"I get knocked down, but I get up again, you're never gonna keep me down!"
Tubthumping Lyrics
(c) Artist (Band):Chumbawamba

Most forecasters have called rent declines an unfavorable trend through 2012, and commented on how the rents in place are tied, almost demonically to home price affordability. The commonly held view is that the strength of the housing market and the relationship between house price affordability and multifamily rent is sacrosanct, so much so that most analyst calls to the top 10 publics on rental play off of that theme.

I'm not so sure that's the case, and in fact it is beginning to look like the rental industry is gaining ground again. According to the most recent CSW data, the national composite home price rose approximately 2.9% on a quarter over quarter basis, not seasonally adjusted, and this is the first quarterly gain since the first quarter of 2006. According to the report, of the 20 metro areas surveyed, home prices increased in 15 regions, with Cleveland, San Francisco and Washington, DC leading the way. The prices are up, but not stunningly so in any metropolitan area.

Just for comparison purposes, I took at look at the September, 2009 Topline Report, courtesy of Pierce-Eislen. Starting with their San Francisco – Peninsula market I wanted to see how rental was faring overall against the newly released house price data. The average rent for September, 2009 was $1,658.96 overall, a decline from the prior month of $15.77. Rental concession participation rates, which I think is an excellent measure of demand strength, and only reported in Pierce-Eislen as far as I can tell, actually declined from 26.2% to 24.6%, probably indicating some positive trends coming in the next few months.

If you break down the rent numbers a bit further, the Topline report shows that at the Upper Mid-Range of properties, (those in the A- and B+ category), rents actually increased on both a month over month basis and their 3 month moving average. Since I was expecting to seek San Francisco still in trouble, the rent numbers overall and their composite sectors instead point to a positive outlook, at least incrementally.

I'm also interested in seeing what's happening in Washington, DC. Since the nation's capital is considered somewhat recession resistent, it wasn't surprising to see the city on the CSW list with house price increases, but rental in DC had taken a beating, and it made sense to see how the rents were now changing.

Again turning to the Pierce-Eislen data, (you can find all of this at www.pi-ei.com) rents in the Washington, DC-Suburban Maryland market averaged $1,263.14, a decline of $16.44 from the prior month. Using the same measure as before, all of the renter sectors declined, but again, on a three month moving average, the A- and B+ properties showed positive gains. What was really telling about the DC market is that the rental concession participation changed month over month from 45.5% previously, now down to 28%, demonstrating a different demand dynamic.

I now believe that rents are going to turn positive and there will be meaningful gains in certain metropolitan areas and submarkets, some appearing before the end of this year. I'm thinking that 2012 will probably look a whole lot different than what you're hearing at the industry conferences. My crystal ball is getting clearer but I still have a hard time getting it through security at the airport. As the forecasts are revised, just remember, we're talking about understanding the recovery, not fretting about the recession. Our internal forecasts and work show more progress in rent gains than anyone is expecting. I think it's about time.

(Jack Kern is the Managing Director of Kern Investment Research, and is fond of telling people he's called every recession, stock market decline and change in the colors of cars accurately since 1980. He can be reached at 301.601.1900 or Jkern@KernIRC.com)

“Should 5% appear too small, be thankful I don’t take it all.”
Taxman (c) The Beatles, 1965

Property values are declining in virtually all sectors of commercial real estate and with local governments seeking relief any way they can get it, assessments are rising. In New York, starting in January the Department of Finance released their tentative assessment listings planned for 2010. Not surprisingly the assessed value was up for all major groups. Most notably, apartment buildings rose 7.8% and commercial buildings went up 9.9%. Single family residences didn’t escape the increases either, rising by 4.41%. All of this designed to help close budget gaps plaguing the state. This is all part of a 5 year plan and so future increases are almost guaranteed.

There was a time our industry has peace of sorts, and apartments, especially pre-1980s were seen as workforce housing. In the days before REITs and the commoditization of units, apartment rents rose slowly, and incorporated communities recognized the need for all kinds of housing. Sadly, the reckless excesses of municipal spending, irresponsible politics and a clearly distracted affordable housing policy have collided in a most unfortunate way.

With the prospects of a continuing loss of pricing power in most markets, underwriting just got a lot trickier. It would be unusual, in today’s environment for property taxes not to rise, and ultimately the yields are going to suffer. At some point, when the markets turn, the cities that choose this short sighted tact will find their citizens paying higher rates and dealing with less competition. Tax increases apparently don’t discriminate, regardless of need.

(Jack Kern is the managing director of Kern Investment Research, LLC, a
market research firm. He can be reached at
301.601.1900 or JKern@KernIRC.com.)

Sometimes news events remind me of the ancient plagues. Just when you thought things couldn’t get any worse, frogs rain down from the heavens or a comedian gets elected from Minnesota. In a way, that kind of makes sense because after electing a professional wrestler governor, a comedian was the next step. I do wonder if they ever called Jess Ventura the First Wrestler, instead of governor. (Expect to see a clown from Minnesota in the House of Representatives in 2012. There are quite a few there already.)
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Florida is one of those states in transition, with elderly residents vying for city services against a tsunami of immigration. Somewhere in the mix, something dumb is happening.

Recently, as if unemployment, immigration problems and a hurricane prone coast weren’t entertaining enough, the Florida Hometown Democracy Act was certified for the November 2010 election. This initiative, if passed by the voters would require local referendums on all comprehensive plan amendments that have been approved by their respective local governments. This means a property developer would have to obtain not just local and sometimes state government approval, but also the local citizens approval. The expense alone of mounting a public relations campaign to convince the electorate to support your project will cast a daunting pall against a lot of new projects.

Since this act has a very good chance of passing, it might just mean the inadvertent decline in unchecked Florida development and reward the citizens of Florida with less competition, higher rents and vastly more constrained surburban markets. This sort of citizen activism has done little across the country to foster the kinds of development and improvements that build strong communities. This may well mean that Florida will now see vastly less employment and ultimately watch its housing stock age in place, something that won’t benefit anyone.

There needs to be a pretty dramatic response by the development community in advance of the November 2010 vote or we can cross Florida off the list as a state worthy of development capital. Let me know if you’d like to get involved. For me, I’m going to the Bahamas next time I want sun and surf, or maybe Las Vegas and Caeser’s Palace, which is a lot like Miami Beach, except for the plethora of wrinkles.

(Jack Kern is the managing director of Kern Investment Research, LLC, a
market research firm. He can be reached at
301.601.1900 or JKern@KernIRC.com.)

“I think you’re bluffin’.” John Wayne in The Man Who Shot Liberty Valance, (1962) (C) John Ford

In what I can only attribute to political gamemanship, the Right to Rent program is making its way around the Hill, seeking support for what will surely amount to be the epitome of a liberal agenda. According to industry pundits, labor unions and very socially liberal organizations, those renting homes that are foreclosed need protection against losing their housing due to proceedings designed originally to turn the asset and get it back on the market as soon as possible. Rather than just asking for time to get re-established, the new effort seeks to gain time periods as long as 20 years, supposedly with the idea that it will stabilize neighborhoods and help limit housing blight. In some instances, these very renters are the ones that lost their homes through foreclosure in the first place.

In the last Congress (known as the dumb one), Rep. Raul Grijalva introduced the Saving Family Homes Act, designed to offer former homeowners the ability to rent their house after foreclosure for up to 20 years. Grijalva represents the 7th Congressional District in Arizona and is a Democrat, a seemingly deadly combination these days.

While that effort went no where, it has been replaced by the newly reconstituted Right to Rent Plan, which has as its cornerstone the premise that homeowners in foreclosure can, by right, rent their homes for long periods (perhaps 10 to 15 years) at market rates, determined by independent appraisals. And we all know what has happened with the appraisal industry.

The program would have little new bureaucracy but will be administered by a judge, presumably in a similar fashion to current foreclosure proceedings. If the owner of the home wishes to sell, the new buyer has to recognize the rights of the renter for the entire contract period, regardless of the amount paid or the effective return on costs.

It’s too early to tell how likely this boneheaded move by Congress is to pass, but with the ultra liberal agenda currently in place, it does beg the question, “What are they thinking over there?”

So do what I’m going to do. Find out which member of Congress or committee chair opposes this crazy idea and drive by their house and make a PAC contribution, like Nincompac, Idiotpac or Corruptapac. They all have convenient drop boxes right next to their mail boxes and take cash, checks and bearer bonds.

(Jack Kern is the managing director of Kern Investment Research, LLC, a
market research firm. He can be reached at
301.601.1900 or JKern@KernIRC.com.)

“Nothing is more damaging to a state than that cunning men pass for wise.”
Francis Bacon (1561-1626)
 
There are an estimated 5 million homes in foreclosure, with the total potentially rising to 7 million. One of the facts coming to light is that as much as 40% of these are investor- or syndicate-owned and leased out to renters. As these houses are falling into default, many of the owners are pocketing the rent payments and letting the renters discover for themselves that they are being evicted, even though they’ve paid their rents on time and consistently. Recent legislation now makes it harder for the bankers and court appointed receivers to evict the renters. If the renter has a lease, they are given the term of the lease plus 90 days to move out. If the renter is on a month-to-month term, then they are given 90 days to move. If no lease is in place, then it’s up to the discretion of the court to decide, based on hardship and other socio-economic factors.

We’ve made mention before about how the foreclosure process has been a negative factor for professionally managed units and now at least the new legislation brings some additional order to the process. While it would be best for the foreclosed inventory to be closed out finally, at least this step avoids the constant lobbying and meddling by local governments with rules in effect that differ by county. It would be smart for owners to monitor court proceedings and potential evictions as these residents are going to need a place to go and their choices, at least by foreclosure standards, are becoming more narrow.

(Jack Kern is the managing director of Kern Investment Research,
Germantown Md. You can reach him at 301.601.1900 or
JKern@KernIRC.com.)

Sometimes, the power curve shifts and the resident gets to call the shots. Reminiscent of the Godfather, 1972 when Michael Corleone talks about how his Father made an offer the band leader couldn’t refuse, residents are seeing the benefits of negotiating lower rents (without horses or large menacing guys like in the movie).
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Rents for doorman buildings, according to the latest release from the May Manhattan Rental Market Report (see www.tregny.com <http://www.tregny.com> ) showed these declines:

Studios – down 9.84%
One BR – down 8.96%
Two BR – down 4.53%

Rents for non-dorman buildings performed this way:

Studios – down 4.27%
One BR – down 7.06%
Two BR – down 5.99%

According to the report, prices and service offerings are the best on the Upper East Side, Harlem and the East Village. What this report points out and others like them, is that rental rates have dropped in most investment grade markets and the resulting declines are beginning to show up in concessions.

I happened to take a look at some of the larger owners and in the Los Angeles area, for comparison, according to data provided by Pierce-Eislen (see www.pi-ei.com <http://www.pi-ei.com> ) rent declines exceeding 5% are typical on a year over year basis at May for AvalonBay and Archstone among many others. Interestingly Equity Residential was down under 3% for a comparable period.

Renters have the upper hand right now and it will take a while to get pricing power back into the hands of the owners. Rent reductions at an effective level of as much as 15% when factoring in concessions are evident in some places too. This problem isn’t going away anytime soon.

It might help your leasing staff if they start smoking cigars and wearing striped suits with fedoras. After all, it worked in the movie.

(Jack Kern is the consigliore of Kern Investment Research, LLC, a market research firm and olive oil importer, and specializes in making sure clients get exactly what they want. He can be reached at 301.601.1900 or JKern@KernIRC.com.)

“It has become appallingly obvious that our technology has exceeded our humanity.” Albert Einstein
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In the Electric Kool-Aid Acid Test there is a line that says, “…we are all doomed to spend our lives watching a movie of our lives – we are always acting on what has just finished happening. It happened at least 1/30th of a second ago. We think we’re in the present, but we aren’t.”

The increasing use of technology in the multifamily arena has become so prevalent it’s hard to believe we can’t survive without Twitter, or Facebook or Friendster or some other GPS enabled service. To have the ability to find an apartment 24 hours a day, everyday and put the selection in the hands of the customer is a real advancement. Despite early reservations about the commoditization of apartments and unified pricing, the industry has reacted well and embraced technology. I find that keeping up with it can be a daunting task. I never knew that I could find a hamburger at two in the morning or that flowers could be ordered the instant you got a break from the argument over, well eating a hamburger with onions at two in the morning.

One of the more interesting applications I’ve seen recently is where you go online and discover your inner-Golden Girl or which now deceased celebrity you most resemble. There are seemingly endless choices to pick from and when I looked at friends’ pages, they were all some recent incarnation of people like John Wayne or Judy Garland or Humphrey Bogart. It occurred to me that as a somewhat skeptical researcher I should take the test just to see what major celebrity I’d be paired with. Imagine the intrigue as I thought about the many adventurers, stars and celebrities that I might be matched against. You can probably then understand my surprise when this is what I got:

Congratulations. You most resemble current living legend Vinko Bogataj. You have the grace of an elephant after a bottle of wine, the finesse of an inebriated monkey and the tactile capacity of an orangutan. Your single most redeeming factor is the ability to park a car between the white lines at the mall, but otherwise you come from the shallow end of the gene pool and can make most use of your considerably limited talents by becoming a blogger. (For those uninitiated, Vinko Bogataj is best known as the guy on the old ABC Wide World of Sports Show as the agony of defeat. He essentially fell down a mountain during a ski race and that clip was used on the air for years on end.)

Another exercise in attention deficit disorder is finding friends on sites so you can link to them. Recently I thought it would be fun to link to an old girlfriend. It turns out, women have really long memories and I’d kind of forgotten about her, her sister and the break-up over it. Getting flamed by an old flame isn’t as much fun as I thought it would be. In one click. they can tell the site administrator exactly what they think of you and bam! you are banished from that site for some indeterminate time period.

It’s important not to spam future residents but the practice of evaluating them hasn’t exactly kept pace. In someone’s profile on Facebook or the many copycat derivatives, you can observe quotes, behaviors and choices that would cause the resident acceptability score to fall through the floor. Just imagine how the apartment is going to look after that band of friends shows up for the party. Sometimes too much information is just that.

I’m going to wait a few weeks and try that personality test again. I just always thought of myself as an explorer and maybe next time I’ll be paired with someone really cool, like Maurice Chevalier or Charles Lindburgh, not that guy that used to wash their cars.

(Jack Kern is the Managing Director of Kern Investment Research, Germantown Maryland. You can reach him at 301.601.1900 or JKern@KernIRC.com. He was going to send out tweets on Twitter about his life and adventures, but let’s face it. He’s a research guy and how interesting could that possibly be?)

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it, if it keeps moving, regulate it, and if it stops moving, subsidize it.”
Ronald Reagan, 40th U.S. President, 1981 to 1989
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I have become increasingly optimistic about the long term prospects for growth in the economy while at the same time becoming bearish on the newly reformatted democratic party’s view of economic popularism. It seems to me that the lack of accountability on the part of federal officials is beginning to rival the cowboy mentality that made Wall Street so fragile, except that the Street reacted to its own hubris and ultimately self-adjusted. Certainly it was a spectacular adjustment, but one borne out of necessity and the rational need to find equilibrium. I was reading an article the other day about some pundit who claimed the country is functionally bankrupt and that civil war and constant struggles for food, shelter and medicine were going to become the de-facto status quo for many of us. I seriously doubt this is anything but an attempt to sell a book or maybe get more people to buy canned goods, but no self-respecting economist is going to head down that track. While foreclosures continue at record levels and unemployment and job numbers are shockingly uneven, the greater capacity to re-balance is evident.

In a sense, we’re constantly looking for rapid solutions to long term problems and in the multifamily sector, it’s no different. Rent growth comes from the economic vitality, drawing employment into sectors that feed the kinds of jobs important to apartment owners. Job growth, frequently misquoted and even more poorly misunderstood by the trade press is a part of that analysis but is not the answer. We can expect to have a jobless recovery, in that strong growth in jobs in all sectors is going to be sporadic and not helpful initially. The vast amount of stimulus being spent, estimated by us to be about $14 trillion at last count, is for projects that create no long term employment but are simply expected to act as a catalyst to spur other kinds of activities. This ultimate multiplier effect will be helpful, but don’t presume there is pent up demand or a massive number of Gen Y kids waiting to move out of their parents homes. In all likelihood, the gain in demand will come about as the entire U.S. housing inventory situation is addressed and rents once again become competitive.

It would be easy to address the issue of rent gain dating by following the industry perception that the economy is going to recover quickly. The real situation is more likely to observe a stringent de-coupling from this folklore in favor of a more long-term trend. Plan on 2009 and 2010 being very slow in most markets. Expect that whatever is being underwritten as an optimistic forecast for later years is just that. Anticipate that economists, who are perennially wrong, will once again miss the cycle and this time call for a cessation of economic duress that will not materialize.

Some real forecasts for you:

The Stock Market, (NYSE mostly) will decline more as the reality of limited earnings and trade imbalances become more evident. TARP, TALF and other programs will have insufficient power to make a difference in the way the market moves and the investing public, tired of the shell game driven by major traders will continue to stay away in earnest. The suspension of disbelief, so obvious in the early part of the market’s decline is now much more acceptable to traders and novices alike. Allowing for the possibility that those on the Street have an economic incentive to be sure Wall Street runs, it will get worse, but not drop to extraordinary lows. Another major adjustment cycle is in the offing and the sails are out of air at this point. Look for another 1500-point decline in the Dow.

The commercial property markets will not collapse as has been mistakenly forecast, but will continue to struggle, with industrial showing flat to slightly down rents, retail showing increased vacancy and new concessions and multifamily continuing to exhibit weakness in all but a small number of markets. Obvious pockets of growth will appear in certain investment grade submarkets, but mostly the prospects for rent growth are bleak across the board. The re-emergence of CMBS is a positive sign, but it’s far from being a certainty in financial markets.

We are in one of those intra-cycle periods where patience and a calm demeanor along with steely nerves will get investors through the cycle. Pricing of assets won’t decline as much as the perception of loss of value would indicate and transactions will close in small numbers until the capacity to underwrite improves. Don’t be fooled by the tremendous publicity about distressed deals, because there are not many of them, relative to the size of the inventory in most sectors. There are just more of them than historically normal. The single best source I’ve seen for information on distressed deals is at Pierce-Eislen, and I encourage you to call Ron Brock Sr. over there and see what they’ve done. The lists are, to say the least, astounding.

(Jack Kern is the managing director of Kern Investment Research. He has been repeatedly voted the best real estate forecaster in the United States by his close relatives and some well meaning friends, but still can’t get on the A list for parties. He can be reached at 301-601-1900 or JKern@KernIRC.com.)

“In Russia, we only have two television channels. Channel One is propaganda. Channel Two consists of a KBG officer telling you: Turn back at once to Channel One.”
Russian Comedian Yakov Smirnoff

Hello Comrades. the next message you see may be from the Commissar’s office thanking you for contributing your information freely to the Motherland. Russian company Digital Sky Technologies just bought into Facebook and while there aren’t a lot of bells going off at the Federal Trade Commission, you can be sure the National Security Agency is working late nights trying to combat this one. If you happen to be reading this, and have either a security clearance or a sensitive position, cancel your Facebook page now.

Russia is still, despite heavily promoted public relations, a wilderness of corruption, with no avowed purpose as a U.S. ally. In fact, we are still, after 50 years facing off with Russia in many nations where they’ve provided military observers, trainers and weapons systems that would shock you. Witness the recent ascension of Putin to Prime Minister by the Puppet President Medvedev. If anyone doubts that Putin is still yanking Eastern Europe’s chain, remember that when they cut off the natural gas supply to the Ukraine, the UK took a few days to get an alternative supply.

What does this mean for the average Facebook user?

We live in an international economy and the patterns of employment, spending and consumer demand are more complex than ever. We’re dependent, in fact, as an apartment industry on many of these. Take for example, the H1-b program. These visas allow knowledge workers to live and work in the U.S. for a period of time. Many multifamily companies and their contractors hire these recent arrivals. In turn, most of them live in apartments and their tenure, based on renewals in their status makes them good longer term renters. Since a lot of H1-b residents work in defense-related industries, it would not be surprising to discover that if they have an active Facebook account, they’re probably not going to be renewed. That makes an already shifting demand problem even worse for apartment owners.

There are those who prefer to think of Russia as a fuzzy little bear somewhere between Finland, Siberia and Mongolia, but in the present political environment, there is little democracy in Russia. Imagine the outcry if Syria bought part of Facebook and you were dealing with an ayatollah instead of a faux czar? Would that be any more comfortable?

We didn’t want to see our ports sold to Dubai, we’re not happy about Chrysler becoming part of Fiat and now Facebook is up for sale, bit by bit, to the latest despot. It’s time our national borders extended to electronic records and files and steps were taken to protect public information from being for nefarious purposes. Take down your Facebook page and remove any personally identifiable information, and please tell everyone you know that a Facebook fact can rapidly become One Day in the Life of Ivan Denisovich.

(Comrade Jack is the Managing Proletariat of Kern Investment Research, a real estate research consultancy and can be reached at 301-601-1900.)

“An Army is a team. It lives, eats, sleeps, fights as a team. This individuality stuff is a bunch of bullshit.”–General George S. Patton, Jr.

Sometimes you just have to wonder how these guys keep getting the top spot. Former Home Depot Chief Bob Nardelli was well known around the orange themed retailer as a guy with organizational prowess and discipline on his mind. What became known inside the company as the Orange Crush, (with apologies to Syracuse University) the military like precision (is that an oxymoron now?) that Nardelli attempted to instill in the troops, from cashiers to counter clerks was met with derision, defecting customers, (Can you say Lowe’s?) and greatly reduced revenues. Nardelli took his parachute, probably not in the way a lot of employees would have preferred, and left.

Not too long after that, when it was obvious that every other possible candidate for Chrysler wasn’t available, they gave the job to Nardelli. It was, in a sense, the beginning of the end of the march towards the destruction of Chrysler, one of America’s founding auto makers. The company was started by Walter Chrysler in 1925 after buying out the Maxwell Motor Company. Chrysler, a very successful industrialist who, born in 1875 was around for the dawn of the era of the automobile would probably have been aghast at the thought of foreign ownership and doubly upset it was Fiat. Chrysler was born in an age yet to see two world wars, and ultimately his railroad experience and becoming a car man, an affectionate term of the times, made important strides in developing technologies we count on today.

I can’t help but feel a sense of sadness at this recent bankruptcy and fire sale to a car maker that builds vehicles that run faster in reverse than any other direction. It’s been said the best way to beat a Fiat in a race is to just wait until they try to get it started. Stories abound about how Fiat makes cars that double as boat anchors that you can always hear coming, but rarely see them leave.

I understand about the critical technologies issue, about the catastropic loss of employment and how this change in ownership, with Fiat potentially ending up with 51% will prove to have been necessary. I doubt it will be seen as a triumph for the president and certainly it will scare the United Auto Workers into submission. As a nation, we’ve gotten used to Toyotas and Hondas and foreign cars are part of the landscape of modern society. The gains in safe and efficient vehicles are astounding.

But with the loss of Chrysler, we’ve lost something dear to American history. As a company tracing its roots to the very beginning of the industrial revolution, somehow, quietly and without fanfare, an era is passing.

I’m going to take off my hat and show respect for what made Chrysler a great company, founded by a man we just don’t hear enough about anymore, and I hope you will too.

(Jack Kern is the Managing Director of Kern Investment Research, based outside of Washington, DC. He can be reached at JKern@KernIRC.com or 301.601.1900.)