February-march-2010

ACCESS LASVEGAS FEBRUARY | MARCH 2010

YOUR ACCESS TO THE LAS VEGAS MULTI-FAMILY HOUSING MARKET

2010 AL V I V SU R DE GUI ED LOCK DE INSI

2010 Multi-Family Survival Guide

Pay Close Attention To These 20 Solid Strategies & Survive This Year Rents are flat or down. Lending is stagnant.

Development seems undoable. Concessions abound.

At first glance, 2010 looks like it will be a lot like 2009: a 365-day survival of the fittest exercise in waiting for property and business fundamentals to rebound. Economic and industry experts alike anticipate great years ahead for multi-family, with a surge in rent-friendly Gen Y demographics coinciding with job creation and a lack of apartment supply culminating in a long run of rent increases, occupancy hikes, and all-around good times.

To get a seat at the table, however, multi-family operators still need to apply mettle to the realities of 2010. With that in mind, it was asked recently that industry leaders across the property management, development, REIT, and owner / operator sectors for their firms’ indispensable strategies for navigating 2010. What they came up with turned out 20 tenacious tactics for coming out on the other side unscathed in 2010. To survive 2010, and possibly much longer, those 20 amazing tactics begin here ...

Development and Design (1) Anticipate the Return of Development Yes -- believe it or not -- multi-family developers are beginning to again take chances on breaking new ground for apartment community construction.

True, both the costs and risks associated with development are paled by the comparatively simple process of addition by acquisition, but development has one key advantage: delivering brand new product into supply-constrained markets between 2011 and 2015.

“Development starts in the second half of 2010,” says Highlands Ranch, Colorado based UDR president and CEO Tom Toomey. “We will look at our pipeline of opportunities and challenge ourselves to start them because they are three years out before they are leasing. Anyone who has the financial wherewithal to start building today is going to face a great environment when they deliver that asset two or three years down the road.”

ACCESSLASVEGAS February | March 2010

Your Survival Guide Continues ...

Source: Chris Wood, MultifamilyExecutive.com

properties from a land purchase and entitlement standpoint and even seeking out lending despite ultimate uncertainty on delivery -- is clearly en vogue among the progressive development set as players posture for market opportunities. “We have that building coming out of the ground as we speak,” says RMK executive vice president Diana Pittro. “It will deliver in May 2010: a brand-new, 221-unit building in downtown Chicago. We also have a couple of other deals in the works for 2010, but we are still in search of a lender.”

“ ... but we’ll also be putting opportunities into a shadow pipeline to begin preliminary planning for additional development in 2011 and 2012.”

- ART LOMENICK, DIVISION PRESIDENT FOR TRAMMELL CROW’S HIGH STREET RESIDENTIAL

Likewise, Houston-based Camden Property Trust has several projects -- notably in the Washington, D.C., market -- that will likely go active in the latter half of the year. “If I started those projects in mid-2010, I would deliver at the end of 2011, beginning of 2012, and those could be pretty nice markets then,” says Camden chairman and CEO Ric Campo. “The demand side of the equation we think will be improved by then, and if you want to deliver into that market, you better start building in 2010.”

(2) Prepare the Pipeline It’s not just big national REITs geared up for development, either. Both Irvine, California based Western National Property Management and Chicago-based RMK Management broke ground on new multi-family stock at the end of 2009 and are identifying additional opportunities for 2010. At Trammell Crow’s Dallas-based High Street Residential, division president Art Lomenick likewise says his team will start to turn dirt this year.

“We do expect to have at least two starts in 2010. It doesn’t sound like a lot,” Lomenick says, “but we’ll also be putting opportunities into a shadow pipeline to begin preliminary planning for additional development in 2011 and 2012.”

The shadow pipeline concept -- preparing 2

The Bozzuto Group has also identified shadow pipeline possibilities -- particularly as they involve land deals -- that could conceivably begin next year.

“We have three or four in the pipeline like that,” says the Greenbelt, Maryland based company’s CEO Tom Bozzuto. “I don’t think construction will start on them until 2011, but that’s still terrific because that has deliveries occurring in 2012 and 2013 when I think the economy will have rebounded and the demographic bubble will really be hitting the apartment business.”

(3) Find Land Deals Integral to the Bozzuto development pipeline plan is the availability of buildable land, where current pricing is again keeping most players far from the market until sellers enter financial distress or otherwise come down from 2007 pricing. “I do think there are some selected opportunities out there where land sellers are recognizing that their land is not worth what they thought it was two and three years ago,” Bozzuto says. “If you can put together the proper deal structure, you could probably begin to work on construction.”

UDR, as well, is combing submarkets for entitled parcels, and CEO Toomey says his company will deploy dry powder for suitable deals in 2010 to get an edge on market competition and avoid bid-ups.

“We don’t think a lot of people have the financial strength to buy in that area,” Toomey says. “As a result, you probably can get a better bargain.”

Still, others will stay the course and focus on acquisition opportunities until land prices reset, particularly in extreme high-barrier and high-cost markets. The

dearth of construction lending, as well, has most on the sidelines in 2010 waiting for brighter days ahead. “Regardless of pricing, land today is worthless,” says New York-based Simon Development principal Matthew Baron. “There is simply no financing for it, and in 2010 through 2011, I can buy finished buildings for less than what it costs to build them. Why would I go through the headache of buying a piece of dirt, designing the building, and taking the construction risk when I can buy that building today?”

(4) Rethink Your Product Green buildings could be a function of demographics as much as anything else in 2010 and the years to follow, and several developers are questioning status quo design at both the site and unit level as they consider groundbreaking possibilities in the next 12 months. “If you look at dormitories, fewer and fewer college kids live in shared space anymore,” Bozzuto says. “When those students become multi-family prospects, they aren’t going to want to share apartments. Perhaps we need to start building more one-bedroom apartments -- maybe even more junior units.”

back burner. “Projects are going to be smaller,” says High Street Residential’s Lomenick. “They have to be scaled back because we are still going to have a problem with construction debt.”

High Street will consequently focus on smaller niche development opportunities in 2010, looking to track what Lomenick calls a core paradigm shift in multi-family development. “We’re looking at walkable environments, urban environments, environment near transit modes,” he says. “The days of garden apartments on the outer ring of the suburbs are over.”

Acquisitions and Investment

ACQUISITIONS

- MATTHEW BARON, PRINCIPAL FOR SIMON DEVELOPMENT IN NEW YORK

The economy in and of itself could demand a shift in product type among multi-family developers. Extremely conservative underwriting and strict lender requirements will likely demand equity-heavy projects for some time, placing fatter developments in need of heftier bridge and mezz financing on the

While buying off of trough earnings in high-barrier-to-entry markets could produce discounts of 25 percent to 35 percent off peak values, many in the industry question whether or not higher-end assets will be available in the 2010 disposition market. That has REITs such as UDR anticipating rehab opportunities over crown-in-the-jewel buys, despite the company’s fortitude and hunger for larger deals.

“We just think there will be a scarcity of Class A product available next year,” says Larry Connor, president of Dayton, Ohio-based owner/operator The Connor Group, which closed on $170 million in acquisitions in 2009. “Unless you’ve got a gun to your head, you are not going to sell.”

“Regardless of pricing, land today is worthless.

There is simply no financing for it ...”

The Gen Y set is also expected to fly back into urban centers as an alternative to the suburban sprawl of their youth, further benefiting multifamily players with assets in the inner urban rings. “The Echo Boomers have a different currency than their parents,” says Orlando, Fla.-based ZOM Residential’s president Steve Patterson. “They don’t want the biggest cars and the biggest apartments; they just want to live in a city with a good quality of life.”

dollars of commercial debt maturing every year into 2012 that will attempt to refinance with stricter underwriting and lower valuations. No matter which way you slice it, people are going to have to come up with more equity -- some of them will be able to, some of them won’t -- and that is going to create opportunities for acquisitions.”

(5) Don’t Turn Your Back on Acquisitions Multi-family portfolio manifestos will continue to march to the call of distressed acquisition opportunities in 2010. How firms define that opportunity, however, is uncertain as the once expected tsunami of deals hitting the market proves to be more fickle and less flood. Yes, some $300 billion in multi-family debt will come due over the next three years, but belief in a full-out property dump is waning as signs of an economic recovery begin to appear.

“Anyone selling right now is in some form of distress; otherwise, why would you sell anything today?” Simon’s Baron asks. “There’s hundreds of billions of

(6) Know that Cash is Still King Simon’s Baron says construction loan qualifications effectively shut most borrowers out of the debt markets, necessitating a dry powder strategy for 2010 multifamily market movers. “I don’t want to say there is no construction financing out there, but it is effectively a cash business today,” Baron says. Even on the acquisition side, deal preference is migrating to cash-in-hand buyers who can guarantee speed of execution and certainty of closing over those seeking to access agency lending as part of their acquisition strategy.

“We’re sitting on $80 million in cash, an untapped $600 million line of credit, and an investment fund of approximately $1 billion in acquisition / development capacity,” says Camden’s Campo. “The most important part of preparation for 2010 is making sure you have the capital.

Even among private, regional companies, the M.O. for 2010 is stack and attack, and the industry seems poised to deploy capital as soon as there is a semblance of normalcy to the transaction market and a bottoming out of rent fundamentals.

“We just closed a fund of $200 million in equity that is liquid and available to us to acquire and develop multifamily real 3

ACCESSLASVEGAS February | March 2010

estate,” says Western National president Thomas Shelton. “There have just been a few transactions, and value is still bouncing around the board. We have expectations on the returns that we need to make, and as soon as we see the prospect of those returns, we will invest accordingly.”

(7) Expect Cap Rate Compression With gun-to-the-head mentality among sellers still a somewhat rare market event, bid/ask spreads remain preventively wide in terms of fostering a healthy transactional environment for multi-family apartment stock. The oft-mentioned disconnect between buyers and sellers as a hindrance to deal flow is expected to close in 2010, and it’s not just sellers that will be moving the gap.

Multi-family properties currently on the block are fetching 20 or 30 bids per go, and that kind of interest -- coupled with an uptick in volume - is the perfect recipe for cap rate compression.

markets -- whether for acquisition or even new development -- have reset the bar on underwriting and leverage expectations.

mean a lender you have been working with for 20-plus years.”

Mike Peter, CEO of Austin, Texas-based Campus Advantage, echoes an industry chorus when he says it’s time for multifamily players to simply expect those lending realities. “Leverage ratios are changed, and the guarantees that lenders are requiring on projects are much more onerous and a little bit shocking for many,” Peter says. “But we develop in Canada as well and a lot of these underwriting requirements have been standard outside of the U.S., and those markets have fared much better because of it.”

(9) Trim Excess -- and Yes, There is Some

“You are starting to see evidence of buyer appetite for good quality, relatively low-risk properties on the market at more reasonable prices,” says Marcus & Millichap managing director of research Hessam Nadji. “On good quality assets in primary markets, we are receiving 20 offers with cap rates compressing 30 to 50 basis points based on buyer competition alone.”

Absent hikes in interest rates and the deployment of capital in the acquisitions and disposition market could even push cap rates down to pre-recessionary levels.

“When things start getting better, you’ll find that there are a lot of people out there willing to buy assets at cap rates not different from what we have seen in the past,” says ZOM’s Patterson. “I don’t subscribe to the belief that we are going to see cap rates rise 100 basis points: We already see quality deals selling now at 6 percent cap rates.”

(8) Locate Lending Executing on acquisition deals, regardless of cap rates, will still necessitate debt financing for many. That financing is still likely to come from Fannie Mae, Freddie Mac, or FHA multifamily lending programs, and even those dependent on agency debt are looking at stricter underwriting requirements and more stringent loan terms. Likewise, banks re-entering the multi-family debt

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Capital and Costs

In late 2008, Connor challenged his firm from top down and bottom up to do three things: identify ancillary revenue opportunities; continue to improve the company’s twice-yearly Gallup survey customer service scores; and find $5 million in excess costs to cut from The Connor Group’s books.

The firm delivered, finding savings in operational costs, purchasing, and in the renegotiation of vendor contracts to ultimately best their challenge by $600,000. Even in organizations already stressed from squeezing blood from the stone, creative thinking can typically find additional cost savings. “Look at your hours, for instance,” advises RMK’s Pittro. “Do you really need to be open six hours on Sunday? Maybe you can do that in five. Those are the types of savings, too, where your team will be very appreciative of anything you can do as opposed to laying off people.”

Don’t forget about spending a little money to make some money. Campus Advantage used 2009 to purchase and install biometric time clocks at most of its locations for better payroll efficiency.

“The clocks have enabled us to be much more accurate with labor hours and avoid unnecessary costs to the property,” says CEO Peter of the palm-scanning devices. “The clocks paid for themselves in a couple of months, and there’s only one trick to override it.”

(10) Rework Tax Assessments

On the construction side, debt is more of a critical issue with banks still largely unwilling to extend capital into the development space. Still, some players have found success -- albeit with higher equity and underwriting requirements -working with regional banks that were not over-extended on real estate. “The lenders are out there but they are cautious,” says Pittro of RMK, which just broke ground on a downtown apartment complex and is looking to commence development on two other projects in 2010. “If you are a good company with a good relationship, you will find funding. And by relationship I

Cost-conscious multi-family operators could also do well to continue wearing down assessors when it comes to property insurance and real estate taxes. Especially given the near national depreciation in both property values and NOI, 2010 will be a critical year for taking it to the Tax Man before a broader economic recovery initiates asset value rebounds.

“There’s no question that values are down across the country,” says Western National’s Shelton. “We are going back to assessors and asking for reductions in taxes and reductions in valuations.

Obviously, the municipalities rely on those taxes to pay for their operating

expenses, and they are quick to use sales comps and cap rates from before the market turned. It’s a challenging exercise, but you can have success in getting them to at least meet you half way.”

Indeed, renegotiation of property taxes and insurance costs factored largely into The Connor Group’s $5.6 million expense cut in 2009, and with continued diligence in that area, coupled with other creative expense reductions, Connor expects -- and is asking for -- another $1 million to $2 million in savings for 2010.

(11) Empower Residents to Slash Energy Costs For multi-family property developers and operators historically focused on higher density and more energy-efficient, walkable communities, the green wave of the first decade of the 21st century was testament rather than revelation. Still, the jury is out on whether residents intrinsically look to their apartment communities during consideration of carbon footprints, particularly given the economy. “For most residents in this environment, price is a larger consideration than green,” sums up Simon’s Baron.

REIT UDR has been conducting ongoing research on resident environmental consciousness, and CEO Toomey says more needs to be done to reach out to residents and partner up on the green effort. “We’re constantly questioning what we can do to further reduce energy consumption, but more importantly, how do we educate our residents in that effort?” Toomey says.

UDR might want to consider the success of Campus Advantage, which embarked on a pilot resident education program in 2009. “After installing low-flow fixtures,

shower aerators, compact fluorescent light bulbs, and programmable thermostats, we implemented a very simple contest among residents to see who could reduce their consumption the most,” Peter says. “The total cost to us was $9,300 on this property, and our utility savings this year was $40,000.

Anybody who thinks green is touchy-feely is flat-out wrong. There are still simple things to be done to achieve tremendous savings.”

Management and Operations (12) Be Prepared for the Worst Whether you anticipate recovery in multi-family real estate to be V-shaped or subscribe to a hockey stick performance model, experts agree that 2010 is going to look a lot like 2009, and that means continued threats to the bottom line.

Simply battening down the hatches and riding out another four quarters might not even be enough: Some pundits recommend running your organization through disaster drills before crisis arrives.

“We are still in survival mode here,” says Patterson of ZOM Residential. “You need to plan for the worst, and the worst in this particular snapshot could be pretty bad. Spend some time walking through these doomsday scenarios, including bankruptcy. I recognize that sounds like a dreary prospect, but as a good company manager and steward, you need to be looking for a below-thewaterline hit, and make sure that if you take one, you can still somehow stay afloat.”

(13) Improve the Organizational Chart Part of the 2010 business plan at Western National is to continue a position-byposition appraisal of company staff.

“From the top to the bottom, we continue to evaluate both the contributions and commitment that people are giving every day,” Shelton says. “We will look to consolidate responsibilities and positions where that makes us a stronger company.” As the economy recovers, many multi-family operators say 2010 will be an apt time to recruit industry talent that fell victim to the recession.

“When so many people have been laid off or mistreated by other employers, it is an opportunity to strengthen your

organization,” says Bozzuto, who adds that The Bozzuto Group will continue to focus on deepening its marketing unit, particularly with younger, tech-savvy employees. “The focus, quite honestly, has been to hire young people who really understand how to market to young people and really understand social media in a way that most of us could never hope to.”

For multi-family units that kept the team intact, the industry job market picture is a double-edged sword, allowing for responsiveness to market changes but perhaps dictating a pass on available top talent. “We’re pretty solid with our team,” says Simon’s Baron. “We would rather keep people than staff up and staff down.”

(14) Train to Retain Other firms are hoping to consolidate if job vacancies do arise. RMK didn’t resort to layoffs in 2009, and Pittro doesn’t expect to cut into jobs at the firm for the duration of 2010. Nevertheless, Pittro expects to consolidate roles should any particular job position become vacant. That in itself could offer additional retention benefits on the employee side as well as cost savings to the personnel line item on the budget.

“We will continue to implement job sharing across the company. It was successful throughout 2009 in terms of saving costs on payroll and the hiring process,” Pittro says. “Job sharing is not difficult in a company of our size with 20 sites, and the ability for employees to be cross-functional on the management and development side -- or at least have exposure to our different business units -creates more efficient communication that enables us to move quickly when opportunities arise.”

Likewise, The Connor Group isn’t set to be a heavy recruiter in 2010, despite the expectation of a critical mass of qualified and even over-qualified applicants in the multifamily job pool. “Instead, we’re increasing our internal training budget this year by $400,000,” Connor says.

“We continue to believe it’s who you’ve got, not how many people you’ve got.”

(15) Figure Out Facebook The Bozzuto Group’s strategy of relying on a youth movement to assist in the Bozzuto social media marketing effort is

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ACCESSLASVEGAS February | March 2010

evidence of the larger multi-family question mark still hanging over community networking sites such as Facebook, MySpace, and Twitter. While such sites represent vast pools of rental prospects, tapping into the reservoir, especially from a sales and marketing standpoint, remains a challenge.

development. Technology and your health club are the two most important things you can do, and if that means you can’t do solar panels on your roof, then the solar goes first.”

“We’ve not seen a lot of traction out on Facebook or Twitter or the Wikis in terms of ‘Gosh I want to do business,’” UDR’s Toomey says. “It’s really an arena to socialize. The transactional aspect of it has not been developed.”

(17) Push Rents Wherever You Can

Rents and Renewals

File it under wishful thinking if you will, but 2010 could present some operators in certain submarkets the opportunity to begin to push rent levels incrementally higher, particularly towards the end of the year. “We’re not forecasting rent growth for 2010,” says ZOM’s Patterson, “but that doesn’t mean we’re not going to try.”

According to Nadji of Marcus & Millichap, the obvious contributing factor to rent improvement is a reversal in job creation. “Given the realities of the marketplace, rents are going to be under pressure through 2010, but I’m more optimistic than some that job creation could return stronger than expected on the upside of the recovery.”

To that point, Camden has made an undisclosed investment in rentwiki.com, a social media Web site with an underlying lead generation Internet listing service in the system architecture.

“We were impressed with their technology but also with the knowledge of the social media marketing,” CEO Campo says.

“Everyone is trying to figure out what you do and how you do it and how you target the 18 to 25 demographic using Facebook and Twitter. We are spending a fair amount of time and money making sure we are state-of-the-art in that regard.”

(16) Invest in Technology Elsewhere on the technology front, multi-family corporate leaders anticipate diverting dollars back into tech budgets after roughly two years of cuts. At UDR, Toomey anticipates keeping technology appropriations at full-throttle as his peer groups return to making infrastructure investments. “In a period when people have been pulling in their horns, we have been accelerating,” Toomey says. “Will that continue? Well, no one ever remembers second -- you have to be first in this platform.” In particular, UDR looks to continue adapting its tech platform in anticipation of the eventual cob-webbing of desktop PCs in favor of mobile computing. “Our targeted renter, between 20 and 35, is adopting the mobile device as the primary communication tool,” Toomey says.

Likewise, Camden is looking at mobile applications for viewing apartment info and availability, completing leases, or even paying rent via cell phone, Campo says. “2010 will be characterized by more investment and focus in technology rather than less,” Campo says, adding that Camden will also look to bolster the tech footprint of the leasing office by introducing leasing kiosks at on-site locations.

That type of on-site, resident-facing technology will continue to be vital as multi-family operators compete for both tech-hungry Gen Y residents as well as older prospects who have come to expect lifestyle efficiencies and bell-and-whistle upgrades to the rental lifestyle. “Technology is the one spot that will not be part of a value engineering exercise in 2010,” says Lomenick of High Street Residential. “There is a lot of cost and effort in creating leading-edge communities, especially in 6

Profiting from a swing in job creation will likely come at the submarket level, and Western National plans to keep the focus on its home turf as it relates to pushing rent levels to new prospects. “There’s no magic potion to increasing rents or putting more money in the bank -- you’ve just got to be better, more creative, and more aggressive than the next guy,” Shelton says. “We’ll stay honed in on our submarkets and rely on our regional scale. We have an advantage there.”

(18) Optimize Your Occupancies While minimizing vacancies is also a key strategy for many in an environment where prospect competition and costs for leads-to-leases are at all-time highs, some multi-family operators are both questioning the full-up strategy, and cautioning against it in as much as higher occupancies are becoming dilutive to effective rents.

“I’m always amused with these great stories about occupancies that are really stories about physical occupancy,” says Campus Advantage’s Peter. “That can often have little relationship to what your revenues are looking like, and occupancy at the expense of NOI is rarely a good thing.”

The Connor Group plans to take effective rents one step further in 2010, asking on-site personnel to deliver a 90 percent occupancy that maximizes effective rents rather than pushing for a full house. “Economic occupancy as compared to physical occupancy is always a far better gauge of asset health and value,” Connor says. “We could be 95 percent occupied but running at only 85 percent occupied relative to effective net market rents, and I think that’s the situation a lot of firms are finding themselves in. It’s far smarter to be only 92 percent physically occupied but to be at an 89 percent or 90 percent economic rent level.”

(19) Burn Off Concessions A primary tactic in improving net effective rents, of course, is eliminating concessions at the door, a difficult step to take for site managers being pressed to convert leads and maintain property stabilization even as they are being asked to cut

operation costs and simultaneously seek out new revenue. Nevertheless, concession burn-off will be part and parcel of any recovery in multi-family rent fundamentals. And as usual, firms operating ahead of the curve stand to benefit from earlier and more robust improvements to NOI. “Concession burn-off is a major factor in 2010, and that burn-off factor has to occur before you see real rent growth,” Nadji says.

Like many firms, ZOM will continue to leverage yield management software as a way to reduce blanket market concessions and improve pricing sophistication at the asset level. “But what we are bleeding from are the enormous rent discounts and enormous commissions for apartment locators to bring people to our properties,” Patterson says. “The decline of those kinds of business practices is decisional, and it is something that we have to wean ourselves from. Our successes there will have more impact on NOI at multi-family properties than anything else over the next two to three years.”

(20) Maximize Renewals Rather than even deal with pushing rents in a concession-laden environment, most firms are taking a nail-the-windows-shut approach to resident retention in 2010, refining strategies put into play across 2009 to keep heads in beds and effective rents high and healthy.

UDR has gone so far as to turn its renewal process into what Toomey calls a “resale process” -- presenting renters a range of options at renewal time that include more space, greener options, perhaps better finishes, all geared towards an up-sell with a common denominator of keeping the resident in-house. “You have to look at this window of time and rethink the thought process around renewals.” Retention might even mean offering a market-rate rent reduction to the renewing resident, sans concessions. Regardless of approach, retention in 2010 is likely paramount to any other on-site strategy for maximizing opportunity and success in a year of change. “We should be renewing a higher percentage of our rentals next year than we ever have before,” says ZOM’s Patterson. “If we don’t get that accomplished, then I think we have failed.”

HOTHEADLINES 2010 Will Usher In Improvements for Apartments Source: Sule Aygoren Carranza, GlobeSt.com

Bolstered by government expansion and spending, the nation’s capital took the top spot in terms of apartment fundamentals for the second year in a row. So reports Marcus & Millichap Real Estate Investment Services Inc. in its "2010 National Apartment Index," released at the National Multi Housing Council’s Annual Meeting.

While most markets across the US have suffered through layoffs and decreased in wages, the multi-family markets of well-established areas like Washington, DC and other high barrier-to-entry locations on the coasts have persevered, relatively speaking.

Taking the number-two spot on the NAI is San Diego, which rose four places due to expectations for comparatively low vacancy and slightly rising rents, unlike most other areas of the country.

Rounding out the top three is New York City. The Big Apple ended 2009 as the strongest apartment market, but fundamentals have deteriorated slightly.

As financial and professional services firms pick up the pace on hiring, it’s anticipated that vacancy will begin to tick down. Vacancy remains tight in the Twin Cities of Minneapolis-St. Paul, but rent declines kept this market at the number four spot.

Job growth and a rise in demand should give a boost to markets that suffered with low vacancy rates over the past couple of years. But some that fall into this category, including Seattle, Denver and Phoenix, will still have to deal with supply issues.

In Florida the recovery is expected to be considerable modest. A soft economy and resulting steep rent declines are forecast for Ft. Lauderdale -- number 39, West Palm Beach -- number 41 and

Jacksonville -- number 44. While a true recovery will probably not occur in the Sunshine State in 2010, the firm says, "properties in these areas could offer strong upside for less risk-averse investors who acquire assets this year."

Overall, Marcus & Millichap warns investors not to get too optimistic this year, as the economic headwinds remain formidable. At best, owners and investors will see a muted recovery, since job growth will not be at a breakneck pace.

But if inflation is kept at bay and the financial markets begin to stabilize, the lending market will in fact improve, along with corporate and consumer psychology. The wild card, the firm contends, is the looming specter of commercial mortgage maturities, which are in the hundreds of billions of dollars at this point.

In addition to modest upticks in demand and, therefore vacancies and rents -- in some markets, a slowdown in overall deliveries bodes well for the national market. Developers will bring 65,000 units to the market this year, down from 94,000 in 2009, and completions in the most oversupplied housing markets, such as Phoenix and Las Vegas, will slip to the lowest levels in years.

Vacancy improvement isn’t expected until the second of this year, but is forecasted to end 2010 at 7.8%. And rent growth will lag, asking and effective rents down an average of 1.7% to 3%, respectively, by year’s end. Pricing power will be available to only a handful of owners, and not until the second half.

The other weapon of sorts in the multifamily sector’s arsenal is the availability of financing from the GSEs, which have maintained their commitment to the asset class. In these incredibly tight capital markets, Fannie Mae and Freddie Mac have become a welcome lifeline for those looking to finance or refinance their properties. But these entities cannot be the only source of capital indefinitely.

Marcus & Millichap expects long-term rates to remain low this year, mortgage rates to stay relatively stable and lenders increasingly opting to work out extensions or modifications for loans rather than taking near-term losses.

Seller financing, or assumable debt, will also become a big factor in transactions this year.

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ACCESSLASVEGAS February | March 2010

OCCUPANCYCORNER

Las Vegas Metro Occupancy Trends January 2009 through December 2009 92% 91% 90% 89.99%

89%

90.09%

89.37%

89.69%

89.55%

89.48%

89.17%

88.94%

88%

88.60%

88.81%

88.72%

88.92%

87% be r ec em D

N ov em be r

er ob ct O

t

be r Se pt em

Au gu s

Ju ly

e Ju n

ay M

il Ap r

ar ch M

ry ua

Fe br

Ja nu ar y

20

09

86%

Source: CB Richard Ellis (104,535 Apartment Units Surveyed in December 2009)

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MARKETACCESS

Las Vegas Snap Shot

Source: The Bentley Group Real Estate Advisors

THIRD QUARTER 2009 REVIEW Demand within the professionally-managed apartment market in Las Vegas remained relatively weak during the third quarter of 2009 despite a modest uptick in occupancies as pricing continued to accelerate downward. Average asking rents valley wide declined for the fourth consecutive quarter, reporting an average price point of $840 per unit per month, or $0.93 per square foot. Compared to the preceding quarter (Q2 2009), average rents are down 2.0 percent from $857 per unit, while the prior year comparison suggests a more dramatic 5.6-percent decline. With average asking rents at a level not seen since the first quarter of 2006 and a record-high unemployment rate across the valley, rental communities continue to experience less rental income potential, a downward trend that appears to be lagging price declines in the for-sale residential market. Average occupancies picked up during the third quarter of 2009, partially attributable to seasonality, as the valley’s average occupancy rate bumped up 0.6 points from the previous quarter. At an occupancy rate of 91.1 percent, demand remains well below the 93.7 percent reported during the same period a year ago. As long as the job market continues to slash positions and median home prices remain near current levels, apartment communities will suffer from reduced rents and less-than-average occupancy rates. Apartment owners and managers have historically experienced occupancy rates in the mid-90 percent range, specifically when looking at five and ten-year averages. Pro formas and operating budgets will likely need to reflect lower occupancy levels and rents throughout the economic recovery process, an adjustment that may press up against debt service and capital expenditure requirements. The market outlook is weakening fundamentals in southern Nevada’s tourism market, pullback in the construction sector, and dramatic declines in consumer spending have created a frail job market. Until sustained job growth returns to southern Nevada, we will continue to see erosion in performance measures in apartment communities. The majority of future apartment sales transactions will likely stem from lender-involved sales, as existing apartment fundamentals do not align with previous market-average price points. When housing prices begin to stabilize and foreclosures begin to fall, the apartment market will ultimately look forward to their own recovery with more stabilized rents and occupancies. Retreating revenues in apartment communities continues to compress operating margins and has investors seeking price points not seen in years. Opportunities for those that are well-capitalized with a long-term investment horizon are available. The reality is that apartment fundamentals remain unstable due to the deteriorating local economic climate, which is lagging behind the broader national economy.

Access Investment Offerings COMMUNITY (UNITS)

ASKING PRICE

PER UNIT PRICE

BROKER / CONTACT INFORMATION

Emerald Suites Las Vegas Boulevard (387)

$ 33,011,000

$ 85,300

Grubb & Ellis / 702.733.7500

Brittnae Pines Apartments (208)

$ 23,750,000

$ 114,183

Elite Realty / 702.376.4305

Lake Charlotte Apartments (126)

$ 9,500,000

$ 75,397

Asian American Realty / 702.234.5655

Terravita (100)

$ 8,800,000

$ 88,000

RealTech Realty, Inc. / 702.477.7575

Emerald Suites Cameron (96)

$ 8,188,800

$ 85,300

Grubb & Ellis / 702.733.7500

Tara Hills (140)

$ 6,700,000

$ 47,857

Asian American Realty / 702.234.5655

Access Recent Transactions COMMUNITY (UNITS)

CLOSING PRICE PER UNIT PRICE

CLOSING DATE

BUYER

Tierra Villas at Lone Mountain (98)

$ 6,500,000

$ 66,327

Century Village (258)

Undisclosed

Undisclosed

December 18, 2009 Jack Chan 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

La Mesa (96)

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 February | March 2010

Not So Bleau, Carl Icahn Poised to Take Control of Fontainebleau Source: Natalie Dolce, GlobeSt.com

Carl Icahn is poised to take control of the Fontainebleau Las Vegas, the stalled casino hotel development on the Las Vegas Strip, reports the Wall Street Journal.

A subsidiary of Icahn's company, Icahn Enterprises LP, emerged as the only qualified bidder after two competing bids were deemed unqualified, an examiner appointed by the US Bankruptcy Court in Miami said in documents filed with the court, the WSJ says. Icahn has pledged $106 million for the project, plus $50 million in financing during bankruptcy proceedings.

Hotel consultant Sumner Baye, president and partner of International Hotel Network LLC, who has worked with Icahn many times in the past, tells GlobeSt.com that Icahn "certainly has a taste for the gaming industry."

exchange for $200 million worth of debt.

As GlobeSt.com previously reported, the deadline for submitting a qualified bid for the stalled $3-billion, 3,800-room Las Vegas Strip resort development was set at 5 pm PST on Friday, January 15, 2010. The last bid supposedly topped Carl Icahn’s $156.2-million "stalking horse" bid by at least $1 million.

Several hedge funds looked closely at the Fontainebleau in the past few weeks but ultimately decided not to bid, a person close to the situation told the WSJ. Penn National Gaming, a regional casino company, scouted the project for months but dropped out last week after determining that the market couldn't support the $1.3 billion to $1.5 billion the company believes it would take to finish the Fontainebleau.

LOCALEFFECTS

More Struggles Predicted for Vegas Housing Market Source: Buck Wargo, Las Vegas Sun

Baye explains that Icahn's "past gaming investments have turned out very well for him" and that Icahn continues to be on the lookout for more gaming opportunities ahead.

The Las Vegas housing market will continue to struggle in 2010 as it faces more price declines and a growing number of foreclosures, economists recently stated.

One of the "past gaming investments" that Baye is referring to includes the Stratosphere, which Icahn sold for $1.3 billion to Whitehall Street Real Estate Funds, an affiliate of Goldman, Sachs & Co. Icahn started investing in the Stratosphere in 1997 when he purchased $82 million of the property's $203 million in mortgage debt. Another gaming investment Baye mentioned in support of Icahn's "taste for the gaming industry" includes the Tropicana Atlantic City, which he, along with creditors, claimed ownership of in 2009 in

In kicking off its International Builders’ Show, the National Association of Home Builders also released its forecast that showed new-home production in Las Vegas will be below 70 percent of normal production by the end of 2011.

10

“It will be continued suffering,” NAHB Chief Economist David Crowe said of the Las Vegas economy and housing market in 2010. “That is the simplest way to say that.” Inventory remains at a high level because of the foreclosures and shows no sign of slowing, Crowe said.

The demand doesn’t exist in Las Vegas to absorb the supply of homes on the market through this year and most of 2011, he said.

Crowe said that the country as a whole, however, has seen the worst of the housing price declines.

David Berson, a chief economist and strategist with California-based PMI Group, said he expects prices to continue to decline in Las Vegas, though not steeply.

Existing home prices have fallen more than 50 percent from the height of the market in June 2006. It’s going to take at least three years before prices rebound to the historical average increase in value of 4 percent a year, Berson said.

The economists said the problem facing housing markets like Las Vegas is no longer adjustable rate mortgages that triggered a wave of foreclosures but steep job losses.

Frank Nothaft, chief economist and vice president of Freddie Mac, said foreclosures typically don’t peak for six months or longer when jobs start to be created. “We are not going to add jobs for at least several more months,” Crowe said. “The return of employment will be the first indication of the return of the housing market.”

Berson said this will be different from other recessions.

“If you look back historically, economic declines are followed by strong economic recovery. But the consensus is this time it won’t,” Berson said.

Berson said it’s been fortunate for the economy that lenders have been slow to put foreclosed upon homes on the market, otherwise prices would have fallen much further. That is why they aren’t putting them all out there at once, he said.

Even for builders who have orders, the credit crunch has kept many from obtaining the loans they need to construct projects, Crowe said. That continues to hamper the recovery of the new-home market, he said.

The positive news about a slow recovery is that it holds inflation low, which means prices for building materials and labor remains low to build homes, he said.

10 Steps to Slowing Down the Revolving Door Source: Rick Hevier, Multifamily Insiders

In a tough economy the focus shifts to increasing leasing traffic through concessions. Yet, improving resident retention, the other side of the leasing "coin", often receives little more than lip service. The NAA reports that the national average for annual apartment turnover is about 60%. How can anyone make money with such a level of turnover? Reduce that revolving door with these 10 steps: (1) Invest in people. “Bricks and mortar” can’t retain residents (soon to be customers, read below) -- only people can develop effective resident relationships.

Pay a premium rate for exceptional office and maintenance staff. Too many investors in the apartment business economize with cut-throat pay scales for their multi-million dollar investments.

(2) Change the paradigm. As much as possible expunge “landlord”, “tenant”, and “resident” from your business approach and consider your “tenants”/

In 2010 Renters Are Making a Move Source: Apartments.com

Many renters across the country are ringing in the New Year with a new apartment. According to a national survey conducted by Apartments.com more than 95 percent of renters said they are planning a move in 2010. Striking while their 2010 moving resolutions are hot, many renters are also moving earlier

RESIDENTFACTS

“residents” as “customers”. Like the Magna Carta, this can be extremely liberating and fosters a “customer relationship” mindset. Without that changed mindset, customer retention is difficult to improve.

(3) Everything is marketing. Create a mindset with the maintenance staff that everything they do is marketing and that they are, in reality, leasing agents.

(4) Obsess over service. Don’t you want your customers surprised when someone shows up at their door ten minutes after they call for service? Make service a PRIORITY. (5) Get rid of emergency service.

Provide full maintenance service 24/7/365. Are customers surprised when someone shows up at their door at 8 p.m. on Christmas Day to replace mini-blinds? So much so, they tell their friends and family. What is that worth?

(6) Proactively ask for service. End every conversation with a customer with this: “Is there anything we can take care of for you in your apartment?” ASK for service requests. Why not take care of that thing that irritates a customer and that he or she forgets to call about?

(7) Embrace a customer-centric business vision. Your vision -- build customer-for-life relationships. Your mission -- to so overwhelm our customers with service that they will tell everyone

this year, searching for better deals and nicer apartments in great neighborhoods.

Given the growing inventory of apartments across the country and competition to fill vacancies, many renters are moving on their own terms and seeking out better bargains during their apartment search. While many renters are looking for a deal on their next apartment, price may not be the most important factor when deciding which apartment to rent. Nearly 40 percent of renters told Apartments.com they are moving because they want to live in a nicer apartment located in a neighborhood where they feel safe and get more for their money by taking advantage of rental offers and deals.

According to Apartments.com, nearly 60 percent of renter respondents moving this year said they are either paying the same or more in rent as last year. Renters are also factoring in how their new home will suit their needs and lifestyle. Some renters are looking for a more convenient

PROPERTYTIPS they know. Your values -- the Golden Rule, treating our customers in the way that we would want to be treated.

(8) Be consistent. Treat all customers in the same way, most of them will appreciate it. Besides being the right to do, it is the beauty and genius of the Fair Housing Act. (9) Avoid desperation leasing. This is a tough message in this desperate economy. Leave an apartment empty than fill it with someone who marginal -you are not helping them or your property. Desperation leasing is like drinking Red Bull -- a quick, but short high followed by a big crash.

(10) Avoid gimmicks. Let’s face it, parties, events, lease renewal carrots (e.g., renew your lease and get free carpet cleaning) cannot affect customer retention in the way that exceptional customer service can, PERIOD.

commute to work, family and school while others want more space to start a family or to double up with roommates.

Renters are also choosing to move earlier this year. While the typical peak rental season extends from April through August, there have been some notable changes in renter moving behavior from year to year. Most notable is that 40 percent of renter respondents said they will be making their move during the first quarter of 2010, which is 16 percent more than 2009. This significant shift may be in response to the struggling economy, which has created a competitive rental market and more flexible leasing terms, providing renters with more opportunities to move during the year.

Renters moving into a new apartment in 2010 are going online to conduct their search. According to Apartments.com, more than 80 percent of renters said they will use an online apartment search site to find a new place to call home.

11

ACCESSLASVEGAS February | March 2010

Advanced Management Group Adds Six More Properties To Its Portfolio; Grows 28% In 2009 Advanced Management Group, utilizing its extensive market knowledge and consistent management principles, added six more properties to its portfolio at the end of 2009. The 533 additional units brings Advanced Management Group’s portfolio to over 2,000 units, if you include its single family division. The company experienced an astounding 28% growth last year despite economic woes, which have gripped hundreds of communities in the Las Vegas valley.

Advanced Management Group’s property owners have praised the company’s service, attention to detail and innovative management fee structure. The management fee structure incorporates full accountability into the owner’s asset, thus creating vested interest in the property owner’s bottom line.

The results have allowed Advanced Management group to flourish.

For a FULL property evaluation contact Advanced Management Group’s President, Bret Holmes, directly at 702.699.9261. Not only will you receive a top notch evaluation FREE OF CHARGE, but Mr. Holmes will buy you lunch too!!! Contact him today.

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