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

Change is never easy but always necessary.   As many of you are now aware Downtown Wake Forest is changing.  A plan that has long been in the making is slowly starting to take shape.  Several years ago our town planners and elected officials set out to preserve and grow our beautiful downtown.   As any resident in Wake Forest will attest our downtown is the heart of our beautiful city.   This new plan called “The Renaissance Plan,” is a balancing act of preserving and revitalizing the 220+ acres which make up the downtown area.   Some of the primary components of the plan include keeping and extending pedestrian friendly sidewalks and areas,  beautifying entrances and roadways,  and matching architecture of new projects with that of the older buildings.   No doubt these big plans will cause growing pains and challenges but will over time yield big dividends for our small town.   Projects that are underway in the area include the streetscape project on Franklin Street, the new Town Hall (scheduled for completion in Fall 2009), and a mixed use building on Franklin Street,  being developed by Wake Forest Partners Group, LLC.   Millridge Real Estate is offering a prime piece of real estate in the Renaissance District, 6.63 acres on the northeast corner of the NC 98 Bypass and Franklin Street.  The link to the marketing flier for this property can be accessed below. To learn more about the Renaissance project visit the web site below.     Trey Watkins  2-10-09

http://www.wakeforestnc.gov/residents/planning_renaissancemasterplan.aspx

Wake Forest will be getting an extended stay hotel in 2009.   Milkam Hospitality Inc., a Millridge Real Estate client, received plan approval last week from the Wake Forest Planning Board for an 81-room Candlewood Suites Hotel.  The hotel if approved by the Town Council will be located along Retail Drive adjacent to Walgreens Drug Store.  Candlewood Suites caters to the business traveler, offering spacious rooms with work areas, free internet, 24 hour snacks, and full kitchens.  Mr. Joe Patel, owner of Milkam Hospitality, believes the extended stay hotel will really fill a need in the Wake Forest community.     Trey Watkins 2-10-09

My top 5 list of rookie mistakes:

1. Ignoring local market conditions

There are two levels of due diligence required to evaluate a real estate investment–the market and the property. And of the two, local market conditions trump everything else.

A great property in a bad market can be a big loser. A poor property in a great market can be a gold mine. How do you know the difference?

Every market is different, and a deal technique or property type that is profitable in one market it does not mean the same holds true anywhere else.

Analyzing the demographic trends of population growth, income, and employment in the local market will tell you where opportunity lies, or not. It will also show which property types are in demand, or oversupply. Those conditions will make or break your investment.

Investing in an area with declining demographic trends is destined for trouble. So learn your market. Then listen as it tells you how, when, and where to invest.

2. Inadequate property due diligence

The second level of due diligence is the property condition, including physical items such as building systems, environmental matters and structural components. Just as important are the intangible items, such as title, survey, and zoning and land-use regulations.

Knowledge of contract law, insurance, finance, accounting, and tax law is also critical to doing things right at the beginning to insure success at the end.

If you’ve never done it before, this is not a DIY project. The money you think you’ll save by doing it yourself can cost twice as much to fix, and may jeopardize the entire investment.

Red Adair, the famous oil and gas field firefighter, said, “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”

Admit what you don’t know. Approach the property like an open book test. If you don’t know the answer to a question, find an expert who does know to give it to you.

Get accurate estimates from professionals of what it will cost to fix what is wrong. The time spent inspecting the components is minimal and can save thousands of dollars in unexpected repairs.

3. Botching the math

This is not rocket science, but real estate is a numbers game. Value is dependent on net operating income�gross revenue minus operating expenses.

That’s why it is so important to get the real operating numbers, not a projection of potential gross income and estimated expenses.

Confirm and verify every element of income and expense. Value the property based only on present income, not projected income you have to produce.

Your profit is dependent on net income. Net income is the net operating income minus debt service. If you’ve overestimated revenue, underestimated expense, or have too much debt service, your profit will suffer or turn into a loss.

Understand that risk increases with every assumption made. Do not assume you can save expenses by cutting corners or that you can raise rents the day after you take possession.

Anyone who has ever prepared a projection of operations has realized that by tweaking the assumptions, the bottom line can be manipulated into whatever will make the deal work.

The problem comes when it’s time to make the numbers happen. It’s real cash then�your cash�and when the rents don’t go up or the expenses don’t come down as much as the projection called for, you take the hit.

You might tweak the numbers to make it work on paper, but paper won’t pay the bills, and hope is not a plan.

4. Over-leverage

Borrowing too much money in this business is fatal. Highly leveraged deals do happen, but unless it’s backed up by a solid plan with sufficient capital, it can be disastrous.

Using 100% financing for entry level deals is like believing gravity doesn’t exist as you jump off a building. You can argue all you want, but you’re going to hit the ground�the only question is how hard.

The proper use of leverage is a function of deal structure and investment strategy. Every investment property should be evaluated in light of the break-even ratio.

The break-even ratio is equal to the Operating Expenses plus the Debt Service, divided by the Gross Potential Income. [(OpEx + DS)/ GPI = BE]. When break-even exceeds 80%, the structure depends on perfection, and that’s dangerous territory.

5. Failure to have multiple exit strategies

An investment plan incorporates all of the due diligence findings and outlines all the possible outcomes of the investment, best case to worst case.

Ask yourself why you think you can do a better job running this property than the seller did. If you can’t answer that with specifics, you won’t do better, and probably not as well.

Your plan should answer the questions of how the property will be managed; what improvements are needed and their cost; how much money might be made (or lost); how long it will take; how to get out if things go wrong; and how to access the profits when it goes right.

The answers will reveal a realistic plan to maximize value in the shortest possible time with the least possible downside. I rarely have less than three exit strategies, and usually a half dozen or more. I’ve learned that if I don’t have a plan to get my money out of a deal, I will soon be out of money.

Starting Oct 1, 2008,  the Real Estate is now requiring brokers to disclose to their clients any rebates, bonuses, and other compensations being offered.  The disclosure should be disclosed to client-buyers before the property is shown.   Disclosure can be oral but must be put to writing before client makes an offer to buy or sell.   Trey Watkins,  per Real Estate Bulletin Volumn 39