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Current Market Conditions
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Apartment Buildings as Investment Property
In general, rental property is better positioned for this downturn than most other properties.
Why Do It
According
to the National Multi Family Council, U.S. apartments have provided the
highest risk-adjusted long-term returns of all real estate asset
classes and with less volatility.
1.
Because investment income property is a cash flow business it has
benchmarks and some standardized methods for determining value. Cash
flow provides the investor with an objective evaluation tool.
2.
Leases are generally one year, rental income makes relatively quicker
adjustments than long term AAA leases or larger shopping malls etc.
Apartment buildings have 12-14 month development cycles and can react
in a timely fashion to the needs of the market place.
3. Apartments
have a lower cost of capital and availability of debt capital thanks to
Fannie Mae and Freddie Mac. Its a matter of policy.
4. Demographic
trends are favorable. As a result, demand for rental housing in the
U.S. is expanding at the strongest pace since the mid-1980s. 3 million
new renter households were created as a result of new household
formation, declining rate of home ownership, foreclosures bringing new
renters to market and the
echo boomers coming of age
5. The cost
of gas and the time it takes to live in suburban/exurban areas is
taxing and many people are moving back to city hubs for the convenience.
Todays Market
Things
are tough in commercial real estate. Vacancy rates are up and rent
rates are declining. Because income property is evaluated using cash
flow, values are declining and are likely to continue to do so for
awhile.
Its not likely we will see the free fall that home
prices have experienced, in part because investors are not emotionally
driven buyers. So development didnt get out of whack and there wasn't
as much of a bubble. Reis Inc. a third-party commercial real estate
data provider, notes apartments will continue to be the beneficiaries
of housing's ills until "expectations of price appreciation" re-emerge
with stabilization of the housing market. Vacancy rates may rise and
rent rates may drop, but the crashing collapse we've seen in the
housing market is not likely.
Cap rates
have already adjusted to lower cash flow and are now at 2004 levels.
Attractive evaluations are beginning to create demand. The banks are
not helpful, but Fannie and Freddie have stepped up and mortgage
financing liquidity is available. The apartment market is viable, even
in times like these. The national Multi Housing Council
points out that "relative to other investment classes such as
industrial, office or retail, apartments translate 83% of NOI into cash
flow while other property types range between 64% and 74%.".
Higher Vacancies and Lower Rent Rates
The Renter Demographic - Who Are They
1.
Echo boomers--the children of baby boomers are now driving the rental
market. They make up a third of the population and are a significant
segment of the renter population. This is a group of younger adults
that grew up on the internet, not television. They are wired,
multi-cultural, and hold more traditional values than many of their
parents. The largest generation of young people since the '60s is
beginning to come of age. The owner that understands this demographic
will rent smarter and faster.
2. Empty Nesters: There's also a
robust apartment market for those over the age of 60 who are trading
large suburban homes and yards for an apartment within walking distance
to shops and entertainment.
Create Your Value Proposition
Apartments
themselves are changing. If you want to rent faster, you will need to
understand what the new renter values and incorporate new design
elements and amenities to make them more desirable.
Some ideas
1.
If you have some outdoor space, consider a community garden. Fresh
herbs and flowers go a long way towards making apartment living fun
experience. Give tenants a space for some communtiy involvement.
2.
Consider converting unused space into a small gym. Wall off a portion
of a basement area, add a few Nautilas machines, some weights and
mirrors and you can turn an underutilized area into a real draw.
3. The convenience of washer/dryers and dishwashers is really appreciated, echo boomers are busy.
4. Make units cable ready and offer them as pre-wired integrated telephone, cable TV and high-speed Internet service ready
5. Add Water purification systems and programmable thermostats to all units
6.
Install a public internet for the building and create a blog or twitter
account for tenants to communicate. Give tenants the tools to create a
sense of community.
REsourced from www.yourpropertypath.com
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