completed (expected in 2017).

But that’s not all. The Center for Transit-Oriented Development projects that by 2030, there will be a demand for 155,000 residential units within a half mile of transit. Downtown Denver alone has expanded from 2,000-3,000 units to 10,000 units over the past 15 years. And plans are being called for another 8,000 units within the next several years.

This is great; more TOD means fewer cars on the road, which means residents have more income to spend on housing and other needs. Transit thus becomes an amenity for downtown living.

But what impact will this failing economy have on transit-oriented development?

While plans for Union Station call for it to be built all at once, the whirlwind of recent events provides a challenge. The airport corridor will be the number one priority. On a larger scale, Forest City reportedly will not begin any new projects in Denver in the next few years.

Stay tuned for more on Denver’s transit-oriented developments, as well as updates for Multi-Housing World…

“CAPITAL INSIGHTS” with Jack Kern

"The Accidental Economist" with Jack Kern No Responses »

Sep 162008

Beware the Ides of September?

What a difference a couple years can make. Between Bear Stearns becoming a term of art, as in "he got Bears Stearned," and now the news being overrun with banks failing (as many as 20 with more on the way), it just got more interesting. In the interest of full disclosure, I used to work someplace that was taken over by Lehman Brothers Holdings, so no, I’m not bitter. (Ha, Ha, Ha, Ha, oops, I mean, gee what a shame…) It’s important to remain neutral, so I’m going to share something that might surprise some of you. I saw it coming. Being on the inside of this industry you sometimes get the feeling that excesses run deep and that responsibility won’t ever catch up with those that have avoided it. Some call it karma. I call it foolishness.

To have Bear Stearns, Washington Mutual, AIG, Lehman Brothers Holdings and a number of others on the horizon appearing to be in great difficulty begs the question – why? Industry pundits are selling the line that it was the irrational exuberance of easy credit and less than sophisticated investors seeking that extra basis points yield. I think it’s something else. There was and still is, I feel a fundamental belief that you can pass the problem onto someone else, and in the end, mitigate your own losses and ultimately your own responsibility. No one now believes that subprime lending was such a good idea, so it went into CMBS, enriching along the way, a feedlot of Wall Street types, who remained largely untouched by the failing. Until now. These variously complex financial instruments are now the province of U.S. and European based investors that have no belief in their negotiated. Rather than just chasing yield, many of these institutions may be running for their own business survival. If the policy response from the Fed isn’t carefully handled, then a recession in the United States will be the least of our problems.

I’m headed off to MultiHousing World in Denver this week. If you’re going to be there, I hope we get the chance to meet and chat a bit. I promise not be territorially negative, but I can assure you I have an opinion and I’d like to hear yours. Stay tuned…

The Calm Before The Selling Storm

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Sep 122008

According to recent National Association of Realtors (NAR) predictions, the level of overall home sales–including multi-housing–is forecast to show little movement in the coming months.

The NAR’s Pending Home Sales Index dropped 3.2 percent from June to July–even with June’s reading being revised to 89.4. (The original reading was thought to be 89.0.)

However, the anticipated calm period isn’t necessarily a bad thing.

Sales rise, and sales decline–but when considering the big picture, many in the industry feel home sales will soon increase.

NAR’s Managing Director of Quantitative Research Jed Smith told MHN that while sales fluctuate from month to month, the market in general has bottomed out, is stable–and ready to rise.

Multi-housing market results would seem to echo that sentiment.

Yes, sales in the overall U.S. housing market have fallen. In the multi-housing market, condo and co-op sales are down 18.6 percent from 2007 levels.

So have some multi-housing prices. And as of July 2008, pre-existing condo and co-op prices for the overall market are down 2.7 percent from last year.

But they haven’t fallen everywhere. In some areas where the market didn’t need to undergo a severe correction–like the Northeast and Midwest, where prices remained relatively steady during the housing boom–condo prices are actually up.

Despite overall market struggles, there continue to be bright spots.

Take, for example, the new, $350 million, seven-acre mixed-use Old Spanish Village development in Coral Gables, Fla.

Florida’s condo market hasn’t had it easy. According to the Florida Association of Realtors, Florida condo prices have dropped 13 percent in the past year alone, falling from $194,100 to $168,500 in July.

And yet, despite statewide condo price declines, interest–and faith–in the market is strong enough to make a condo-intensive project like Old Spanish Village a reality.

The community will feature three mid-rise condominium buildings and 38 villa residences, priced from $500,000 to $3 million. The village will also house 250,000 sq. ft. of commercial space.

The response thus far has been amazing: Half of the condos sold at the pre-construction stage, says Jorge L. Hernandez, founder of Jorge L. Hernandez Architect, the firm that is designing Old Spanish Village.

Projects of this scope–new developments that will create entire new communities upon completion–indicate an ongoing confidence in the multi-housing market.

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