Thursday, June 16, 2011

MUH Owners Either Raising Rents Or Offering Incentives

As the old real estate saying goes, its all about "Location, Location, Location."

Two stories published this week regarding apartment vacancies are at polar opposites: One discusses how the housing downturn is a boon for some renters, particularly in hard hit markets of Florida, Las Vegas and Southern California.

There, the Associated Press reports that explosive condominium development and conversions of apartments into condos for sales are finding those units unloaded onto the rental market because developers can't sell them. In some areas of the United States, apartment vacancies are edging up as frustrated sellers instead try to rent out their homes and condus in once red-hot housing markets. This "shadow market" of investor owned homes and condominiums is creating competition for traditional rental markets. In some cases, incentives such as a a free month of rent or upgraded unit fixtures have re-emerged after disappearing several years ago.

Some invstors will take any dollar amount just to get some cash flow. On the downside, many of these same residents are being displaced with distressed owners ultimately are foreclosed upon.
Conversely, MSNBC reported that rents are going up in many markets due to tightening supply of apartment housing. I would throw in that inflation is a factor as well. But simply put, with apartment and rental housing construction halved in recent years and a wave of former homeowners competing for apartment space with "echo boomers" and other renters, conditions have suddenly ripened for owners to raise the rent. Many national apartment operators adjusted their projections recently and expect to be nudging rents up across the nation.

Nationally, rents are expected to rise 5 percent this year and another 5 percent in 2012, according to Greg Willett, vice president of research and analysis at MPF Research in Carrollton, Texas. The trend is not expected to moderate until 2013, when new multifamily housing construction adds to supply and the housing market stabilizes enough to attract new buyers.

For existing owners, if you are in a market with a tight supply, you will likely be edging your rents up over the next few years. For investors looking to buy in these markets where the apartment business has been relatively untouched by the recession, and this includes Central Ohio, however, you will be paying higher prices to invest in multi-unit housing properties. On the other hand, investors who aren't afraid of those markets terribly hard-hit by the economic downturn, and who have deeper pockets to wait out the fiscal rough waters, will continue to be able to pick up bargain rental properties as developers and others cut their losses and dispose of long-empty inventory.

Investor demand for apartment building is heating up (I am seeing it among my investors and with conversations with colleagues and peers). Interestingly, we are seeing inquiries coming from either coast, where investors are realizing the Midwest and so-called "Middle America" provide significant opportunity, either to pick up any available distressed assets or invest in stable, steady growth properties. In fact, sister company Prudential Mortgage Capital last week sold a troubled portfolio of 4,681 apartment units in Western Pennsylvania, Indiana and Ohio to a venture led by Kushner Cos.

Meanwhile, giant lenders Fannie Mae and Freddie Mac are facing potential reforms under pressure from borrowers, advocacy groups, and Congress. Even Congressional leaders who several years ago, despite overwhelming evidence that the two organizations' lending practices were creating a figurative house of cards, resisted changes or oversight to the two iconic lending bodies, are admitting that they made huge mistakes. Now, members of Congress from both sides of the political aisle are pushing for change.

The likely result? Tighter lending standards. In fact we are already seeing a tightening in line with what most traditional lenders have instituted. And with an incredibly heavy supply of homes for sale, as I have written in these pages previously, we may well be raising a generation of renters. Many renters either are choosing never to buy, believe they can't qualify, or have decided to wait to move into home ownership some years down the road after uncertainty about jobs and looming inflation level out.

Bottom line: Investors have choices, many choices, depending on location.

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