This posting is from my colleague Matt Wilson, This is a great read. I also included the link to his orignial posting. Thanks to Matt for allowing me to re-post his words.
Matt Wilson | Advisor
Jansen Multifamily Team
Coast | Sperry Van Ness
It truly is better to give than to receive… unless you are an apartment owner. Even owners with the largest of hearts don’t find virtue in concessions, such as “3 months free rent” or “free plasma TV,” decreasing rents and a lack of liquidity in the market.
As the apartment market continues its “slide” (for reasons both real and perceived), the Jansen Multifamily Team is reminded of the classic scene in A Christmas Story when Ralphie “chokes” on Santa’s lap, unable to request the gift he covets; rather, he simply nods “yes” to “a football” as Santa’s crass elves attempt to hastily push Ralphie down the “Santa slide.” In an instant, Ralphie snaps out of his trance, plants his feet into the slide to halt his descent and blurts out, “No! No! I want an Official Red Ryder Carbine-Action Two-Hundred-Shot Range Model Air Rifle!” This is the Jansen Multifamily Team’s “moment on the slide.”
Our 2009 Holiday Wish List:
Increased Liquidity in the Market (particularly from local banks rather than agency lenders)
Over the past year, it was abundantly clear that the only viable lenders in the apartment finance game were government sponsored entities – Fannie, Freddie, and, to a lesser extent, FHA. These lending sources have provided liquidity to would-be apartment buyers, but have not been immune to the increasingly strict underwriting criteria pervasive in the capital markets, for both properties and the borrowers attempting to purchase them. Had it not been for the GSEs, it is safe to say that the number of units sold in 2009 (already the lowest amount since 1976) would have been reduced by at least half. Simply put, leverage drives returns, making finance the most critical component of the apartment investment market. In order for a 2010 rebound to take place, lending must become more accessible to prospective buyers, particularly individual investors and local investment groups. “Accessible financing” must manifest itself in the form of competitive portfolio loans from local banks that understand the fundamentals of their local markets. The Fed has announced it will stop purchasing GSE securities by the end of March 2010, thereby eliminating many of the subsidies that are keeping agency loans competitive. Fannie and Freddie have already projected they will have lower volumes in 2010, and without an appropriate response by local banks to fill the void left by GSE contraction, apartment investments will grind to a screeching halt.
Absorption of New Units
Another crucial element to any recovery will be the absorption of both existing and new units on the market. The rental market is fundamentally governed by the laws of supply and demand, and stability depends on the equilibrium of the two. Puget Sound apartment owners have been contending with an oversupply of units over the past year, spurred by overdevelopment of multifamily units (particularly in core King County markets) and reconversion of failed condo projects to apartments. When supply so drastically outpaces demand, the result is downward pressure on rents and occupancy. The only path to equilibrium – and the sanity of apartment owners – requires filling the existing supply of units, a move that will be possible with the fulfillment of our next wish.
The clearest path to recovery in the apartment rental market, and the economy in general, is job growth. Job growth brings people to the Puget Sound region and provides them with income. Job growth creates demand for all the things an employed population needs, such as housing and durable goods, and is the key to reversing the current market trends of concessions, falling rents and decreasing occupancy.
Bridging of the “CAP Gap”
Aside from the realities of the capital markets, the next largest obstacle to putting a successful transaction together is the “CAP gap” between buyers and sellers. Essentially, this refers to the difference in the conception of property value between buyers and sellers. Many sellers are unwilling to accept the fact that their property values are not what they were in 2007/8 as credit has tightened, converters have gone out of business, and buyers require positive financial leverage, thereby driving up CAP rates. Many buyers, on the other hand, are looking to “steal” properties by using fear and market uncertainty in an attempt to drive CAP rates to levels seen only in Detroit or other markets that lack the Seattle MSA’s strong fundamentals. The “sweet spot” is somewhere in between these two extremes, and closings will not take place until both buyers and sellers can get realistic about what a “market” transaction looks like.
Real estate professionals, be they investors, lenders, or brokers, need to be proactive. In an ever-changing market, proactive professionals will separate themselves from the “herd” through superior education, expertise, strategy, vision and execution. The Puget Sound apartment market is filled with immense opportunity, which is why the Jansen Multifamily Team wishes for lenders to lend, investors to invest, owners to reevaluate their current holdings, and brokers to intelligently advise and educate their clients. Those in the real estate industry who take a proactive approach to tackling market realities will “rise to the top,” while those who take a passive approach to the market are not likely to survive. As a result, the best investors, lenders and brokers in the business will thrive, thereby reestablishing a solid foundation upon which our market can again grow.
Initially, Ralphie’s Red-Ryder holiday wish went unfilled in A Christmas Story. It seemed that all hope was lost for the main character of this holiday classic as St. Nick responded, “You’ll shoot your eye out, kid.” However, when Christmas morning came, Ralphie got his wish. Similarly, our 2009 Holiday Wish List may be nothing more than “wishful thinking” in the short term. Eventually, however, banks will start lending, employers will start hiring, new hires will rent apartments and buyers and sellers will agree on market realities. Most importantly, those real estate investors, lenders and brokers who proactively pushed through the market downturn will be poised to capitalize on the market’s eventual recovery.
The Jansen Multifamily Team wishes you and your families a joyous holiday season and a Happy New Year.
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