April-may-2010

ACCESS LASVEGAS APRIL | MAY 2010

YOUR ACCESS TO THE LAS VEGAS MULTI-FAMILY HOUSING MARKET

The Year of the Third-Party Property Management Company 2010 is already beginning to look like the year of the third-party property management company. Many bank owners are relying on third-party property management companies to maximize their property values until the marketplace is more favorable to sell their reclaimed assets.

More and more in the Las Vegas market -- and nationally too -- banks are becoming accidental multifamily property landlords. Something they know absolutely nothing about. This has been happening at an alarming rate. Through foreclosure and other unfortunate economic events, third-party property management companies are stepping in to be of service and sometimes, saviors.

Banks are not generally familiar with the subtleties of multifamily management. The Las Vegas condo demise, among many other factors (i.e. job losses and the overall Las Vegas economy), has forced the role on them. Many bank-owned multifamily properties, which were originally intended as for-sale products, are increasingly marketed as rental

properties. As a result, bank owners need assistance in day-to-day management of these properties.

At last glance, banks have their hands full with many “other� things. Daily, the rules which apply to banks change and the last thing a bank wants to figure out is how to operate a property. The bottom line, banks need money to survive and they need their money maximized. On a property, banks have no clue how to maximize their cash flow. Enter the third-party property management company. The management company helps bridge that money gap and in the process they make money themselves.

Hey, even in a recession someone’s going to make money. These management companies gain the trust of the bank and potentially can keep management when new ownership steps in. The experience and relationship between the bank and property management company becomes virtually priceless.

For the property management company it is all about maximizing revenue and preparing the property for maximum exposure. So, when it comes time to place the asset back on the market, it sells.

ACCESSLASVEGAS April | May 2010

Light At The End Of The Tunnel: Seizing Hidden Opportunities Understanding Multifamily Market Trends In 2010 and Beyond Source: Christopher Hosford, MHN Online

We’re barely into a new year and perhaps, just perhaps, what is perceived as the beginnings of an economic recovery. The proverbial lights at the end of the tunnel may seem like pinpricks, but lights they are, fledgling bright spots for multifamily investment in the new year. Those flickering opportunities include certain geographic areas and markets that have weathered the storm relatively well, as well as others that present more hidden opportunities.

“It’s most important in this economy to have an investment strategy already thought through,” says Hessam Nadji, managing director, Marcus & Millichap Real Estate Investment Services, Walnut, California. “There are many approaches, starting with stabilized quality assets in relatively safe markets, all the way down to value-add assets in tertiary ones.”

Nadji notes that each investor has to decide which category to play in, how much risk can be tolerated and an appropriate level of patience with the performance of capital. Given that, he adds, though last year began in uncertainty with investors sitting on the sidelines, it ended with renewed interest, in particular at the upper-end of the market -- quality assets in primary markets and submarkets.

“Earlier in the year there had been much flight to safety, but now we’re seeing multiple bids from as many as 20 or 30 buyers for a single property in the upper tier,” Nadji says.

Judging the Fundamentals Vacancy rates provide the broadest indicator of a “healthy” market for investing. Marcus & Millichap’s third-quarter vacancy rankings identify New York as the leader here, with a measly 2.9 percent of the market’s units empty, compared to a national U.S. average of 7.8 percent. Other key markets based on

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low vacancy include San Francisco (4.7 percent), San Diego (5 percent), Miami (5.9 percent), Salt Lake City (6 percent), Boston and Philadelphia (6.3 percent), and Washington, D.C. (6.2 percent).

“It’s most important in this economy to have an investment strategy already thought through.”

- HESSAM NADJI, MANAGING DIRECTOR OF MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES IN WALNUT, CALIFORNIA

“From the perspective of opportunities, what might be considered a bright spot for one might be a challenging situation for another,” says Gleb Nechayev, senior economist with CB Richard Ellis.

“But overall, if you can apply the more general criteria for a bright spot, that would be in an area that is characterized by a relatively stable housing market.”

That would not, Nechayev stresses, include areas that still suffer from high vacancy and foreclosure rates, such as much of Florida, Arizona, Nevada and areas of Southern California.

“It does vary from one part of the state to another, and even within metropolitan areas by submarket,” Nechayev says. But generally, he adds, significant investment opportunities do not exist “in areas with extremely high degrees of distress, such as in housing prices or vacant inventory in single-family and multifamily homes.”

Two of the biggest markets that stand out, because of their relative stability, are the Washington, D.C. / Baltimore region and Boston, according to Greg Willett, vice president of research, MPF Research.

Risky investment choices, based on still high vacancy rates, are Jacksonville, Florida (13.3 percent), Phoenix (11.9 percent), Houston (11.8 percent), and Atlanta (11.1 percent). But even in severely hit markets such as these, there could be decent deals, experts say, in particular where banks have taken back condo-conversion disasters, offering them for sale at significant discounts. Here, local partners with experience may be called.

Willett also suggests that investors look at inherently healthy infrastructure, as much as to the fundamentals of housing performance. He cites such markets as Columbus, Ohio, and Pittsburgh, both with significant health services and government sectors that have weathered the economic downturn. Norfolk and Newport News, Virginia, both with major nearby military installations, also fall into this category. Orange County, California, although with plenty of available inventory on hand, also may stand on firmer footing because of the still strong local biotech industry.

Factoring in Supply Constraint Nadji also advises investors to acknowledge the “true meaning of supply constraint.” This pertains best, he notes, to those markets that not only have maintained decent occupancy rates, but that also have inherent barriers to new development, such as limited space or difficulty in gaining permit approval. He cites New York, Minneapolis, northern New Jersey, San Francisco, Los Angeles, Boston, Philadelphia and Washington, D.C., as key examples. These criteria may apply to most locations, coastal or otherwise, that are focused more on urban fill rather than sprawl.

Even here, investor patience for decent cash flow may trump all. New York, San Francisco, Los Angeles and the nation’s capital all experienced falling rent corrections in the low double digits.

Clustered in second place behind those areas that enjoy decent vacancy rates plus supply constraint are Seattle, Denver, Salt Lake City, Portland, Oakland, Chicago and San Antonio, according to Nadji.

For example, Jacksonville offers stability in markets south of the St. Johns River, while foreclosure opportunities may exist in the severely hit north and west submarkets. Phoenix, another laggard overall, may be poised to experience population growth in its Gateway area because of new zoning allowing for dense mixed-use development.

And despite Atlanta’s high vacancy rate overall, Marcus & Millichap sees investment opportunities in the Roswell and Alpharetta submarkets, “where vacancy is tight and renter demand remains high.” And then, consider Florida. True, the perpetual comeback kid of the real estate market has been battered. But the state was most several impacted earlier than much of the rest of the country, onlookers note, and thus it’s closer to working its way out of the doldrums.

York City actually is lumped in with struggling Phoenix by this standard.

The downside in calculating trends is how far a particular market had to go.

New York (despite severe financial-sector job losses) and San Francisco have weathered the housing storms relatively well from their lofty perches, and perhaps shouldn’t be penalized for not getting even loftier. Still, trends have the advantage of uncovering sleeping potential.

“Looking ahead, metros where MPF Research is forecasting annual revenue change to get back into positive territory during 2010 include Austin, Baltimore, Inland Empire (California), Fort Lauderdale, Minneapolis, Orlando, Philadelphia, San Antonio, San Francisco and Washington, D.C.,” Willett says.

“San Antonio and the Washington, D.C. / Baltimore area are expected to finish on top for the year,” Willett adds.

Neil Gronowetter, chairman of commercial brokerage Multifamily Investor in New York, echoes MPF Research’s assessment of the importance of trends, adding in job growth as a key benchmark.

“The only major cities with positive changes in employment in the last eight quarters were Austin (a little under 3 “Part of it is, in Florida you have percent), Fort Worth, Texas (about half a developers who are used to market cycles percent), and Washington, D.C. (about a and weren’t really caught off-guard,” quarter of 1 percent),” says Gronowetter.

Willett says. “Many made smart decisions “More employed people means more about rental rates, and cut them by only people paying rent on time.”

1 percent or 2 percent as occupancy diminished. Compare this with Gronowetter notes that 2010 will see California; the first time occupancy went strongest job growth in Austin, Raleigh, down, they cut rents 5 percent.”

N.C., Fort Worth, Salt Lake City, and Nashville. The bottom areas for Where Are We Going?

An alternate take on these kinds of fundamentals considers trends, where early signs of a comeback are most noticeable. MPF Research’s third-quarter 2009 analysis combines annual revenue change based on occupancy, in addition to effective rents. Here, the top performer was Louisville, Kentucky, followed by Norfolk, Virgina. Dayton, Ohio and Baltimore, Maryland rounded out the list.

Faring most poorly by the trending yardstick were Seattle, Las Vegas, San Jose and San Francisco. Robust New

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ACCESSLASVEGAS April | May 2010

increased joblessness -- from least worst to dead last -- are New York, Jacksonville, Cleveland, Detroit and Tampa.

“There is a direct correlation between the unemployment rate and the multifamily vacancy rate,” Gronowetter says. “If you follow the job trends, rent trends will be close behind.”

Supply Will Remain Tight The year 2010 will probably not see much increased multifamily inventory.

According to CB Richard Ellis, a new record low will be set this year in multifamily permits, of something below 100,000 nationwide, breaking the previous one-year record low level of 127,000 units in 1993. Over the past decade, the average was in the neighborhood of 250,000 to 300,000 new units per year. The paltry level of new inventory coming on the market may serve to enhance the value of existing product.

suggests that patient investors may want to take a look at development or acquisitions along or near Minneapolis’ pending Northstar Commuter Rail and Central Corridor Light Rail, or areas within the Dakota County submarket, poised for population growth and with currently limited inventory.

Marcus & Millichap raised Denver two places in its National Apartment Index, based on prospects for healthy rent growth despite modest job losses. The brokerage notes that the outlying Louisville and Boulder markets, driven by a new corporate presence and a large student population, respectively, could be attractive for investment.

“The Denver market has taken a hit on revenue, but that’s more tied to overbuilding,” agrees MPF’s Willett. “It’s a market with significant upside potential.”

Still, new construction, however sparse, is something investors should keep an eye on closely, says Nechayev. “New construction may present an investment opportunity, but it also could present a supply risk,” Nechayev adds. “If you’re thinking of investing in an existing property, and you suddenly learn about a new development next door, you’d obviously have to assess how that would affect your investment.”

Of other markets, Hendricks and Partners project that Chicago will experience increasing job losses, slightly falling rents and vacancies approaching 6.5 percent. The lower rent is due to some 6,000 new condo units, primarily downtown, that may flip to rental units to make up for flagging sales. Nevertheless, the Oak Park submarket could experience growing renter demand as expansion continues on the Rush University Medical Center, says Marcus & Millichap.

Other key Midwest market leaders are Minneapolis, among the low vacancy rate leaders at 4.9 percent for the third quarter of 2009, and Milwaukee, at 5 percent, according to Marcus & Millichap.

The brokerage firm raised Minneapolis up 14 places on its 2009 National Apartment Index, because of scarcity of product and rent increases. The firm

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Multifamily To Lead Industry Out of Black Hole Source: Sule Aygoren Carranza, GlobeSt.com

A sense of relative optimism has pervaded the investment arena in recent months, and most players are confident the market is at least stabilizing, if not nearing bottom. And among the various asset classes, investors seem to feel particularly good about multifamily, which is expected to lead the commercial real estate industry in the recovery.

That’s the consensus of the

PricewaterhouseCoopers Korpacz Real Estate Investor Survey for the first quarter of 2010, titled, "Investor Sentiment Improves, But Challenges Persist in 2010."

That’s not to say the sector is performing well. Rather, the national average vacancy rate sits at a historic high, climbing 130 basis points over the year to hit 8% at year-end, points out PwC, citing Reis data. Rent cuts and concessions -- including an average of three months’ free rent, reduced or eliminated deposits and fees and merchandise giveaways -- are now common practice in just about every market. The multifamily market, many investors believe, will "bump along the bottom" this year, with conditions changing little.

Like in other property sectors, sales activity has diminished for apartments, but demand is high for well-located, high-quality assets. PwC notes that a 92% occupied, 612-unit property in a good location generated 14 bids during its 21 days on the market, before being sold for $54 million to the Prime Group in a deal that took just two days to close.

Another first-quarter deal involved a 254-unit asset near the California State University, which Strata Equity bought for $21.2 million, representing a 7% overall cap rate.

Overall cap rates for apartments have actually fallen over the final three months of last year, ranging from 5% to 11%, with an average of 7.85%, down from 8.03% in the third quarter of 2009.

However, the current cap rate was still 97 basis points higher than it was a year ago.

The average residual cap rate isn’t that far off, coming in at 8.01% this quarter, also an 18-basis-point decline.

Discount rates, or IRRs, on unleveraged, all-cash deals remained relatively unchanged quarter-to-quarter, 10.18% in Q1, but were up 113 basis points from last year. Meanwhile, properties for sale are sitting on the market for shorter lengths of time.

The average asset sold within 8.06 months this quarter, a 9.03% drop from the prior quarter. In terms of pricing, those polled said apartment prices nationally will decrease an average of 3.81% this year, with responses ranging from a 25% value decline to 25% pricing uptick.

Freddie Mac Plans More Emphasis on Multifamily Source: Jerry Ascierto, MultifamilyExecutive.com

In many ways, Freddie Mac’s single-family side often overshadows the multifamily division. But last year, more than one out of every three multifamily mortgages was a Freddie Mac origination. So, when Congress debates the fate of the government-sponsored enterprises (GSEs) next year, the future of the apartment market will very much hang in the balance.

In the interim, Freddie Mac’s commitment to the multifamily industry is growing. “There should be no doubt that we are strongly committed to it. It’s a highly profitable business that is growing well, where we have an exceptional record,” says Ed Haldeman, CEO of McLean, Va.-based Freddie Mac. “One would be just crazy to think about less emphasis; in fact, we want to bring more emphasis to that business.”

To that end, the company is overhauling its multifamily systems platform, software that was built in the mid-’90s and developed for about 100 loans, or $1 billion of annual business. Seeing as how the company did $16.6 billion last year, the system was in dire need of an overhaul.

“That’s going to make us a lot more efficient and move loans through the pipe more quickly, as well as provide better customer service,” says Mike McRoberts, Freddie Mac’s national head of multifamily underwriting and credit.

Closing the Gap Apartment financing was always a small slice of the company’s overall pie. And today’s single-family housing crisis -- with its accompanying sea of red tape -threatens to overwhelm the agency as it struggles to keep homeowners in their homes.

Despite this, the multifamily side of the business, though smaller in size, outpaces the single-family side in a number of critical ways.

For one, Freddie’s multifamily business is profitable, and its multifamily delinquency rate, at just 15 basis points, is much better than the rest of the multifamily lending community. Contrast that with a single-family business that’s bleeding billions, and has a delinquency rate around 400 basis points.

Last year, the GSEs were responsible for more than 80 percent of all multifamily loans. And while that combined market share is unsustainable in the long-term, the competitive gap between the two companies is closing.

In 2008, Fannie Mae had about 40 percent of the market, while Freddie posted a 27 percent market share -- a 13 percent gap. Last year, Fannie posted a 45 percent market share, and Freddie a 37 percent share -- an 8 percent gap.

“We believe we are closing the gap, but we’re going to be very prudent in our attempts to narrow that gap,” Haldeman says. “The way we’re going to close that gap is not by broadening out our credit box, but rather by emphasizing our strong management team and the great client relationships they’ve made.”

The GSEs are expected to again dominate the multifamily market this year. But McRoberts said that he’s begun to see more competition enter the marketplace: The company recently lost a deal to a life insurance company, which was bittersweet news. “I was upset about losing it, but happy to see that we’ve got some players back in the market,” McRoberts says.

scoured their reports to determine a comprehensive list of 10 markets to watch in 2010 -- five that should see signs of improvement by the end of the year, as well as five that will likely suffer even more pain.

Five Markets Seeing Signs of Strengthening 1) Washington, D.C. / Baltimore No surprise here. In fact, it may be tough to really put the Washington, D.C., metro area on a list of improving markets since it’s basically paced the apartment business over the past couple of years. Marcus & Millichap, for instance, named Washington its top market in 2009 and expects a repeat in 2010 with rents expected to improve 20 basis points to 6.5 percent. The primary reason for this is simple: The government remains a strong employment driver.

If the private sector follows suits and also adds jobs (Marcus & Millichap anticipates 35,000 new jobs in the metro in 2010), things could get even better.

“We do think that Washington, D.C., apartment owners will do a little better in calendar 2010 than they did in 2009,” says Greg Willett, vice president of research and analysis for Carrollton, Texas-based M/PF Yieldstar. “It is our No. 1 choice for revenue growth for next year.”

There has been some construction in the market, with 5,700 units delivered in 2009, and Marcus & Millichap expects to see 4,750 units in 2010, putting the D.C. area at third (behind Houston and Dallas) in 2010 completions. But Willett doesn’t think that has been hurting the market.

2) San Diego, California

INVESTORINSIGHT 5 Hot and 5 Cold Markets to Watch Source: Les Shaver, MultifamilyExecutive.com

Industry experts don’t always agree on which markets are the best and worst in the country. Vital market researchers

Last year Marcus & Millichap ranked San Diego at No. 6 on its National Apartment Index. This year, it’s jumped four spots to No. 2. Like Washington, D.C., the government will drive a lot of demand, pushing demand up a full percentage point in 2010, as Marcus & Millichap forecasts the metro will add an additional 12,500 jobs.

But that’s only part of the story. Only 541 new units were delivered last year with 1,100 more expected to follow in 2010. “They have had a lack of supply,” says Sarah Bridge, owner of RealFacts.

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ACCESSLASVEGAS April | May 2010

“That would suggest their market will recover faster.”

Marcus & Millichap says that should push vacancies 20 basis points lower in 2010 to 5.4 percent and asking rents up 0.2 percent to $1,308 per month. “That is a story of occupancies in pretty good shape and really no new supply,” Willett says. “While the economy has taken a hit, they’ve been doing better than the nation as whole and it [San Diego] is forecasted to be one of the leaders in the recovery."

3) San Antonio, Texas You may notice a theme. Washington, D.C., is the base of the federal government. San Diego has robust demand from local military and naval concentrations. And so does San Antonio. While not everyone is ready to put Alamo City in their top 10 or top five markets, it does have its fans. “It’s gotten beat up in the last year or two, but the job losses are not that meaningful thus far,” Willett says. “Because the military is bringing 12,000 additional jobs over the next year and very little supply, there’s probably a big move in occupancy San Antonio in 2010. Rents should get back into positive territory.”

There are other drivers as well. Marcus & Millichap projects that the city will gain 22,000 jobs in the metro, a 2.6 percent gain, in 2010. “It continues to emerge as a call center hub and a very efficient place to do business,” says Ron Witten, president of Witten Advisors.

Marcus & Millichap projects that San Antonio will boast flat asking rents and falling vacancy this year, putting it at the No. 12 spot on its national list. There are projected to be about 2,000 new completions in the city, but Marcus & Millichap projects that job and population growth will improve vacancy 50 basis points this year to 10.4 percent.

In 2009, rents will stay flat at about $685 per month (though effective rents could slip 0.6 percent to $632 per month).

4) South Florida South Florida has been the poster child for the housing bust for a number of years now, but many analysts and REITs think things are improving significantly.

That may mean as little as putting the brakes of stunning rent declines. But in this economy, that’s enough to out South Florida on a list of most improved 6

markets for 2010.

Nowhere has South Florida’s improvement been more noticeable than the recent fourth-quarter REIT conference calls. Denver-based AIMCO said that over the past 30 days it has seen rate increases in Florida. Chicago-based Equity Residential, another large apartment owner, said the market is at 94.8 percent occupied and mentioned it alongside solid performers Boston and Washington, D.C., as its top performers.

And Witten agrees. “Parts of South Florida are on the list of most improving markets for sure,” he says.

While vacancies rose 120 basis points last year, they’re expected to decline 10 basis points to 3.4 percent in 2010. Equity announced that it underwrote 3 percent revenue declines in properties it recently bought in the market, but expects things to improve going forward.

Still, asking rents are expected to drop 1.5 percent to $2,647 per month in 2010 and effective rents should drop 2.5 percent to $2,506 per month. Last year, asking and effective rents fell 6.6 percent and 8.1 percent, respectively, according to Marcus & Millichap. Supply will also be a problem in New York, with 3,650 units expected to come online this year.

“You’re seeing signs that the rent cuts are getting pulled in a little bit,” Willett says.

“It’s one market that will probably stabilize over the course of the next year.”

Five Markets Yet to Find the Bottom

Still, there are challenges. Marcus & Millichap, which puts Miami at No. 25 on its index, projects employers will cut 3,000 jobs this year (a 0.3 percent decline but an improvement from 2009) in Miami-Dade County. Only 500 new units will come online this year, but unsold condos provide stiff rental competition. Vacancies should rise 50 basis points, which is a major drop from last year’s 130 basis points, and asking rents are projected to fall 3 percent to $1,010 per month, according to Marcus & Millichap.

5) New York, New York Everyone knows the Big Apple was hurting when the credit crisis hit in 2008.

But many of those same financial firms that shed jobs are hiring again, with Marcus & Millichap projecting that 29,000 jobs will be added in New York in 2010. That should make 2010 better for apartment owners than 2009 was.

“New York is one city where we are seeing some job stabilization and recovery,” said Equity’s CEO David Neithercut in the company’s 4th quarter 2009 conference call. “Anecdotally, our people in New York were telling me just recently that all of the big houses -- J.P. Morgan and Goldman Sachs -- are hiring. We’ve got a number of new leases just recently both in Manhattan and over in Jersey”.

1) Jacksonville, Florida If you look purely at the numbers, Jacksonville, Florida, could be the worst market in the country. Walnut Creek, California-based Marcus & Millichap Real Estate Investment Services has it at # 44 -- dead last -- on its National Apartment Index.

Greg Willett, vice president of research and analysis for Carrollton, Texas-based M/PF Research, sees similar problems.

“Jacksonville’s late 2009 occupancy rate (at 86.3 percent) was the lowest across the 64 metros that form the core of our analysis,” Willett says. “And rents were cut 5.7 percent over the past year.

“Beyond the general struggles with the economy, one of the problems they have had is lots of new supply, some of it initially intended to be for-sale condos,” Willett continues. “Deliveries topped 2,400 units last year, translating to inventory growth of more than 3 percent in a market that small.”

Marcus & Millichap says the market indeed received 2,000 new units in 2009, with 1,000 more on the way this year.

There’s no demand there to really sap up these new units. In 2009, employers cut a whopping 19,000 jobs. This year, Marcus & Millichap expects that number to fall to 3,000 positions eliminated.

In all, this supply / demand equation means vacancy rates will push up 60 basis points to 14.5 percent (after jumping 170 basis points last year).

Marcus & Millichap expects rents to fall 4.1 percent to $747 per month this year, while it projects effective rents to slip 5.3 percent to $693 per month.

2) Phoenix, Arizona Like South Florida and Las Vegas, Phoenix has been the symbol of death and destruction in this housing bust. In certain segments, Phoenix is showing signs of improvement. Construction activity will decrease by more than 60 percent in 2010, according to Marcus & Millichap. After averaging deliveries of about 4,100 units a year, only 1,800 apartment units are expected in 2010.

And, with employers cutting a whopping 112,600 jobs in 2009, they’re actually expected to add 11,000 positions this year, which is a 0.7 percent gain.

But there are still problems. “The B-minus and C-plus assets west of the city are decimated,” says Nicholas Michael Ingle, director of capital markets for Phoenix-based Hendricks & Partners. “It’s not really unusual for buildings to be at 50 percent occupied.”That’s bad. And a major problem is existing homes. “In Phoenix, we don’t have a lot of supply, but we’ve lost a lot of jobs and have a lot of empty homes,” Ingle says.

Because of these factors, Marcus & Millichap expects vacancies to rise 30 basis points to 12.6 percent this year, after rocketing up 120 basis points last year. The firm expects asking rents to fall 2.5 percent in 2010 to $729 per month, while effective rents are projected to decline 3 percent to $656 per month.

Novato, California-based RealFacts says that Phoenix’s year-over-year rents have fallen 12.2 percent and its year-over-year occupancies have fallen 1.7 percent.

completion pace does appear to be slowing down. Marcus & Millichap says completions are expected to total 990 apartments this year, after clocking in at 2,500 units last year. Still, there is enough supply coming online to cause problems.

“The Northwest Las Vegas submarket has five properties coming online within the next 90 days, and there are no jobs there,” Ingle says. But that’s not the only issue. “Las Vegas is still losing jobs and has a lot of oversupply,” Witten says.

The local economy, which depends on consumer spending and construction, lost 57,000 jobs last year, but could actually add 2,500 positions in 2010, according to Marcus & Millichap. But that would be enough to stop the slide in apartment fundamentals with vacancy projected to 70 basis points to 12 percent in 2010 (after it jumped 320 basis points last year). Marcus & Millichap projects asking rents falling 4.8 percent to $782 per month and effective rents to drop 6.6 percent to $708 per month. RealFacts says that year-over-year rents have fallen 12.5 percent and occupancies have dropped 2.1 percent, making it the firm’s worst market in 2010.

“Las Vegas still has considerable struggle ahead of it,” Willett says.

4) Seattle, Washington Without a doubt, the Emerald City has better days ahead. Need proof ? Look no further than the institutional players and REITs eyeing and buying properties in the market. But for the remainder of 2010, rental owners in Seattle won’t have a lot of fun.

3) Las Vegas, Nevada

“The biggest downturn over the next year will probably be in Seattle,” Willett says. “They’re still struggling with the economy. The rent cuts just keep getting bigger and bigger. We’re saying that Seattle revenues will come down another 6 percent. We’re forecasting that rents still have another 6 percent to go before they bottom out in Seattle.”

With its massive overbuilding and job loss, Sin City has been a problem market for a while now for apartment owners.

But it’s behind South Florida in its recovery. “The problems in Las Vegas began well after South Florida,” says Ron Witten, president of Dallas-based Witten Advisors. The condo glut, with cranes all up and down the strip, has been well documented. But the

Owners agree. Palo Alto, California based Essex Property Trust sees revenues in Seattle dropping 9 percent to 11 percent. Marcus & Millichap expects a 50 basis point rise in vacancy to 8.4 percent this year. It also expects asking rents to go down 2.8 percent to $928 per month and effective rents to drop 3.9 percent to $852 per month. RealFacts says that rents have gone down 11

percent year over year and occupancy has gone down 2.3 percent, making it the ninth-worst market in 2010 for that firm.

There are multiple problems causing these sharp drops. Marcus & Millichap says that major Seattle employers, including Washington Mutual, Microsoft, and Boeing, had layoffs in 2009 -hurting demand -- but they do expect things to pick up this year, with employers expanding payrolls 1.6 percent.

And there’s still the issue of new supply.

In 2009, 4,150 units were delivered there.

This year, 2,600 are expected. “There are not a huge number of units on the way,” Willett says. “But if you look in terms of inventory growth rate, it’s still pretty meaningful.”

5) Dallas, Texas Dallas, like other Texas markets, has a supply problem. It’s expected to have the most new completions in the country in 2010 -- outpacing another Texas metropolis, Houston. But the 7,800 units expected in 2010 will trail last year’s 11,700 units. Despite that, this year’s starts will expand apartment stock in Dallas by 1.4 percent. “We’d put Dallas on the list of toughest markets for 2010 because they have so much new supply to deal with,” Willett says.

Some people aren’t as negative about the market. Marcus & Millichap has it at No. 23 on its National Apartment Index. Part of this reason is because the region should see some job growth to absorb this year. After shedding 66,000 jobs in 2009, Dallas is expected to add 66,000 spots this year, which is a 2.3 percent increase. Out of those 66,000 spots, 12,000 professional and business services positions should be added, according to Marcus & Millichap. The firm expects core areas such as Oaklawn, Uptown, and the central business district to see the largest upside as jobs return.

The projected job growth won’t be enough to thwart rising vacancy though.

Home prices are affordable and supply remains high and conditions will continue to deteriorate in 2010. Marcus & Millichap expects apartment vacancy to rise 40 basis points to 9.5 percent. The firm thinks asking rents will actually rise 0.4 percent to $768 per month, while effective rents slip 0.9 percent to $677 per month as concessions remain a problem.

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ACCESSLASVEGAS April | May 2010

OCCUPANCYCORNER

Las Vegas Metro Occupancy Trends March 2009 through February 2010 91% 90%

90.09% 89.69%

89%

89.55%

89.48% 88.94%

89.17% 88.81%

88.60%

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88.92%

88.72%

88.90% 88.32%

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Source: CB Richard Ellis and ALN Apartment Data

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MARKETACCESS

Las Vegas Snap Shot

Source: The Bentley Group Real Estate Advisors

FOURTH QUARTER 2009 REVIEW Demand within the professionally-managed apartment market in Las Vegas continued to weaken as pricing accelerated downward and vacancies ticked up. Average asking rents valleywide adjusted downward, reporting an average price point of $770 per unit per month, or $0.85 per square foot. Average asking rents have been consistently trending lower during the past several quarters. Compared to the preceding quarter (Q3 2009), average rents are down 8.4 percent from $841 per unit, while the prior year comparison implies a more dramatic 12.6-percent decline. With average asking rents at a four-year low, property owners have continued to adjust their pricing to market realities, noting similar changes in the residential for sale market over the last 24 months. Rental communities will continue to experience revenue shortfalls as prices and occupancy levels remain pressured due to a weakened labor force, reduced incomes and a favorable home buying market. Average occupancies slipped during the fourth quarter of 2009 with the Las Vegas valley posting an occupancy rate of 90.1 percent, falling a full percentage point from the previous quarter (Q3 2009) and 1.9 points from a year ago (Q4 2008). Average occupancy levels have steadily edged downward since reaching their peak of 96.2 percent in the first quarter of 2005 and remain well below their five- and 10-year averages of 93.8 percent and 94.0 percent, respectively. Sales performance showed continued downward movement. Rents and occupancies continue to push valuations south and investor capital to the sidelines. With limited sales transactions closing during the past quarter, property values remain a question mark for many. During the quarter, the 352-unit Summerlin Entrada Apartment community closed for $15.6 million, or $44,318 per unit. The same property previously sold in March of 2006 at a price of $36.8 million. The latest transaction reflected a 58-percent decline during the two and a half year timeframe. Going forward, the gap between seller and buyer expectations is expected to shrink as operating margins continue to contract and distressed sales volumes start rising. Stabilization in sector fundamentals within the apartment sector will likely spur increased interest by investors in the next 12 to 24 months. The accelerated downward trend is following a similar track witnessed in the resale housing market 12 to 24 months prior. Movements within the rental market tend to lag those in the for sale market. Should historical relationships hold true to form, we would expect to see rental rates start to report flattening in three to five quarters. With this expectation in mind, the gap between buyer and seller expectations will likely shrink and increased sales volumes will begin to emerge, albeit, at lower price points.

Access Investment Offerings COMMUNITY (UNITS)

ASKING PRICE

PER UNIT PRICE

BROKER / CONTACT INFORMATION

Emerald Suites Las Vegas Boulevard (387)

$ 27,500,000

$ 71,059

Grubb & Ellis / 702.733.7500

Brittnae Pines Apartments (208)

$ 23,750,000

$ 114,183

Elite Realty / 702.376.4305

J & J Apartments (80)

$ 4,000,000

$ 50,000

Prudential - Americana / 702.312.7070

Horizon View (85)

$ 3,500,000

$ 41,176

McMenemy Investment / 702.307.4925

Bonanza Apartments (36)

$ 1,700,000

$ 47,222

H & L Realty / 702.385.5611

Sherwood Pines (20)

$ 1,499,000

$ 74,950

NuVision Holdings, LLC / 310.927.4060

Access Recent Transactions COMMUNITY (UNITS)

CLOSING PRICE PER UNIT PRICE

CLOSING DATE

BUYER

Tierra Ridge (98)

$ 6,015,000

$ 61,378

December 31, 2009 Petwin Capital Group

Tierra Villas at Lone Mountain (98)

$ 6,500,000

$ 66,327

December 18, 2009 Jack Chan

Century Village (258)

Undisclosed

Undisclosed

December 15, 2009 Bank of America REO

Palmilla (157)

Undisclosed

Undisclosed

November 18, 2009 Ockwen Financial Corporation REO

Summerlin Entrada (352)

$ 15,600,000

$ 44,318

October 2, 2009

Leo Zuckerman

Sierra (68)

Undisclosed

Undisclosed

August 31, 2009

California Mortgage & Realty REO

For additional information and / or broker information on Access Investment Offerings and / or Access Recent Transactions contact Bret Holmes at 702.699.9261.

9

ACCESSLASVEGAS April | March 2010

Las Vegas Apartment Rents Reach Four-Year Low Source: LasVegasNow.com

Las Vegas is a renters' market. Research firm Applied Analysis reports asking rent prices are now about $770. That is a four-year-low.

Garry Cuff with Commerce Real Estate Solutions says rents are down about 150 dollars a month on average from where they were a few years ago. That is because demand for apartments is low.

Cuff says apartment owners are lowering prices to attract renters, but they are also using other incentives. "Not only (are they offering) a free month's rent if you sign a lease, but sign a lease today, and we'll give you a 32 inch television," he said. "Anything and everything is on the table."

Restrepo Consulting Principal John Restrepo blames a plethora of options available to renters. "What's happening is a traditional apartment complex is being negatively affected, because it's got to compete with these individually owned homes and condos," Restrepo said.

"People prefer to rent a home if they can, (especially) if they have kids and pets. Now, you can get it with a pool."

Renters can now get into a home for close to the same monthly rate as an apartment.

Restrepo says he doesn't see any relief for the apartment market any time soon.

"It's a good time for renters, not so good for apartment owners," he said. Experts say a recovery will not start happening until the economy recovers. Many believe that will happen with more job creation.

10

Vegas Apartment Market Still In Grip of Recession

LOCALLOWDOWN

complexes of 100 units or more. Just 11 changed hands in 2009 in Las Vegas Nevada is not only at the top of the list in after 42 were sold in 2007 and 17 were sold in 2008, according to Belnick. home foreclosures. The state also leads the nation in the percentage of More activity has been in the fourplex delinquent loans for apartment market, with 416 sales in 2009 in Las complexes.

Vegas, nearly doubling the 209 sales in Nearly one in four loans for multifamily 2008, Belnick said. residences that rely on commercial mortgage-backed securities are in Of properties that are on the market, arrears, according to Fitch Ratings. many transactions have multiple offers, That’s about double the national sometimes driving up the price, Belnick average. said.

Source: Buck Wargo, Las Vegas Sun

Rents will remain depressed as landlords offer significant concessions to sustain occupancy levels, said Mary MacNeill, a managing director at Fitch Ratings. High unemployment and stagnant growth have reduced the demand for apartments and, therefore, cash flows, she said.

The investor groups, however, are looking for bargains. “If a property is running at 25 percent vacancy and expenses are running high, they are not going to pay $60,000” per unit, Belnick said. “We have a test of wills going on right now.”

“Nevada has a stressed multifamily market,” MacNeill said. “It’s certainly showing a lot higher deterioration than the rest of the country.” Despite the high number of delinquencies, lenders are reluctant to foreclose on apartment owners, MacNeill said. That would drive down values and rents, she said.

The price per unit for all complexes sold in 2009 in Las Vegas was $40,300, down 44 percent from $72,200 in 2008.

It was as high as $108,500 in 2007.

That’s a function of rents and occupancy, Belnick said.

Michael Belnick, an apartment market specialist for Re/Max Central Commercial, said frustrated investor groups are waiting on the sidelines to gobble up foreclosures, but lenders haven’t been putting them on the market.

Many are managing the properties and waiting for the market to recover before selling them at better prices. Lenders are working with apartment owners to help them get through the recession, he said.

“Nothing makes sense right now. We are not getting the amount of product that was anticipated,” Belnick said. “The vulture-fund people with the dollars don’t like it because they don’t have access to the product. They are not getting anywhere.”

Belnick attributes that to federal banking regulators relaxing rules for commercial properties and reserve requirements.

This has affected the sale of apartment

Belnick cited the Village at Karen in the southeast valley -- a cluster of fourplexes run as one big complex. In 2007, it cost $690 to $710 a month for a twobedroom unit; today that’s down to $525 a month and there’s a 25 percent vacancy rate, he said.

Lloyd Sauter, co-owner of the Sauter Cos. real estate brokerage, said he has seen a noticeable increase in interest by investors who think the apartment market has bottomed out and don’t expect any more declines in rental rates.

Many apartment owners are reluctant to sell because they would receive less than they would spend to build a new complex, Sauter said.

Most of the foreclosures have occurred in older lower-end properties that were bought for $60,000 to $70,000 a unit.

They’re worth about $30,000 today, Sauter said. Owners of newer complexes are in better financial positions to wait out the economy, he said.

Simple Ways to Improve Your Property Inexpensively Source: Marc Courtenay, PropertyManager.com

Recently I received an advertisement from a rental car company. It simply stated, “The next time you need a rental car call us and receive a free upgrade”, and they meant it.

PROPERTYTIPS

The first way to inexpensively improve your rental community is to offer something free to both existing residents and prospects.

One property manager in our area made arrangements with the local fitness center. He could purchase a 3 month trial membership for his residents at an extremely reduced price, and then give it as a freebie incentive. Everyone came out a winner.

Another inexpensive improvement for your property is to make it more accessible. Offer free bus passes or a $10 gasoline card to those who come to see your property. Call your local mass transit authority and find out about group discounts and special rates for seniors, children, or frequent riders who reside at your property.

Give out free discount cards, bus maps, schedules or other incentives that makes your property feel like the center of your residences’ universe.

The word “free” strikes a positive chord for us all. So if I’m a couple looking for an apartment or a rental home and I see the word “free”, I’m likely to investigate this offer.

Provide adequate parking at your properties, and that each resident has their own assigned space. Install secure bicycle parking racks and offer a free locking system for every resident that chooses to own a bike.

Social Media Tip: Using Subtlety with Facebook

Social media is about marketing without marketing. It’s about using subtlety. If you were laying back, surrounded by people fanning you, would you rather have them be waving feathers or hammers?

Source: Heather Blume, PropertyManager.com

We’re moving quickly into a world where overt marketing isn’t going to work any more. Gen X and Gen Y don’t trust advertisers, and they’re the folks swiping their debit cards in the coming years. It’s time to not only find a new aim for our message, but to find a new gun to fire it from. Herein lies the subtlety!

I see a lot of properties and companies doing a cannonball in the deep end of the Facebook swimming pool. I’d estimate that I’m “friended” or “followed” by at least six new properties or management companies a week.

Of the over 230 properties that have friended me or asked me to “fan” them in the last year, I’ve seen roughly 15 of them who understand how to use the medium effectively.

The others have either put up a page like a ForRent.com ad where they blast out their specials, or they’ve abandoned the medium all together.

Another great idea is to provide free tax resources for your residents during tax season. One way of doing this is to bring in a tax advisor once a week for your residents.

If you want more senior residents, make your units senior-friendly. Install shower rails, elevated toilet seats, and extra lighting outside and inside. Call the community ride-share or dial-a-ride program and facilitate pickups and drop-offs for your senior residents.

Call your tax advisor and find out what improvements are tax-deductible. Rental property owners may assume that anything they do on their property is a deductible expense. Not so, according to the IRS. A repair keeps your rental property in good condition and is a deductible expense in the year that you pay for it.

Repairs include painting, fixing a broken toilet and replacing a faulty light switch.

Improvements add value to your property and are not deductible when you pay for them. You usually can recover the cost of improvements by depreciating the expense over your property’s life expectancy.

* Giving just enough information to inspire some questions that will make someone have to actually call, rather than click. * Putting up tagged pictures of people, since Facebook is setup to send out new taggings with an embedded link that most people will click on.

NETKNOWLEDGE

To help you understand how to be subtle when growing your Facebook audience, I’ve created some helpful guidelines.will use an online apartment search site to find a new place to call home.

Being Subtle Is ... * Doing something remarkable enough that talk about your community ends up on someone else’s Facebook page, not just your own.

* Gaining your friends organically, for example, through your residents, or through connections with other businesses or organizations in your area that will help.

11

ACCESSLASVEGAS April | May 2010

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For information, article consideration and featured columns ACCESSLASVEGAS can be contacted at 702.699.9261.

The publisher of this newsletter is The Internal Press.

ACCESSLASVEGAS 2775 South Rainbow Boulevard, Suite #101-C Las Vegas, Nevada 89146