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OMAHA MSA Multi-Family

MARKET REPORT First Half 2011 Summary Prepared by: Eric Renner Associate Vice President

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


Omaha: An Illustration of Stability By: Eric Renner, World Group Commercial Real Estate

Omaha Leading the Way Omaha is a mid-sized Midwestern city that requires only a small amount of bounce-back from the economic recession. As Omaha looks into the future we realize that a strong state-wide agricultural economy and a stable workforce aids in its ability to withstand the recession and recovery better than most. Five Fortune 500 companies maintain their headquarters in Omaha. The Metro boasts a population of over 1.2 million people within a 60 minute drive. It continues to garner national attention and was recently named No. 1 on Kiplinger’s “10 Best Value Cities for 2011.” According to Kiplinger: “A revamped downtown and waterfront area has helped boost the economy and attract a fresh generation of entrepreneurs to Omaha. New businesses such as PayPal have moved to the area to take advantage of ubiquitous, cheap broadband access and Omaha’s vaunted Midwestern work ethic.”

According to the Greater Omaha Chamber of Commerce, Omaha’s unemployment rate is hovering around 4.6 percent - well below the national average of 9.2 percent. Omaha mirrors the current national trend of people leasing rather than owning a home. Relatively low unemployment, solid job growth, and a strong market-wide occupancy rate all bode well for Omaha’s multi-family market for 2011 and beyond. Omaha’s multi-family occupancy, according to IREM, checked in at robust 95 percent in the spring of 2011. Meanwhile, new building permits year-to-date for 2011 have totaled an insignificant 118 units, compared to more than 1,000 units in 2006 and 2008. The lack of new permits has clearly had a favorable impact on occupancy rates and rents in existing product. Nationwide, apartment valuations have taken the lead in the national commercial real estate recovery, and Omaha likely will post notable occupancy and rent gains over the next year. High Demand for Product Year-to-date sales of investment-grade assets in the Omaha market have been limited as only one multifamily complex over 100 units traded. Tiburon Apartments, a 120-unit, Class B apartment complex,

sold in June 2011 for $8 million ($66,700 per unit). This distressed asset was under bankruptcy protection but was still able to close at a market per unit cost. This is a sign of the strength of the Omaha multi-family investment market as investors continue to search for multi-family opportunities, and demand remains high for quality investment-grade product. Omaha Metro apartment complexes with less than 100 units have traded more actively than larger properties. Class B and C apartment communities between 20 and 100 units typically are appealing to a wider range of local buyers as they represent an opportunity for investors to get into the market at a lower total deal value point, and for $30,000-50,000 per unit. Expect Class B and C owners to continue to contemplate selling while multi-family lending rates remain favorable. World Group and Seldin Company World Group and its parent company Seldin Company are able to leverage the management and leasing power of more than 9,200 multi-family units in the Midwest, thus providing lower expense-per-unit ratios and quicker lease up of available apartments. While the availability of Class A product is low, we continue to work with a number of highly qualified investors with an appetite to acquire additional investment-grade multi-family assets in the Omaha Metro as well as Class B apartment communities under 100 units. These buyers understand and appreciate the stable yields, relatively low per-unit costs, the improved capitalization rates associated with the Omaha multi-family market, and are ready to act now while interest rates and loan terms remain favorable. Omaha: An Illustration of Stability Report Prepared by Eric Renner World Group Commercial Real Estate Associate Vice President 780 North 114th Street Omaha, NE 68154 erenner@worldgroupllc.com (402) 697-8899

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


The Mustoe Appraisers’ Perspective By: Christopher M. A. Mustoe, C. Mustoe Appraisals

High Demand for Quality Product

More People are Leasing As we press forward, the multi-family market is beginning to show much of what had been anticipated. The single-family housing market, although continuing to march forward, albeit at a significantly reduce rate of previous years, is having a minimal effect on the multi-family market. In the mid part of the decade the push seemed to be “buy a house with a payment no more than you were paying in rent”. Although there is a selection of homes in the market which this is true, and will likely always be true, the uncertainty has led what would be the new generation of home buyers to one, be sure they are financially healthy to be able to purchase a home, and two be comfortable that where they might be buying will not see an erosion of their equity put into purchasing the home. This together with the influx of “former” homeowners, which are now renters, has buoyed the demand for apartments, over that of the anticipated normal growth in demand. The Omaha MSA has been experiencing population increases, some expansion of employment and has continually had an unemployment rate, which has been well below the national average. May 2011 figures were 9.1% nationally and 4.4% for the Omaha MSA.

Sales activity is slow, and it is not for a lack of buyers. The simple mechanics lie in the economics. If a seller of a project needs to reinvest the proceeds in a manner in which a “similar” return is realized, to that which they are already receiving, (certainly it seems in real estate anyway), it is difficult if not impossible, without “reinvesting” back into “multi-family”. The residual seems to be, why sell one multi-family property to enter into the investment of a similar property, having introduced a level of risk into the transaction. There does not seem to be another “market wide” sector of real estate investment, which can consistently beat out multi-family. Of course there are several reasons to which an investor or group may wish to sell without needing or wanting a reinvestment of the proceeds. The demand for multi-family, together with the level of interest rates, has continued to put downward pressure on capitalization rates. Although there is a lack of sales in the local market, a national survey, PwC Real Estate Investor Survey, provides a “snapshot” by quarter from 2009 to the second quarter of 2011.

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


Investor Survey - National - Apartments Change Back from Current Quarter Low

High

Average

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

1st

3.80%

9.50%

6.88%

-

-

-

-

2

5.50%

9.50%

7.49%

0.61%

-

-

-

3

5.75%

10.00%

7.84%

0.35%

0.96%

-

-

4

5.75%

11.00%

8.03%

0.19%

0.54%

1.15%

-

1

5.00%

11.00%

7.85%

-0.18%

0.01%

0.36%

0.97%

2

5.00%

11.00%

7.68%

-0.17%

-0.35%

-0.16%

0.19%

rd

3

4.50%

11.00%

7.12%

-0.56%

-0.73%

-0.91%

-0.72%

4th

4.25%

10.00%

6.51%

-0.61%

-1.17%

-1.34%

-1.52%

1

4.00%

10.00%

6.29%

-0.22%

-0.83%

-1.39%

-1.56%

2

4.00%

10.00%

6.10%

-0.19%

-0.41%

-1.02%

-1.58%

Quarter 2009

nd rd th

2010

st nd

Source: PwC Real Estate Investor Survey

2011

st nd

IREM Occupancy-Year

Source: PwC Real Estate Investor Survey

Spring

Fall

2010

93%

95%

2009

92%

93%

2008

93%

93%

2007

93%

93%

2006

93%

93%

2005

94%

94%

2004

92%

92%

2003

93%

93%

2002

93%

93%

2001

92%

94%

2000

94%

93%

There have found to be several sub-markets, i.e. downtown, midtown, etc. where occupancy rates have been extraordinarily high, even to the point where some projects are indicating they have wait lists for certain types of units.

Occupancy Remains Stable Occupancy, from the last published IREM (Institute of Real Estate Management) study for the Omaha area provided an aggregate vacancy rate of 5%. This is a slight improvement over the last survey, and stronger than has been reported over the last ten years. The Spring 2011 survey should be available soon, and it is anticipated the occupancy levels could be even slightly higher.

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


Permit activity, is continuing at near historic lows for the market.

Multi-Family Building Permits* County

Source: Omaha Chamber of Commerce - Greater Omaha Indicators *Permits filed through May 2011

Douglas

Sarpy

Pottawattamie

Three County Area

Year

#

Units

#

Units

#

Units

Total Units

YTD**

2011

9

118

-

-

-

-

118

Total

2010

23

380

11

304

-

-

684

Total

2009

13

241

2

39

2

4

284

Total

2008

43

1,135

6

240

2

4

1,379

Total

2007

41

712

7

316

10

256

1,284

Total

2006

115

1,032

23

132

23

122

1,286

Total

2005

58

676

20

332

6

45

1,053

Total

2004

28

328

23

420

1

2

750

Seven Year Totals (2004-2010)

321

4,504

92

1,783

44

433

6,720

Average of Last Seven Years (2004-2010)

46

643

13

255

6

62

960

(23)

(525)

(2)

49

(6)

(62)

(276)

-50%

-82%

-16%

-19%

-100%

-100%

-29%

Last Year (2010) Compared to Average of Last Seven Years

Requests for New Permits are Low The number of permits for new multi-family units is low, but the financial markets have settled some, to where financing is available for some new construction. There will be an increase of new units constructed in the coming years, but does not appear it will be detrimental to the current market. In summary, lower permit activity as an aggregate number, demand for the purchase of units, higher occupancies than have been seen by some in recent years, the market is considered to be good. Rents appear to be increasing together with most expenses being kept “in-line”.

The market is anticipated to “stay strong” over the next couple of years and certainly possibly longer depending on some of the “economics” which will play out in the near future. The Mustoe Appraisers’ Perspective Report Prepared by Chris Mustoe C. Mustoe Appraisals 1011 South 78th Street Omaha, Nebraska 68114 chris@mustoe.com (402) 660-5616

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


NorthMarq Capital Lenders’ Perspective By: John T. Reed, NorthMarq Capital

Rally in U.S. Treasury Securities Despite a temporary fix regarding the U.S. debt ceiling, lingering doubts about the U.S. and Global economies have caused investors to flock to safehaven investments. The tremendous rally in the U.S. Treasury market has sent the benchmark Ten-Year Treasury Yield to 2.20%, which generally improved mortgage rates by 0.50%. Fannie Mae and Freddie Mac Active

Fannie and Freddie- Fixed Rates Stable Class A & B Multi-Family TERM

LTV

Rates

Rates

10 Years

80%

4.55%-

4.85%

7 Years

80%

4.15%-

4.45%

Freddie Mac Capped Arm 10 Years

80%

4.20%-

4.50%

7 Years

75%

3.25%-

3.55%

Agency (Fannie Mae and Freddie Mac) rates are now in the range of historical lows at 4.55% for a full leverage (80% LTV) 10-year fixed rate mortgage. Freddie Mac is 62% ahead of 2010 production as of June, with $12.5B funded. Fannie Mae 2011 production is also reported to be ahead of 2010. Though Agency production is up, discussions indicate that they have lost overall market share to life insurance companies and conduits. Life Companies have Increased Activity

INDEX RATES

YIELD

30-Day LIBOR

0.19%

Prime

3.25%

Life Insurance companies have been concentrating on more conservative Class A multifamily mortgages, in the 65% to 70% LTV range. They are winning this business based on outstanding pricing and the ability to lock rate immediately, versus a month or more for most lenders.

Portfolio Lenders TERM

LTV

Rates

Rates

5 Years

75%

4.00%-

5.00%

7 Years

70%

4.25%-

5.25%

10 Years

70%

4.25%+

5.50%%

15 Years

70%

4.75%+

Fed Funds Rate

0 to 0.25%

5-Year Treasury

0.92%

7-Year Treasury

1.50%

10-Year Treasury

2.17% Source: Fannie Mae and Freddie Mac

CMBS Markets A number of Conduits that had previously closedup shop were reconstituted in 2011. Conduits had a good YTD 2011, and successfully focused on lower quality multifamily deals that Agencies or Life Companies will not consider. The CMBS market was hammered in June and the current environment for securitizations is dicey. Spreads have increased 100 bps since June and 10-year pricing today is approximately 5.80%, or 3.00% over the 10-year Swap at 2.80%. Conduits have been able to obtain 75% max leverage on multifamily financing. Multifamily owners should be aware of some significant deal points

that can impact a Conduit Loan. A locked interest rate is typically subject to a Material Adverse Change (MAC) clause that permits the lender to adjust the locked rate to market. Typically, it takes a substantive correction in the CMBS market for a lender to use this clause. A rate lock deposit, typically 2% of the loan amount, is subject to a mark to market margin call on the Lender’s Swap hedge. For example, a Lender may require an additional .50% deposit on a .15% decrease in the 10-year Swap. Finally, conduit legal fees will be approximately $30,000, which is about twice the typical legal expense for other lenders.

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


HUD Financing Attractive HUD rates continue to be outstanding, in the low 4% for 223(f) (35-year fully amortizing note) refinances, and production continues to be tremendous. In addition to outstanding rates, huge HUD volumes were driven by a 3-year waiver permitting owners with recently completed properties to obtain HUD financing. This waiver is set to expire February 17, 2012 and the industry is uncertain whether it will be renewed for another year. Certainly, HUD refinances can take the better part of a year to close, which limits the effectiveness of this execution.

NorthMarq Capital Lenders’ Perspective Report Prepared by John Reed NorthMarq Capital SVP, Senior Director 10040 Regency Circle, Suite 345 Omaha, NE 68114 jreed@northmarq.com (402) 343-0570

As always, our goal is to be your resource regarding commercial real estate debt and equity. Please contact us at the Omaha office as you have any questions.

780 North 114th Street • Omaha, NE 68154 • 402.697.8899 • worldgroupllc.com Information furnished is from sources deemed reliable but not guaranteed by us and is subject to change in price, corrections, errors and omissions, prior sales or withdrawal without notice.


Multi-Family Market Report - First Half 2011 Summary