See the article below about the apartment market in the current economy.  We have the ability to analyze these deals and help you determine the quality of  an investment and project potential returns. 

Contact us with your investment objectives and we can search for investment properties that will meet your needs.

Dan Smith

Millridge Commercial Real Estate

919 554-4165

APARTMENTS:

Transaction Volume Rises More in Apartment Than in Other Property Types

Distress is hitting home in the multifamily sector, and as more assets become troubled, the bid/ask spread will tighten in 2010 and cause sales volume to rise quickly. In the last cycle,apartment-sales volume peaked in 2005 (due to the condo-conversion craze), while office,retail, and warehouse sales volume peaked in 2007. This timing, combined with the sector’s shorter lease terms and tumbling NOIs, is resulting in expedited distress. Delinquencies in the apartment market have risen by 590 basis points in the last 12 months as of the third quarter, compared with just 390, 290, and 240 basis points for retail, warehouse, and office,respectively. The typically higher loan-to-value ratios and lower debt-service-coverage ratios in this sector are certainly not helping matters, either, and just as delinquencies are mounting, the vultures are circling. Since apartment investment has been sliding since 2005, there is plenty of pent-up interest in the sector. And if PPR’s client activity is any indication, that interest is growing daily. As of December, 61% of all client activity on the PPR Portal in the last 90 days has been apartment related, and this proportion has been steadily increasing. The apartment sector’s strong drivers going forward (including healthy demographics, an increasing renter pool, and stabilization in the labor markets) are driving investor interest. And, of course, the greater availability of debt in the multifamily sector will propel investment volume through 2010. As Fannie and Freddie continue to finance multifamily loans, apartment investors have a leg up on their other commercial counterparts. But should the GSEs cut down on their apartment lending activity in the second half of 2010, sales volume could certainly take a nosedive.

Exhibit 9). In addition to the pretty rough fundamentals environment through year end, with record high vacancies and plummeting rents, the cap rate question is really one of spreads. Right now, apartment cap rates of around 7% on 10-year Treasuries of about 3.5% equates to a spread of about 350 basis points. As fundamentals improve, cap rate spreads will come in a bit during the recovery; however, given the stimulus and the potential for higher inflation, we expect the 10-year Treasury rate to head towards 5.5% — if not in 2010, then in 2011. Therefore, a 250- or 300-basis-point spread results in cap rates of 8%–8.5%, depending on the market. However, if we handicap this prediction, particularly for 2010, we expect that we are a bit too conservative — i.e., rates could surprise on the upside and remain low, and spreads could come in a bit more than we expect.

White Paper

Real Estate/

Portfolio

Strategist

January 2010

vol.14 no. 1

page 14

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Wake Forest named a top U.S. growth city

Triangle Business Journal

Wake Forest is one of the top high-growth communities in the country, according to a ranking compiled by research firm Gadberry Group.

Gadberry, which provides location information and household data for clients such as retailers, on Tuesday announced the top nine cities in its “from 2009” report.

Little Rock, Ark.-based Gadberry evaluated various metrics, including growth in households and income. Wake Forest placed sixth in the ranking. The city grew from 8,150 households in 2000 to 17,803 in 2009, a 118 percent increase, according to Gadberry’s analysis. The average annual household income for Wake Forest increased from $70,148, to $82,771.

The top city was Atlanta suburb Braselton, Ga., which saw its household income increase 67 percent from 2000 to 2009. Houston suburb Atascocita, Texas followed. Texas was well represented with four cities. Besides Wake Forest, no other North Carolina community made Gadberry’s top rankings.

“As a Wake Forest native, I’ve recognized the explosive growth that our community has experienced,” Don Stroud, Wake Forest Area Chamber of Commerce board co-chair said in a statement. “The Gadberry data will give us the quantitative tools we need to continue to draw new development to Wake Forest.”

Published: Sep 22, 2009 03:40 AM in The News & Observer

The auction method has advantages for every party in the event: the buyer, seller, all bidders and spectators.

Buyers often find rare items and can usually take home their purchase right away from an onsite auction, not waiting for shipping or incurring shipping costs after they have already purchased an item.

Sellers at auction can usually be assured that their property will sell on a certain day. Real estate sellers, in particular, like the fact that a sale on a specific day will end their carrying costs and they enjoy being able to set a minimum price they will accept at auction.

Bidders have a great time, even if they don’t always get their chosen item. They eagerly anticipate the item coming up for auction; they think about how high they will bid; they watch the competing bidders and often talk with them afterward.

Spectators at auction enjoy an exciting event and seeing what types of items are offered in auctions these days. Attendees don’t feel pressured to buy, and they can bring the whole family to see and learn about antiques, art, furniture and other items.

Auctions are a community event. People see friends and meet new people. Auctions have been a social gathering for thousands of years and continue to be the best way to determine current market price for items.

Here are a few other facts about auctions.

• A speedy process.
  There’s no doubt that an auction is the fastest sales process around. It’s quick and efficient and that’s what makes it attractive. We sell a multitude of items in a short time.
• You Set Your Own Price and Establish a Value.
  You are in control at an auction. You decide when to bid and how much to bid - how high or low you want to go.
• Certainty of Knowing What You’re Getting.
  Auctioneers deal with a wide range of merchandise. They are educated professionals who know value and price. Many have special certifications in personal property or estate appraisals.
• Fun and Excitement.
  There’s no doubt that an auction is entertainment at its finest. Crowds of people competing for unique property, combined with that lively and rhythmic auction chant make for some great entertainment and fun. It’s an event the whole family can enjoy.
• Honesty of the Transaction.
  Auctions are very organized and the rules are straightforward. Auctioneers who are members of the National Auctioneers Association, as I am, are bound by a code of ethics that protects consumers against unfair auction practices.

www.auctioneers.org

Distressed properties reflect struggling market fundamentals

Commercial real estate closed the first half of the year with weakened fundamentals and a slow pace of transactions amid difficult economic conditions.  Demand for commercial properties dropped precipitously, bringing down prices and rents.  In addition, maturing commercial debt was met with little available credit, leading to a jump in delinquencies and distressed properties.  As space flooded the market, vacancy rates have been rising across the board.  And while the economic decline is showing signs of a slowdown, commercial real estate continues to face strong headwinds.

Commercial real estate activity has suffered from a severe credit crunch for commercial sectors, sustained job losses and weak consumer spending, although the decline appears to be slowing.  A forward-looking indicator shows commercial real estate will remain weak into 2010, but recent actions by the Federal Reserve should improve some flow of capital into commercial lending, according to the National Association of Realtors®.

The Commercial Leading Indicator for Brokerage Activity declined 1.3 percent to an index of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter, and is 13.7 percent below the 117.6 recorded in the second quarter of 2008.  The index is at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990.

Lawrence Yun, NAR chief economist, noted the pace of decline moderated, but the leading indicator has fallen sharply and quickly from the peak, suggesting much lower business opportunities for commercial real estate practitioners engaged in leasing, sales and property management.  “The reduction in commercial real estate activity is expected at least through the first quarter of 2010.  Any meaningful recovery is not likely to occur before the second half of next year.”

The decline is driven by falling industrial production, far fewer jobs requiring office and retail space, a fall in durable goods shipments, much lower personal spending, lower retail and wholesale sales, and a negative return on commercial investment.  

“With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow,” Yun said.   “The office sector requires job growth to fuel the demand for additional space, the industrial sector needs a rise in production and the retail sector is tied to consumer spending.  Multifamily housing – the apartment market – often performs in reverse to trends in home sales, but can improve if there is sufficient household growth.”  

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 650 local market experts,² also suggests a lower level of business activity in upcoming quarters.  Most respondents are seeing sales prices that are lower than replacement costs, and 96 percent report deep rental discounts and increased tenant concessions.

The SIOR index has declined for 10 consecutive quarters and stood at 36.0 in the second quarter, compared with a level of 100 that represents a balanced marketplace.

Realtors® Commercial Alliance Committee chair Robert Toothaker said it is crucial to improve the availability of funds for commercial loans.  “Properties with positive cash flow have had trouble finding financing to roll over debt, transactions are essentially at a standstill and new development is virtually nonexistent in most areas,” he said.

“Commercial loans are mostly short term, and without ready financing even the most experienced commercial players can get into trouble.  The Fed’s recent decision to extend the TALF program for commercial mortgage backed securities beyond the end of 2009 is highly welcome because the flow of liquidity to commercial real estate will be critical for a sustainable economic recovery,” Toothaker said.  “However, unless there is a tremendous short-term recovery in the CRE markets, we expect the Fed will be revisiting the issue of another extension of the TALF program early in 2010.”

Bond yields on CMBS rose following the announcement by the Federal Reserve on August 17 that it is extending TALF lending for existing commercial securities through March 31, 2010, and for newly issued CMBS through June 30.

Looking at the broad market, commercial vacancy rates continue to rise while rents decline, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK.³  The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets.  Historic data were provided by Torto Wheaton Research.

Yun projects the unemployment rate to peak around 10.4 percent in the fourth quarter, then gradually improve as 2010 progresses.  “We will need sustained economic growth before many employers have enough confidence to expand the job base and create new demand for space,” he said.

The gross domestic product should contract 2.9 percent in 2009 before growing 1.5 percent next year.  Inflation, as measured by the consumer price index, is forecast to decline 0.5 percent this year before rising 2.0 percent in 2010.

Office Market

The office sector continues to suffer the most from job losses, which reduces the demand for space.  Vacancy rates will probably increase from 15.5 percent in the second quarter to 18.8 percent in the second quarter of 2010. In the Triangle market, office vacancy is substantially higher than the national average, posted at 18.49% according to Triangle Business Journal’s SPACE survey.

Annual rent in the office sector is projected to fall 14.1 percent this year and 10.0 percent in 2010 after a 0.4 percent decline last year.  In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is estimated to be a negative 75.0 million square feet in 2009 and a negative 47.2 million next year.

Industrial Market  

The contracting global economy has constricted the industrial sector.  Vacancy rates are likely to rise from 13.0 percent in the second quarter of this year to 15.0 percent in the second quarter of 2010. Triangle warehouse vacancy is trending higher than the national average as well, posted at 19.78% as of the end of the second quarter.

Annual industrial rent should fall 11.4 percent this year and another 11.7 percent in 2010, after declining 0.8 percent in 2008.  Net absorption of industrial space in 58 markets tracked is seen at a negative 300.0 million square feet this year, and a negative 112.0 million in 2010.  Because much construction in recent years was customized to meet specific industrial needs, many obsolete structures remain on the market.

Retail Market

Given a pattern of weak consumer spending, the retail vacancy rate is forecast to edge up from 11.7 percent in the second quarter to 12.9 percent in the same period of 2010.  Average retail rent is likely to fall 6.1 percent in 2009 and 4.9 percent next year; it declined 2.0 percent in 2008.  Net absorption of retail space in 53 tracked markets is expected to be a negative 25.9 million square feet this year and a negative 3.6 million in 2010. Largely due to restraint in speculative building on the part of retail developers, the Triangle market is faring better than the national average in the retail sector, with vacancy posted at 8.81% as of the end of the second quarter.

Multifamily Market

The apartment rental market – multifamily housing – is facing higher home sales by first-time buyers, but also is experiencing increased demand from families who have lost their homes.  Multifamily vacancy rates should slip from 7.4 percent in the second quarter of 2009 to 7.1 percent in the second quarter of next year.

According to the National Association of Realtors’ overall forecast for commercial real estate, this industry will continue to face negative absorption, increasing vacancies for all property types and declining rents. Commercial debt continues to pose a major threat.  Extension of TALF funds for commercial lending should provide liquidity, particularly in the CMBS market.  Investments may rise due to distressed properties and lower prices.

If you are considering to sell or purchase commercial real estate in the North Raleigh/Wake Forest and surrounding areas please consider Millridge Real Estate, LLC.

The metropolitan area is home to more than 1 million people after growing by more than 4 percent from 2007 to 2008. But that is slower than in previous years.

By Kristin Collins, Staff writer

As the national economy lost steam last year, the Raleigh area continued to attract residents, becoming the fastest-growing metropolitan area in the country.

According to census numbers released today, the Raleigh-Cary metropolitan area, which includes Wake, Johnston and Franklin counties, grew by 4.3 percent from July 2007 to July 2008, and is now home to close to 1.1 million people. It well outpaced its closest rival, the Austin, Texas, area, which grew by 3.8 percent.

The national average was just under 1 percent.

The Triangle has been near the top of the nation’s growth chart for more than a decade, as newcomers poured into the area to take jobs in technology, tourism and academia. The resulting building boom, and the jobs that came with it, drew hundreds of thousands of new residents.

Much changed in recent months as the economy fell into a deep recession. While the downturn took longer to arrive in North Carolina, the state’s unemployment rate of 9.7 percent is now well above the national average of 8.1 percent.

Next year’s figures may show a darker picture for the Triangle.

Even this year marks a slowdown for the area, despite its place at the top of the list. The growth rate was nearly half a point lower than the two previous years, when it was 4.7 percent.

The Durham-Chapel Hill metropolitan area, which includes Durham, Orange, Chatham and Person counties, didn’t make the Top 10, but its population continued to swell at a steady 2.5 percent, up slightly from the year before. Just fewer than 490,000 people live in that area.

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What happens when you sell an exchange property at a loss? In today’s real estate market, this is a great, and common, question. What does happen if you sell a property, that you bought in a 1031 exchange, at a loss? Let’s say, for example, that you have a buyer with cash in hand offering you $175,000 for a rental property you paid $200,000 for as part of a 1031 exchange you did three years ago?

“Do I have a capital loss of $25,000, and if so, how will that impact my tax return?” I’m currently getting a lot of calls from people with questions similar to this. Most of them are annoyed, and a few just down right mad, to discover that instead of the loss they think they have, they have a gain on the sale.

“How can that be,” you ask? The answer is that when you do a 1031 exchange your basis from the Old Property rolls over to the New. The Old basis is modified slightly if you buy-up, but not if you buy-down. For example, if your Old Property that you just sold for $200,000 has a tax basis of $125,000, and you buy a replacement property for $200,000, your tax basis in the New Property is exactly the same as the Old ($125,000) and you’ve deferred paying tax on the $75,000 gain.

On the other hand, if you buy the New Property for $190,000, you’ve bought-down (which is a taxable event in a 1031 exchange), and you’ll pay tax on the $10,000 buy-down. Your basis on the New Property is still $125,000, your deferred gain is $65,000, and you paid tax on the other $10,000.

The result is slightly different if you buy-up in an exchange. Assume, for example, that you paid $225,000 for the New Property; its basis would be $125,000 plus the buy-up of $25,000 for a new basis of $150,000, and your deferred gain remains unchanged at $75,000. This is how the IRS views it, although you arrive at exactly the same basis amount if you take the purchase price of $225,000 and back off the deferred gain of $75,000.

So, coming back to the purpose of this article, what does happen if you sell the New Property at a loss? If you sell the property for $175,000, and your basis is $125,000, you have a gain of $50,000, and it matter not that you paid $200,000 for the property. The net effect of the transaction is that you had a deferred gain of $75,000 when you did the exchange, but then lost $25,000 of value resulting in a taxable gain of $50,000 when you sold it.

A couple of final thoughts about this whole issue: first, depending upon the amount of your loan on the property, you may realize barely enough cash on the sale to pay the tax. Also, to point out the obvious, you can still do another exchange on this property and avoid paying tax on the gain.

By: Gary Gorman

If you are fortunate enough to have money to invest in real estate during these trying times, deals are here to be made.  Home prices are low, land is a little cheaper (in certain areas), people are losing jobs and needing to get out of the financial strain of this market. 

If you are looking for a good investment opportunity; land, homes and commercial buildings in the Northern Wake and surrounding counties please feel free to contact us at Millridge Real Estate.