ACCESS LASVEGAS OCTOBER | NOVEMBER 2010
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Positive for Apartments? Housing Isn’t Close to Stabilizing Shadow inventory paints a painful, dismal outlook How real is the “Shadow” market? How does it truly affect apartment occupancies? Does this market warrant closer tracking than ever before? All great questions, all tricky answers.
about whether it even exists. Let’s take an in-depth look at this shadow inventory and see whether it really is a threat to housing markets around the country.
The “shadow inventory” (as most call it) is as real as you want to make it. If you are a number cruncher, the “shadow inventory” is very real. If you are a skeptic, it is just an excuse ... among thousands of other excuses. If you are a realist, take a real look at this article. The million dollar question still remains, is this bad for apartments, apartment owners and apartment investors ready to get back in the game?
Shadow Inventory Defined
Excerpted from the article “Housing isn’t close to stabilizing” by Keith Jurow of Minyanville.com
Much has been written about the so-called “shadow inventory” since the term was first coined a few years ago. Some analysts and commentators have argued
Rather than joining the dispute about what the term actually means, we will simply define it in this way: The “Shadow Inventory” is comprised of all those distressed residential properties (other than MLS listings) which we know will almost certainly be coming onto the market in the not-too-distant future. MLS Foreclosures - The Tip of the Iceberg The starting point in discussing the shadow inventory has to be homes actually on MLS listings around the country. With the plunge in home sales starting in July, the number of listings has risen substantially since the spring. For example,
ACCESSLASVEGAS October | November 2010
Housing Isn’t Close to Stabilizing (Continued from Page 1) California listings are up 25% since April. The percentage of total listings that are bank-owned properties has declined over the last year, while the percentage of short-sale listings has risen tremendously during the same period. For example, short sales comprised 40% of all active listings in Sacramento County in August. The following table (see right) from data supplied by ZipRealty shows this soaring number of short-sale listings. Because of the sharp climb in short-sale listings, roughly 30% of all July home sales in California, Arizona, and Nevada were short sales, according to Inside Mortgage Finance. It also reported that nationwide, closed short sales have climbed from roughly 45,000 in January to nearly 100,000 in June. With regard to shadow inventory, the key question is how many foreclosed and repossessed properties are now either in the inventory of banks or held on behalf of residential mortgage-backed securities investors whose loans they service. Estimates start at about 500,000 and go up from there. One highly reputable data provider with a huge database of first mortgage liens has been reporting an REO inventory in excess of 1 million since last summer. Whatever the number is, it seems clear that the vast majority of these properties aren’t currently on the market. Defaulted Properties Heading for Resale Market In addition to repossessed properties held off the market, the shadow inventory includes all the homes that have been placed into default -- the first stage of foreclosure proceedings. According to Lender Processing Services’s July Mortgage Monitor report, there are now 2.02 million properties in default. This number hasn’t declined in the past year in spite of more than 1 million trial mortgage modifications. In many of the worst bubble metros, the number of homes in default has been climbing in the last year. Take a look at the soaring number of defaults in the Las Vegas metro area in this graph from ForeclosureRadar (see below). In spite of the huge number of foreclosed homes that have been sold by the banks in the Las Vegas area, the volume of new foreclosure actions continues to rise. While many of these defaulted properties throughout the nation will escape foreclosure by means of a short sale, the rest will move on to foreclosure proceedings and eventual trustee sale to a third party or repossession by the lender. Overwhelmed by the number of defaulted
properties, banks have stretched out the time between the beginning of mortgage delinquency and formal foreclosure to an incredible average of 469 days -- more than 15 months. Since these homeowners in default are living in their house without making mortgage payments, that’s a way to build up a sizable pile of cash. Delinquent Homeowners - The Number Just Keeps Growing You could argue that the shadow inventory is the total of repossessed homes not yet on the market and defaulted homes that will move into foreclosure. However, there’s also the matter of homes which are seriously delinquent in mortgage payments. Why? The homeowner can cure the delinquency by paying the arrears before the home goes into default. The problem is that the cure rate for these seriously delinquent mortgages is almost zero. If this were early 2005, one could claim that 40% of homeowners who were delinquent 90 days or longer would eventually bring the mortgage current. But the cure rate has plunged along with home prices. As early as one year ago, the cure rate had dropped to almost zero. A delinquency of 90 days now means almost certain foreclosure or short sale. How many homeowners are now seriously delinquent by 90 days or more? To answer that, we turn to Lender Processing Services and its massive database of roughly 34 million first mortgages. Their monthly Mortgage Monitor provides a detailed table of non-performing first liens. At the end of July, the number of residential first mortgages that were delinquent by 90 days or more stood at 2.47 million. While the figure has declined from a record 3.06 million in January of this year, this is due almost entirely to the mortgages that were placed in trial modification by the banks. While in modification, they’re no longer considered delinquent. We know from the cure rate chart shown earlier that nearly all of these seriously delinquent mortgages are headed for the resale market either through a short sale or foreclosure. To these 90-day delinquencies we need to add first mortgages that are delinquent
for at least 60 days. Lender Processing Services Mortgage Monitor reports 761,000 of these 60-day delinquencies. The Mortgage Monitor shows us that the vast majority of these delinquent properties will also end up on the resale market. Finally, we must also include those mortgages that are newly delinquent for 30 days. That number has been stuck at roughly 1.8 million for the last three months. Now, you may question the inclusion of these newly delinquent loans. Keep in mind, though, that the vast majority of those homeowners who become 30 days delinquent have been delinquent before, according to Lender Processing Services figures. The cure rate chart shows us that only 30% of those borrowers who go into arrears by at least 30 days will cure the loan without lapsing into delinquency again and eventually falling into default. Concentration of the Shadow Inventory in 25 Major Metros It’s very important to understand that this enormous shadow inventory of distressed properties that will eventually be thrown onto the resale market is heavily concentrated in a limited number of metros. According to data provided by Lender Processing Services, 52% of the nationwide 90-day delinquencies and 58% of the defaults are concentrated in 25 major metros. The table (see right) shows this concentration. If you look carefully at the distressed property figures for the top four metros, you’ll see that the number of residences that will be pouring onto their housing markets in the next one to two years is enormous. Anyone who thinks that prices have bottomed in the Miami, New York, Los Angeles, or Chicago metro areas had better take a good, hard look at these statistics. Tallying up the shadow inventory An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default. education provided by management. To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we’ll
add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we’ll add 70% of those delinquent for at least 30 days -1.25 million properties. And, of course, let’s not forget the REOs that haven’t yet been placed on MLS listings by the bank servicers. We’ll be conservative and estimate them at 500,000. Adding all of these together, we come up with a total of roughly 6.97 million residences that are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk. 3
ACCESSLASVEGAS October | November 2010
Apartment Market Showing Signs of More Improvement Even with a weak job creation, apartment demand is increasing Source: MarketWatch
The apartment industry often doesn't improve until the job market strengthens, and workers gain the confidence to drop their roommate and get a place of their own or move out of their parents' basement. But recent measures show that vacancy rates are falling and confidence is rising in rental markets -- specifically in apartment buildings -- despite only subtle improvements in the nation's employment picture. "We certainly see the increase in rental demand in 2010, and it's been a little more, frankly, than most apartment experts had anticipated," said Mark Obrinsky, chief economist and vice president of research for the National Multi Housing Council. Demand for apartments has risen
NATIONALNEWS significantly this year, said Greg Willett, vice president of research and analysis for MPF Research, which analyzes apartment trends. "There's no way to look at these apartment numbers and not be impressed," he said. June vacancy rates in the largest 64 markets in the country averaged 6.6%, down from 8.2% at the end of 2009, according to MPF Research. Rents are also on the rise, Willett said. The apartment market absorbed 215,000 units in the first half of the year, and at this rate, the market will absorb a little more than 300,000 units by the end of 2010, Willett said. Absorption is the net change in the number of units physically occupied. Absorption was just under 300,000 units in 1999, 2000 and 2004; the record since the early 1990s was 350,000 units in 2005, when absorption jumped due to the volume of Hurricane Katrina evacuees, Willett said. As units fill up, property owners feel more confident.
The NMHC's quarterly market-tightness index, released on Friday, had a reading of 83 in August -- the highest reading since July 2006. The index measures changes in occupancy rates and rents through a member survey; a reading higher than 50 indicates improving market conditions. A year ago at this time, the reading was a meager 20. In January 2009, it hit 11. And according to a property owners' survey conducted by Rent.com in June and July, 56% of participants said the number of vacancies in their properties had dropped or was unchanged compared with a year ago, said Peggy Abkemeier, president of Rent.com. "Some customers indicated that the vacancy rates have been extremely low," she said. Rise In Renters But with the job market still struggling, it isn't easy to explain the growing demand. Private-sector job growth was weaker than expected in July, and the unemployment rate held at 9.5%. "It's one of those situations where it's hard to fully explain where the demand is coming from," Willett said. "You can't look at the stats and fully explain it." That doesn't stop those in the industry from hypothesizing. Obrinsky said even the slightest improvement in the economy could be motivating some renters to sign an apartment lease. But their attitudes probably have more to do with confidence in their local economy than the national indicators being reported in the media. "In the world in which they live, they see fewer people getting laid off. Friends are finding jobs. They react to those things with more confidence in their personal situation and can take that step with finding a 12-month contract," he said. "If you have a job, you feel less likely that you're going to lose it now." Some in the industry say more parents -finally confident in their own jobs -- are now willing to co-sign leases for their
according to the Census Bureau. While the rate is slightly improving, a 10.6% rate is still high, said housing economist Michael Carliner, adding that "it's still a renter's, rather than a landlord's market." Carliner is a visiting fellow at Harvard University's Joint Center for Housing Studies.
second quarter 2010 increases were of more than 15 points when compared to the first quarter and the highest level since 2007.
“As the supply of additional units declines and pent-up household formations re-emerge when the labor markets improve, demand for traditional And for apartments in particular, rents rental apartments will rise,” David might not rise very quickly due to Crowe, NAHB’s chief economist, noted broader market conditions, Willett said. in a statement. However, “it’s possible In many areas, the monthly cost to buy a that the supply of new units will not home is now equal to or less than the cost arrive in time to meet the emerging of renting, he said. "The fact that there's demand and some shortages will occur in not a premium to buy in so many cities some markets. Even in robust production could put some sort of cap on rent years, it’s only possible to increase the growth potential," he said. stock of rental units by a relatively small percentage through new construction.”
children, Willett said. And apartment managers are doing a better job at retaining the renters they already have, he said. Even if renters still need a roommate to be comfortable in signing a lease, they might decide to "room with just one other person, rather than three," said Dung Lam, chief financial officer of J.I. Kislak, a national investment company that primarily operates as an owner and operator of multifamily properties. Continued skittishness about the housing market also may be boosting rentals. The homeownership rate fell to 66.9% in the second quarter according to the Census Bureau, the lowest it has been since the fourth quarter of 1999, and Obrinsky said it's possible it will continue to decline, at least for a while, as people doubt the financial wisdom of buying a home or can't get financing to buy. "There is still a hangover from the housing boom that is keeping people from jumping into homeownership, and has fueled people getting into the rental market," Obrinsky said. "Unlike in the past, they're not jumping out and thinking 'I'm going to buy a house.'"
NAHB Sees Rising Demand for Multifamily Rental Properties Source: Multi-Housing News
The latest National Association of Home Builders’ Multifamily Market Indices (MMI) show that current and expected demand for rental apartments improved significantly nationwide in the second quarter of 2010 compared to the first quarter. The organization breaks the MMI into Class A, Class B and Class C property components, and the three rose to 59.5, 57.6 and 56.6, respectively, during 2Q10. The MMI measures multifamily builder sentiment based on production and occupancy at the current time, as well as builders’ expectations for conditions over the next six months. An index number greater than 50 indicates that the number of builders who view conditions as getting stronger outnumber those who view conditions as becoming weaker. The
The current production index for market-rate apartments, at 34.4, rose from the 30.1 reported during 1Q10, but increased significantly when compared to the same period a year earlier (16.7). For lower-rent units, the current production index slipped from the first quarter to the second quarter of 2010 (35.4 to 32.8), yet was an improvement over the 21.8 reported a year earlier. Until very recently, lenders have been unwilling to fund much rental multifamily development, says Crowe. That’s because the inventory of rental housing expanded from traditional multifamily communities to include foreclosed and investor-owned single-family homes made available for rent as a means of creating a temporary cash flow until the homes can be sold. Development of multifamily rental housing might be edging upward, but for condos, according to the NAHB, no such luck. The current production index for condominiums for sale sank to 14.5 from 21.5 the previous quarter, to about the same level it stood a year earlier (15.2).
A Wider View The overall rental vacancy rate -including not only apartments building units but also single-family homes -- was 10.6% in the second quarter, unchanged from the first quarter but down from 10.7% in the fourth quarter of 2009 and 11.1% in the third quarter of 2009, 5
ACCESSLASVEGAS October | November 2010
Las Vegas Metro Occupancy Trends September 2009 through August 2010 91% 90% 89.30%
88.81% 88.72% 88.92%
OVERVIEW: The 9.54% vacancy rate is the lowest vacancy since October 2008. Either the market is really beginning to tighten up or the vacancy rates reported are inaccurate. From our perspective, we have not seen income collections improve so concessions are still prevalent and operations are still a struggle. Source: Spencer Ballif and Jeff Swinger of CB Richard Ellis (Las Vegas) (112,472 Apartments Surveyed in June)
Las Vegas Snap Shot
Source: Trepp LLC
APARTMENT MARKET UPDATE While the Las Vegas housing market continues to get pummeled by a wave of foreclosure activity -- a trend compounded by a double-digit unemployment rate -- the local apartment market is confronting its own crisis. The delinquency rate on apartment loans held in commercial mortgage-backed securities (CMBS) reached 28.3% in metro Las Vegas in July, well above the national delinquency rate of 14%, according to Trepp LLC, a New York based commercial real estate and analytics firm. In fact, the Las Vegas apartment market recorded the highest delinquency rate among the top 10 metropolitan statistical areas based on the unpaid loan balances, reports Trepp. Phoenix was the next closest market at 16.4%. “Las Vegas was the poster child for that overgrowth, for that lending boom from 2005 to 2007,” says Paul Mancuso, vice president with Trepp, citing lax underwriting standards during that period as the culprit for the high delinquency rates dominating the real estate landscape today. Indeed, an overwhelming 98.2% of delinquent CMBS multifamily loans in the Las Vegas market were originated from 2005 through 2007, according to Trepp (see table). The current balance on those loans is $648.8 million. “If you look at the top 10 delinquent loans in special servicing based on the loan balance, every single one was originated during that period when valuations were at their highest. In hindsight, those valuations couldn’t be maintained,” says Mancuso. In fact, eight of the 10 loans on that list are now in some stage of foreclosure. Michael LaBar, vice president and director with the multifamily housing division of Marcus & Millichap Real Estate Investment Services based in Las Vegas, estimates that 65% of the apartment inventory locally traded hands between 2004 and 2007. That led to the frothiness in pricing and paved the way for what has turned out to be a hard landing. “There is a truckload of distressed properties. Something in the neighborhood of one in every four apartment complexes is in some type of distress,” says LaBar. “In a lot of cases, they [lenders] are working out the situation with the owner. In a lot of cases, the owners are having to bring money to the table.” Without substantial job growth in metro Las Vegas, many apartment owners face the prospect of high vacancies and little or no growth in net operating income. The unemployment rate in the Las Vegas area in July -- the most recent data available -- registered 14.8%, up two-tenths of a point from June, according to the Bureau of Labor Statistics. That’s well above the national jobless rate of 9.6%. While the apartment vacancy rate in metro Las Vegas fell from 11.8% in the first quarter to 11.1% in the second quarter, it’s still much higher than the national average of 7.8%, according to Reis. The double-digit vacancy rate has been a drag on effective rents, which averaged $780 in the Las Vegas market during the second quarter compared with $803 a year earlier. The good news for landlords is that after six consecutive quarters of decline, effective rents rose 0.1% in the second quarter, raising hopes that a recovery is imminent. But the CMBS problems plaguing the apartment sector could get worse before they get better, based on trends Mancuso is seeing in debt-service coverage ratios. The debt-service coverage ratio measures the owner’s ability to pay the property's monthly mortgage payments from the cash generated from rent. A debt-service coverage ratio of less than 1.0 indicates that there is not enough cash flow to pay the property's rental expenses and have enough left over to pay mortgage payments. Mancuso sees cracks in the surface. Some 14.6% of securitized apartment loans in the Las Vegas market that are current had a debt service coverage ratio of less than 1.0 in fiscal 2009. While these loans are still performing, the situation can be fragile. In some instances some troubled borrowers are benefiting from reserve accounts established at the time the loans were originated to cover any payment shortfalls. “That can only last for so long,” says Mancuso. “These may be some of the next loans in the pipeline that become delinquent.” Some 75% of multifamily loans current on their mortgage payments experienced a year-over-year decline in net operating income in 2009, according to Trepp, providing further evidence of a decline in property financials in the Las Vegas apartment market.
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ACCESSLASVEGAS October | November 2010
Buyers Look To Distressed Apartments Source: Las Vegas Review-Journal
Factor in 14.8 percent unemployment and it's easy to see how the multifamily housing market in Las Vegas could be viewed as a risky investment. Still, investors are taking a good look at distressed apartment complexes that can throw off 10 percent returns in the Great Recession when no investment appears safe.
nonperforming assets from their balance sheets, brokerage Marcus & Millichap said in its third-quarter apartment market update. The median Las Vegas apartment price declined 40 percent over the past 12 months to $37,800 a unit as distressed properties traded at deep discounts, driving up sales velocity by 30 percent in the first half of the year, the brokerage reported. Capitalization rates for quality assets in good locations are running in the mid to high 8 percent range, up roughly 100 basis points from the year-ago period.
Dotan Melech, president of United AMS and court-appointed receiver for several Opportunistic investors can acquire the Las Vegas apartment complexes, said Tam Drive Apartments in receivership demand for rental units will increase as for $295,000, or $12,292 a unit, said people who've lost their homes to Geoffrey West, vice president of commercial brokerage CB Richard Ellis. foreclosure and bankruptcy spend a couple of transitional years in "financial True, the apartment buildings are located repair." in a rough neighborhood east of Interstate 15 and north of Sahara Avenue -an area once known as "Naked City" -and they need major rehabilitation work. The upside is the reduced price and proximity to the Strip, West said. "I think what's so attractive in apartments versus other commercial property types is that it's a critical need," West said. "People need to have somewhere to live. That's what investors feel. At its core, Las Vegas is a blue-collar town." He's also got the 32-unit Bonanza Apartments listed for $640,000, or $20,000 a unit, reduced from $795,000. Projected net operating income after rehabilitation and other expenses is $84,463, giving a capitalization rate of 13.2 percent. The downtown property is "somewhat nestled away from all of the challenges in surrounding neighborhoods" with single-family homes and government buildings in the immediate area, West said.
surged 300 basis points. Over the past 12 months, asking rents declined 3.6 percent to $812 a month, while effective rents -taking out concessions -- fell 4.4 percent to $755 a month. Las Vegas investor Wallace Roberson said he's getting a lot of bank-owned properties at discount prices, fixing them up and putting them back on the market. He has a fourplex for sale on 15th Street for $80,000. "You pay below market value, plus some of them need a lot of work," he said. "You're going to put money back into them." CB Richard Ellis' West said it's going to take some time to work through the amount of distressed properties in Las Vegas, which is significantly higher than comparable markets. The majority of apartments for sale throughout the country are either "trophy or trauma," West said. He's seeing more Class C apartments -older, lower-end properties with no amenities -- come on the market in Las Vegas. Banks are more likely to keep "trophy" properties, he said. "Lenders are more willing to part with those C-quality properties because there's not as much meat on the bone," the broker said. "Those deals have viability and lenders are working with the receiver or borrower to do different things."
"I believe multifamily will be a good long-term investment due to the fact there's nothing being built and people are still losing their homes," he said. Melech said his duty as receiver is to protect, preserve and marshal the property while it goes through the foreclosure process, bridging the "disconnect" between bank and borrower. He takes offers from investors and presents them to the court for approval.
Distressed apartment properties will continue to come on the market in Las Vegas well into 2011 as lenders remove
Buyer caution is fading as vacancy rates begin to stabilize and prices fall below replacement costs, Marcus & Millichap said in its quarterly report.
Vacancy will end the year at 11.5 percent, the firm projected, rising just 30 basis points from 2009 when the rate
West reported $26.6 million in sales volume through July for apartment complexes with five to 100 units, which already exceeds last year's total of $25 million. There were 38 transactions involving 1,008 units, compared with 29 transactions and 696 units in all of 2009. Smaller properties are more attainable for investors, West said. They don't have to syndicate their money or be part of a complex transaction, thereby keeping direct control over their investment, he said. Developers will build about 1,500 apartment units in Las Vegas this year, after completing 1,700 units in 2009, Marcus & Millichap reported. Over the past five years, they averaged 2,200 units. Contact reporter Hubble Smith at firstname.lastname@example.org or 702.383.0491.
Sales Out of Receivership Expected to Increase
Favorable court precedents and evasion of foreclosure spurn multifamily sell-off from court-appointed asset receivers Source: Multifamily Executive
San Diego-based Trigild was named the court-appointed receiver this month for Enclave, a high-end, 1,119-unit multifamily property in Silver Spring, Md., that had seen its appraisal value drop from $284 million in February 2007 to $114 million this July, some $36 million below the outstanding loan held on the property by New York City-based Stellar Management. There is little secret about Trigild’s operations strategy from here: Complete any critical deferred maintenance, stabilize occupancy, and sell the asset, which shouldn’t be hard considering the dealmaking interest in similar Washington, D.C., submarkets. “This is a highly desirable asset offering commuters easy access to Washington, D.C., and Bethesda, Md., and we are optimistic that we can successfully position it for a quick sale and avoid a lengthy, expensive foreclosure,” says Trigild president Bill Hoffman of the 26-acre development. Following Trigild’s sale of Irvine, California-based Bethany Group’s assets out of receivership to Standard Portfolios, interest in receivership sales -which can help lenders avoid the
foreclosure process -- has increased significantly. Part of this is attributed to the moneys that can be saved by avoiding default: In the sale of the Bethany Group’s Arizona portfolio, Hoffman estimates the lender realized a premium of $50 million by avoiding foreclosure. “We have been seeing receiverships increase over the past couple of years, and we are expecting a flood over the next four to five years,” Hoffman says, adding that Trigild now manages 11,000 multifamily units within its 158-property portfolio of apartment, office, restaurant, and hotel assets under receivership. Part of the reason for the uptick in sales out of receivership have been recent court decisions regarding the legality of receiver sales, which some states specifically allow, other states specifically do not, and still other states remain silent on. Bad Loans, Good Assets Indeed, the opportunity to avoid foreclosure on quality assets with
struggling borrowers makes receivership sales attractive. Even if lenders are looking for an exit strategy, receivership sales can result in price premiums by avoiding foreclosure legalities, costly delays, and distressed vacancies. “Receivership sales will be present more so than they have been in the last few years just given the condition of the financial markets,” agrees Jeff Fuller, vice president of acquisitions for Irvine, California-based The Bascom Group, which closed on a 360-unit Class A receivership deal in late August, bringing the Retreat at Canyon Springs Apartments in San Antonio into the firm’s Lone Star state portfolio of 9,173 units across 25 properties. In comparison to Triglid’s Enclave deal, the Retreat at Canyon Springs Apartments is also characterized as a luxury asset in a prime market with improving fundamentals and a lack of supply. “That helped the sales process,” Fuller says. “The senior lender really wanted to stay in longer term on the asset. They liked the property, they liked the market, and they wanted to stay on board.” For the buyer, receiver sales can be logistically more difficult than a straight foreclosure sale as approval of the deal is required from the court, the lender, and in some cases the original borrower. “The purchase process was fine on our deal,” Fuller says. “With a foreclosure you are only dealing with one party and the legalities have all been hammered out, but the transactions are not difficult. It is certainly something we are open to, and any time there is an opportunity like that we are definitely going to pursue it.” 9
ACCESSLASVEGAS October | November 2010
Exclusive: Finance Execs Expect More Distressed Opportunities in 2011 Source: Apartment Finance Today
What's the word on the street? More distressed acquisition opportunities will come to the multifamily market next year, while the dearth of Class A assets trading hands will likely continue. And that's not all: The cap rate compression that characterized much of 2010 isn’t expected to continue, according to a survey of 168 senior-level multifamily finance professionals conducted by Apartment Finance Today magazine this month. The survey also uncovered a growing consensus that the worst of the recession is over. Fewer multifamily firms expect to lay off staff or reduce employee benefits in 2011. What’s more, a growing number of developers will pursue value-add rehabilitations in 2011, a sign that many expect fundamentals to strengthen next year.
Forecasting Deals While the wave of distressed auctions that many expected hasn’t yet materialized, investors are increasingly optimistic that next year will be different. Nearly 62 percent of those surveyed expect more distressed acquisition opportunities to be unearthed in 2011. Many feel that it’s just a matter of time before all of those short-term, interest-only CMBS loans made at the peak of the market finally come due. And balance-sheet lenders can only extend-and-amend for so long -- as banks slowly return to health, they’ll be able to take greater losses as they clear their balance sheets of distressed notes. But as investors line up to capitalize on distress, it’s a different story for core assets. Throughout 2010, Class A assets in strong locations inspired bidding wars so heated that most players walked away shaking their heads at the size of the winning bid. That feeding frenzy will likely continue: More than three-quarters of respondents (78 percent) believe there will be fewer stabilized Class A assets hitting the market next year.
FUTUREFOCUS Meanwhile, in a sign that valuations have reached a sort of equilibrium, half of all respondents expect capitalization rates to remain flat in 2011. Only 23 percent of respondents expect to see cap rates continue to fall next year, compared to 27 percent that expect them to rise next year. Market Upsides In last year’s survey, Atlanta emerged as the top distressed market with the most upside. But this year’s survey shows investors are increasingly pessimistic about Atlanta, as it enters a last-place tie with distressed poster child Las Vegas. But confidence is rising around the prospects of South Florida and Southern California. More than a quarter (27 percent) of respondents think South Florida has the most promise, making it the No. 1 distressed market with the most upside. And prospects for Southern California, which barely beat out Phoenix last year, have also grown: 25 percent cited
Top 5 Distressed Markets with the Most Upside
1) 2) 3) 4) 5)
South Florida Southern California Phoenix Atlanta Las Vegas
Southern California as presenting the most potential long-term growth, an improvement of 9 basis points over last year’s survey. Cost-Cutting Continues Renegotiating vendor contracts and fighting tax judgments continue to be among the most popular cost-cutting strategies employed by firms. More multifamily firms also plan to pass utility costs on to residents and use software to automate business processes than they did last year. A deeper look at the list of cost-cutting measures reflects some encouraging signs. Last year, reducing the development pipeline ranked fourth, but that category drops down to ninth this year. Similarly, headcount reductions were the second-most popular cost-cutting strategy in last year’s survey. This year, staff cuts dropped down to fifth. Note: The survey of 168 senior-level multifamily finance professionals was conducted from August 5 to August 19, 2010. The respondents included senior-level finance staff from merchant developers, owners, managers, and multifamily financiers. Additional results can be seen in the September | October 2010 issue of Apartment Finance Today.
8 Seconds to Make a Good Impression on a Prospective Resident, That’s All You Have Source: Heather Blume, PropertyManager.com
opinion of you and you have to start over again from scratch.
Be exceptional by following these simple rules:
Keep in mind that the following tips don’t just apply to potential residents. It’s also important to make a good first impression when interviewing potential employees.
1) Listen to what your customers (owners and residents) are saying to you.
How to Make a Good Impression Stand to greet your potential new resident when they enter the office. Have a clean, well groomed appearance. Shake their hand with a nice firm handshake while you SMILE. Wear a name tag and introduce yourself. Brush your teeth and make sure your breath stays clean during the day.
Humans are judgmental. Going beyond cultural lines, beyond family, beyond age, and beyond any other conceivable grouping, across the board, humans as a species are judgmental. We learn tolerance at a young age, but tolerance isn’t the same thing as acceptance. The most recent statistic I read on the subject said that when meeting a new person, you have 8 seconds to make a first impression that they will base the rest of their judgments on your character from. 8 Seconds. That’s a very long time if you’re riding a bull. Not so long if you’re meeting a prospective resident. So how does your property management team rate? What does your first impression look like? Now, I’m not asking you what it looks like at optimal performance. What I want to know is what does your 8 seconds look like on a bad day, when you’re stressed out about the budget, move outs, and your boss is crawling up your back? Or how about on a day when the apathy for your current situation is overwhelming? On top of only giving you 8 seconds to make an impression, the human psyche also requires almost 10 interactions of a vastly different nature to change someone’s initial opinion about you. This means that even if the resident rents from you, they could be well in to the 3rd, 4th or 5th month of their lease before they decide that you are not, in fact, a jerk or lazy. And that’s only if every interaction you’ve had up to that point is of a positive nature, otherwise, one bad interaction reinforces their initial
5 Rules of Great Property Management Customer Service Source: Aimee Miller, PropertyManager.com
Have you ever read a website or a company description that says something like …”We pride ourselves on delivering terrible service. Really, great service is expensive and we don’t think it is worth it so instead of great service we will provide pretty adequate to bad service. Thanks for your business.” ... Probably not! Really, we all say the same thing: “We pride ourselves on providing the best service to all of our customers.” Take a moment now and think about how many times you’ve read that on a website, marketing brochure, customer service email. Have you written it too? Hopefully I’m not alone. If you say you deliver great service, is that really enough? Clearly no. The reality is that in today’s world of connectedness exceptional service (exceptional, not “best”) is your number one marketing and sales tool.
All customers aren’t the same. Find the time to ask a few thoughtful questions and customize your response. Not only will you learn something new, your customers will feel more connected and loyal to you. 2) Find opportunities to connect personally and authentically. That can be hard when you have a lot of customers, but you can do it. Think of your communication style, remember and acknowledge an important event, send a handwritten thank-you note, be sure your office staff recognizes a customer when he or she calls the office. 3) Be surprisingly responsive. Of course we all know to respond to issues, questions and complaints -- but this is what everyone (i.e your competitors) does, too. When your customers have to wait, they get cranky and frustrated. Respond within hours -even if it is simply to acknowledge that you received their call and will be getting back to them shortly. 4) Set expectations and then always follow through. Tell your owners when they will receive owner statements and newsletters, then deliver them exactly on that day. Tell them how you will be marketing their properties and then send them some examples. Do what you say you will do, when you say you’ll do it and you will build lots of trust. 5) Identify unique ways to deliver stand-out service. I think this is the most important one on the list because it is a way to rise above your competition. The best place to start is by asking your customers. Conduct a health check with a few customers every month and ask them the one thing you should be doing to keep their business, then find a way to do it!
ACCESSLASVEGAS October | November 2010
Owners Benefitting From Advanced Management Group’s “Advanced NOI Results” Program “Advanced NOI Results: A Better Design for Your Bottom Line” is drawing rave reviews from owners. Advanced Management Group designs strategies focused on owners profitability through efficiency. By creating obtainable benchmarks, goals are set and managers are held accountable for maximizing their resources to achieve the maximum results. Even the most finite areas to improve an owners bottom line are identified and all actions are monitored to ensure success. Advanced Management Group Nevada, LLC, is a real estate management company providing advanced property management, financial and accounting, and asset management services for multi-family properties.
Contact or visit us to find out more about on how to get your property focused on “A Better Design for Your Bottom Line”. You can e-mail Advanced Management Group at email@example.com or contact Bret Holmes at 702.699.9261.
For information, article consideration and featured columns ACCESSLASVEGAS can be contacted at 702.699.9261. The publisher of this newsletter is The Internal Press.
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Access Las Vegas - Newsletter October-November