Millridge Real Estate Blog

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

NORTH AMERICA EUROPE ASIA-PACIFIC

A large tract of land was just bought up in the Raleigh North Carolina region in Cary. Phillips Development & Realty L.L.C. closed on 13.2 acres for its Phillips Swift Creek apartment project in Cary, N.C. The firm expects construction of the $20 million garden-style development to begin in the 3rd quarter. The residential area is located on the Northeast corner of Old Apex Road and West Chatham Street and will include 196 units ranging from one to 3 bedrooms and 784 to 1,321 square feet. Amenities will include a large 5,200 square-foot clubhouse, with media, fitness and business centers, an amenity pond with gazebo, an outdoor pool deck with fire pit and trellis, and two acres for a walking/exercise trail.