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The numbers are in… The first quarter of 2008 shows what we in the industry have been feeling for the past year; the market is slow.

The National Association of Realtors Commercial Alliance has released the first quarter numbers and when compared with the same period last year, the difference is staggering.  Overall commercial volume is down almost 70% when compared with the same time period last year.  What is the reason?  No, it’s not ridiculous pricing or abundant commercial foreclosures, it’s simply the economy and lack of investor confidence. The big drop has been the lack of individual investor activity while the institutional grade investors continue to invest.  The prime reasons for the slowdown are the downturn in the US economy which began  in late 2007, rising oil prices and lack of job creations, all things that effect the commercial market.

 Looking at multifamily in specifics, transaction volume for the same period last year is down by 46%. In addition, 80% of the transaction volume was through institutional grade investors such as REIT’s, pension funds, insurance companies, etc.  This leaves a large gap in the market that is ripe for the savvy individual investor to take advantage of.

With the larger size investments still being traded and the lack of movement on the smaller, more individual investor friendly properties, the amount of available properties continues to increase and the needs of sellers continue to get greater.  Many sellers are getting into time and money constraints which is an excellent situation for buyers with cash ready to go. 

Another important note is that any and all investors wanting to purchase commercial investment real estate should be ready with a minimum of 20% equity to put into any investment as lenders are no longer financing “creative” deals that they did in years past.  Everything is being underwritten based on the numbers now, not what could be in coming years.

It is imperative that you work with professionals who have experience in their local market who can get you connected with the right people to make each transaction as painless, quick and profitable each and every time.

Peter J. Barnett, CCIM

The following article appeared in this months issue of National Real Estate Investor and I thought it was a good snapshot of many investors feelings on Multifamily investments.  Enjoy.

Players in the real estate industry are operating in a challenging new environment. This includes those of us in the multifamily sector, which has had a long run of strong operating fundamentals, an abundance of liquidity and competitive equity investment.

Every day we tune in to see how the financial news and economic indicators are affecting the real estate capital markets. The changes influence acquisitions and our ability to capitalize transactions.

We want to believe there are opportunities in all sectors to buy deals at distressed prices. However, the multifamily sector, particularly in the West Coast’s infill markets, is still showing persistently low cap rates of 5% to 6%. Consequently, more discipline is required in underwriting in this new age of turbulence.

As we underwrite value-added opportunities, we need to be aware of the trends 12 to 24 months down the road. That could mean slower job growth, less leverage for buyers upon exit, fewer equity partners willing to gamble on higher market rents, and exiting cap rates that are stabilized above 6.5%.

Multifamily setbacks

Despite these shifts, there remains a disconnect between the perceptions of buyers and sellers, and the realities of today’s multifamily operating fundamentals. In certain cases, this has led to deals coming back to the market and sellers unable to pull the trigger.

Markets like Las Vegas, Phoenix and the Inland Empire in Southern California have been negatively affected by the “shadow market” supply of condominiums and homes available for rent. This will likely affect vacancy assumptions and the ability to grow rents. Other factors that will dog multifamily include interest rates and the availability and cost of mortgage financing.

With regard to interest rates, we anticipate that the Federal Reserve will continue to favor liquidity over inflation-fighting measures. Thus, we see short-term interest rates remaining at less than 6% over this period. While mortgage rates will also remain low, lenders have returned to fundamentals. Debt coverage ratios need to be 1.10 at a minimum, while loan to values range from 65% to 70%. Lenders have also begun to implement rate floors on quotes.

I think the most telling fact in this article is the 65-70% loan to value ratio, as this is what we are seeing in our local area as well as lenders wanting at least 1.20 or better debt coverage ratios in our local market.  All this shows the importance of using the due diligence period on a property to the fullest along with using a qualified commercial broker.

 Peter J. Barnett, CCIM

Much has been published over the past year of the Florida legislatures attempts to help homeowners lower their taxes to reduce costs. However, little concern has been shown to non-homesteaded or commercial properties during this time period. I just received an update from the Florida Association of Realtors who is lobbying to help commercial owners reduce their costs as well. Here is a recent update of what has been happening:

This week the Florida Tax and Budget Reform Commission (TRBC) passed CP 002. What does it do? Here’s a summary: 1. Starting in 2009, limit assessment increases to 5% a year on all non-homestead property. This is down from the 10% included as part of Amendment 1 passed in January, and keeps it permanent (Amendment 1st cap lasted only for 10 years.)

2. It requires the Florida Legislature in 2010 to abolish the states required local effort for schools. It will be somewhere between $9-11 billion dollars, and that money can be made up in any combination of 4 ways.

a. An increase of up to one percentage point to the sales tax (The Florida statewide sales tax is currently 6%)

b. Spending reductions for other components of the state budget and revenue increases resulting from economic growth attributable to lower property taxes

c. The repeal of sales tax exemptions, but not including food, health services, prescription drugs, the sale of real property, and items for resale

d. Other revenues identified or created by the Legislature.

3. This will result in lower property taxes between 25-50%, depending on where you live in Florida. More simply, it does away with the School Board portion of your property taxes, though local school boards will retain a very small amount of discretionary taxing authority.

The important part for Commercial property owners is the 5% cap on non-homestead properties. If you own a property that has been receiving large increases each year, that will be no longer the case as the limit will be 5% each year. This is a welcome relief to owners here in Florida who have been hit hard over the past 5 years with tax hikes.

But this amendment is not passed yet…It needs 60% approval by the voters in November to be passed into law so if you live in Florida now’s the time to do your part and help save yourself some money. In this down market all of us need all the good news we can get, and this time we can affect our own pockets for a change.

Peter J. Barnett, CCIM

If any of you have been waiting with baited breath for part 2 and beyond of our series on selling multifamily properties I apologize. The good news is that I have been so busy with market activity that I have not had time to post, but I promise more is coming. It contains a wealth of information that comes from experience in real life deal making and property ownership.

Now for a brief update on the actual feel of the Tampa Bay Commercial Market:

In the past several months activity from buyers have increased by at least 50-75% over last years levels at this same time. The general consensus I get when I speak to buyers is that they are waiting for the market to stabilize before they invest. So the root of the problem is not a lack of capital or investment desire; the root is fear of the market caused by instability. Whether or not the recent drops in the Federal Funds rate have helped quell that feeling or not is uncertain. However, one thing is becoming more certain; the fact that buyers are once again ready to make actual purchases. This being said we are still seeing our fair share of ridiculous low ball, bottom-feeder offers. As many will tell you from experience, sometimes these low offers will be accepted but I do not believe Sellers in the current market feel their properties have bottomed out enough to start cutting loose their equity in a last ditch effort to simply be rid of their properties.

Another good sign for all investors is the availability of financing increasing. Local banks, conduit lenders and other funding sources were very tight fisted in past years with their underwriting and their desire to take on new projects in our local area but those fists are slowly opening. In the multifamily market many new sources of funding are opening up on both a local and national level.

The bottom line is the market is starting to stabilize at least in my opinion and by the end of the year buyers and sellers may be their closest to a meeting of the minds that they have been in the last 5 years. If that happens, it will be a great time for everyone.

I look forward to any comments or critiques you might have on the subject. A good dialogue is always welcome on this blog.

Peter J. Barnett, CCIM

Thought you all might enjoy an excerpt from a recent report by the National Association of Realtors chief economist Lawrence Yun. It’s his current market and outlook for the state of Florida. I included the Multifamily excerpt. Enjoy:

The apartment rental market ” multifamily housing ” is attracting risk-averse institutional investors. Of the record $98.6 billion spent in this sector last year, 40 percent of acquisitions were from institutional investors such as pension funds and life insurance companies. Private investors were equally active, accounting for another 40 percent of transactions.

Many potential first-time home buyers continue to rent, placing downward pressure on vacancy rates and upward pressure on rents. The number of new multilfamily units remains relatively high, due in part to the conversion of condo projects into rental buildings ” notably in the Washington, D.C., area and South Florida.

Multifamily vacancy rates should average 4.8 percent in the fourth quarter, down from 5.1 percent in the fourth quarter of 2007. Average rent is seen to rise 5.3 percent in 2008, up from a 3.1 percent increase in 2007.

Multifamily net absorption is estimated at 245,800 units in 59 tracked metro areas in 2008, up from 234,400 last year.

The current national vacancy rate is 4.7 percent, below the 5.0 percent level which is considered landlord’s market. The areas with the lowest apartment vacancies include Northern New Jersey, San Jose, Miami, Salt Lake City and San Diego, all with vacancy rates of 2.9 percent or less.

My brief interpretation of this reads that we are on the verge of the next Buyer’s market though institutional investors are in the game the individual and partnership investors are not far behind…

If you’re a multifamily investor either currently operating a multifamily project or you’re looking to purchase your first multifamily building one of the driving factors of your everyday business will be the demands and needs of apartment renters. And one of the most important factors to keeping your building competitive and purchasing the right property is keeping up to date with the amenities that draw your tenants.

Apartments.com recently compiled a survey of the highest rated tenants amenities and some of the highlights were:

Air Conditioning and more specifically central units were the highest rated amenity on the list, and here in Florida that goes double for most of the year. With many old properties having windows units, an upgrade to new central units would be a smart investment to make, especially if you’re in for a long tenure and not trying to flip your property.

Parking was the second highest rating on the list and is no surprise as well. In urban areas like St Petersburg that offers mostly on street parking, having a property with at least a one to one parking ratio will set your building apart from the others in the area.

In-Unit washer/dryers were also in the top five but having some sort of on-site laundry is always better than offering the tenants no other option but to go to a nearby laundromat. And it’s an excellent source of additional income.

High-speed Internet is also widely coveted by renters in today’s fast paced give-it-to-me-now society. Most of the local cable/phone providers have updated their connections to offer this connectivity so only much older buildings are at a disadvantage in this arena.

Dishwashers round out the top five as no one likes to wash dishes (least of all me). This can be a costly option to add in many buildings as older cabinetry can require a complete remodel in a kitchen to include a dishwasher.

Elevators, pools, and hardwood floors were also high up on the priorities list with fireplaces coming in last, and even less so here in Florida.

Current owners would always do well to stay up to date on these areas and those in the market for properties now should examine their potential investments to make the most out of their commercial real estate investments.

Peter J Barnett, CCIM

First off, my apologies at not updating this blog in weeks but we just completed a move of our physical offices and the infrastructure took some time to get back to working properly.

The Real Estate Research Corporation (RERC) released it’s third quarter Investment Trends report and had some interesting observations about the Southern and Tampa Bay specific markets. A podcast from the CEO of the RERC, Ken Riggs, CCIM observed that on a national level we have not yet seen the market correction in the commercial sector that we are seeing in the residential sector over the past year or two. He also commented that the multifamily and hospitality sectors were the most promising at the present time due to the correction of the housing and sub prime mortgage crisis slowly but surely. He felt the industrial sector is going to stay on a level plane but the retail and office sectors were due for a fall. The retail sector may be hit by a worsening economy and the office sector affected by the increased cost of property owners to lure new tenants to their area, thus lowering the bottom line profits and decreasing values in a sales situation.

The following is a breakdown of the trends in the Tampa Bay Market over the third quarter of 2007 and compared to the previous year:

Office markets saw a rise in both the price per square foot and weighted average cap rates over the last quarter, but the cap rate for the previous year fell overall. The National price per square foot rose by nearly $50 a foot while the Tampa market rose only by nearly $20 a foot respectively over the past year.

Industrial markets rose in price per square foot on both the previous quarter and previous year, but only by a few dollars per square foot as the market remained slow and stable.

Retail markets saw an increase in the price per square foot across both the quarter and the year, while cap rates dropped for both periods. The nation saw a slow and steady increase in retail prices while Tampa saw a sharp fall in prices in early 2007 only to rebound to match national levels by the end of the third quarter.

Apartment markets saw a fall in the price per unit for the year of upwards of $10k per unit for Tampa, while the south region as a whole dropped nearly $15k per unit over the same period. Cap rates for the apartment market finished well above the national rate by almost 2 percent showing the impact the correction of the residential market on the multifamily market.

Mr Riggs also observed that the most likely forces driving the commercial market over the next few years will be risk and available capital. One of the reasons Tampa Bay enjoyed such a frenzied last 5 years was the large availability of capital and the relatively low risk of investing with demand at high levels. Now those same factors are correcting the market as the risk continues to sharply rise for investors that purchased at unrealistic prices. Add to this the drop of available capital and we will see the correction affect the commercial market as well. How much will it be corrected? No one knows for certain but stay tuned into this blog and we will provide the news as it happens to make sure your investments are sound and profitable. We’re looking forward to 2008 to bring about better prices and more favorable investments and you can be confident that we will make sure you have every opportunity to view them first. If you’re not signed up as a user on our site, (it takes less than a minute) then you’re missing out on our direct emails of properties that are available but not yet on the open market. This is just one of the many services we provide our clients and its an important one. Don’t hesitate to contact us with any investment questions regarding investment real estate. It’s our business and our passion.

Peter J. Barnett, CCIM

In a recent article the National Real Estate Investor magazine posted a great article about the multifamily market that I know many of you would enjoy, so I’ve included an exerpt below:

Apartment properties remain one of the strongest investments in the commercial real estate market, says Brian McAuliffe, managing director and chief investment officer with RREEF Alternative Investments.

Demand for multifamily housing has surged as potential homebuyers face tougher mortgage requirements, higher debt payments and declining home values, McAuliffe said at a seminar on capital markets and investment trends at the fall meeting of the Urban Land Institute in Las Vegas. He anticipates more construction of garden apartments nationally because commodity costs for lumber and drywall are coming down with the drop in home construction.

That is the sector we are very bullish on, McAuliffe says. When you look at the demand of the apartment sector, you have to look at two areas ” one is the existing tenants that you have in your community, and the other is the demand for vacant space. Obviously, we feel very confident on the renewal rates,” he says.

“We have already seen signs where it is increasing, and we expect that to continue. That is because the ability to get financing today is much more challenging. You need higher debt. The other factor is the fear factor of being in a position to buy a home today and find out six months or a year from now that its worth less. I think there is going to be a lot more patience by the existing renters.

So this is further good news for the multifamily owners and investors who have been waiting out the market fluctuation here in Florida. The bottom line is: Now is the time to be looking for multifamily properties.

Peter J Barnett, CCIM with contributions from NREI magazine and Buck Wargo.

This week Florida lawmakers agreed upon a revision to our current tax structure which you may have been following. While it makes most of the provisions for homesteaded properties and focuses on “Portability” of the exemptions for these properties, the commercial market got a small bit of good news.Â

Under the new law, properties recognized as non-homestead and income producing will have an annual cap of 10% on the increase in taxable value of their property. This will go into effect on the 2009 year tax roll, using 2008 as the baseline year to put the 10% cap into effect. So if your property has an assessed value of $1,000,000 in the 2008 year tax roll, then in 2009 the value can not increase above $1,100,000 and your taxes can not increase above 10% accordingly. This provision will be in effect for 10 years and then the voters will be responsible for keeping going after that time.

 These changes will go to a final vote in January at which time many are expecting the changes to the law to pass with flying colors. We will continue to keep you up to date with legislation changes for tax and insurance problems that affect commercial property owners in Florida.

Peter J. Barnett, CCIM

Tampa Bay is fast becoming known as a great center of technology through both the universities and the new businesses being attracted to the area. Check out the website at http://www.visitthecorridor.com for more information. It has some great info that helps shine light on this previously overlooked sector of Central Florida.

 This means good things for any office building and multifamily owners as the demand for jobs and housing for students is steadily increasing. And since most students live on off campus housing, many investors could consider finding multifamily housing near a university and rely on a steady influx of renters.