Friday, January 11, 2013

What Renters Want

As if how to increase NOI isn’t enough, believe it or not the more aggressive owners of multi-family investment properties continually wrestle with the ever-present question: “What Renters Want.”
Because it can have implications for how to increase NOI (Net Operating Income).
Better titled, “Are You Sick of These Five Apartment Designs?,” trends constantly come and go. Some attract higher paying residents. Others . . . well, not so much.  Several elements are growing in use in today’s apartment communities. If owners don’t feature them in their community, then, good luck attracting new lessees. New residents want the latest whiz-bang. You want new and better residents.
Here is the Top 5 List, according to MHNblog, and my take on each:
-        Stainless Steel Appliances:  They are all the rage and have been for several years. They make kitchens look more professional. Reasons for them to go? All the “chef” shows on cable have residents thinking they want professional-grade kitchens. Everyone wants to be Anthony, or Giada. Likely to stay? Yes. They are striking, and stainless is gender neutral, appealing to all kinds of residents.

-        Granite Countertops: Preeeetttttyyyyy!!!  They look more expensive than other types of countertops (because they are), and they come in various colors. Reasons for them to go? Please refer to earlier “expensive” reference. Have I mentioned they are uber-heavy! There are less costly alternatives, laminates among them, that look like granite. Likely to stay? Yes, but popularity is waning due to cost. AND, its not a deal-breaker for most new residents.

-        Hardwood Flooring:  Way to make an apartment look classy! While few want to beat a rug and most “dustbust” or mop or vacuum. Wood is classic, color neutral and goes with pretty much every décor. Reasons to go? Have you ever had to sit for a long time on hardwood? Not comfortable, and running around with socks doesn’t create enough static to shock a significant other, roommate or annoying sibling. Then there is the cost of hardwood. And there are cheaper laminates that mimic the look. Likely to stay? Yep! If you’ve got ‘em, FLAUNT ‘EM! If building new and can afford it, go for it.

-        Paint:  It’s simple. It’s cheap. Dirty walls? Paint over them simply and cheaply. See the pattern? Reasons to go? Neutral colors are drab. Bright colors can look gaudy.  Bring back wallpaper? Ooohhh… that's a subject for another day. Likely to stay? For rentals, neutral paint will stay. It appeals to every caliber of resident.  Mix with wall decals featuring catchy, impressive sayings to appeal to the intellectual, or folksy (depending on the audience) set. Your mileage may vary.

-        Open Floor Plans:  Doggone those high-profile cooking shows! Everyone fancies themselves a Gordon Ramsey, Paula Dean or Swedish Chef. Entertaining is popular and now EVERYONE wants to be in the kitchen! Reasons to go? Not many, when you think about it. Open floor plans open up small apartment spaces and enable people to watch TV from their living room while they’re slaving over their stainless steel stove whipping up a delightful crème brulee to go with their mac-n-cheese.  Likely to stay? Duh! Here for the duration.

Financial Advisers Becoming Bullish On CRE

Well, DUH!!

Oops, perhaps I should use "business-speak" to comment on the following. Here's the news:

According to the National Association of Real Estate Investment Trusts, investing in commercial real estate turned out to be a profitable move in 2012, and financial advisers see promising opportunities in 2013 as the broad economy continues to recover.
American Realty Capital Properties and Cole Real Estate Investments have enjoyed recent successes in the nontraded REIT space by focusing on triple-net-lease REITs. Other promising areas for investment include multifamily, local shopping centers with grocery store anchors and opportunities to invest in mortgages.
Definitely an intuitive observation on the part of NAREIT! (proper business-speak).
Yeah, no **** Sherlock! (in-the-trenches daily CRE practitioner speak).

Monday, January 7, 2013

SURPRISE: Accounting Rule Proposal Rankling Europeans Too!

Much to my surprise last week, I came across an article from the Financial Times indicating that European business people are very concerned about proposed accounting rules changes -- changes I first warned about back in 2010 when it was first proposed.

Imagine my surprise! From multiple disciplines -- financial planners to corporate accounting specialists and commercial real estate/investment advisers, such as myself -- experts are roundly criticizing the proposed changes.

Why am I shocked? Because in the U.S. this proposal has been universally promoted as bringing the U.S. into line with the way European accounting works. Only the Europeans are asking why this proposal is being foisted upon them.


At issue is an entirely different way of looking at corporate liabilities, under the flimsy guise of protecting investors. The proposal purports to make transparent corporate liabilities, in order for investors to be able to make better decisions on whether they wish to invest in any given publicly held corporation. The impact on corporate real estate, both for owners, and for lessees (particularly publicly held companies) is significant. The most onerous of the requirements states that "options" to renew a lease must be shown as a current liability on the balance sheet (actually this applies to privately held firms also). EVEN IF THE OPTION ISN'T EXERCISED, the stated future rent costs are to be shown as a liability now. Which makes absolutely no sense to even the most accounting illerate folks you explain it to!

I have written on this subject numerous times over the past two years. It made no sense then. It makes even less sense now, considering that the powers that be promoting the change -- the Financial Accounting Standards Board here in the U.S., and the International Accounting Standards Board -- have been, I believe, less than truthful about the needs for these changes.

Now, in a letter to the IASB, the UK's Financial Reporting Council and the Accounting Standards Committee of Germany say they fear problems with the new approach, though their concern is that corporations will abuse the new system somehow. From France, the accounting stand setting body there, the ANC, is also critical of the current reform.

Our British "cousins" use the word "scheme" to refer to a plan. In the U.S. the word technically is definied similarly, but in common use has a more nefarious meaning, more akin to a secret undertaking with the intent to defraud.

With that said, IMHO, knowing now that Europe doesn't like it any more than I do, I would suggest that this scheme to push for worldwide accounting rule changes is bureaucreatic nonsense with seriously doubtful progress for anyone. Opposition to these changes is going to cause significant changes in leasing. I would not be recommending lease options to renew. And this will also cause a stagnation in growth of property values. Values today are often not only based on schedule income, but also the rent bumps and renewal options in place.

So why do this? I'm no conspiracy-type. But except for bureaucrats and others looking to make the system more byzantine, therefore guaranteeing consulting work -- or government jobs -- for life to the watchers, I see no benefit. The argument about "transparency" wore out its welcome a long time ago.

Wednesday, January 2, 2013

Quality Properties Commanding Solid Prices

Rolling "low-balls" at sellers may have been an effective approach between 2008 and early 2011. But in 2012’s environment – at least in rebounding markets – it was counterproductive if you truly wanted to buy.

Today, in most cases, if you trip across a quality investment grade property that someone has decided to sell, you won't get it for dimes on the dollar. Particularly in the multifamily housing sector and geographical areas that have remained strong economically.

I have numerous high-dollar buyers and we cannot find the quality they demand for the dollars they want to spend. What is available often is either overpriced or has so much deferred maintenance that the purchase cost and the cost to upgrade create a scenario where the property doesn't make any sense.

The quality is out there. The buyers are out there. I have never been afraid to aggressively go after a property on pricing, but the "steals" are mostly gone unless you are going after $15,000 single family rental dumps and can still talk owners into giving it to you for $1,200 or so, assuming they are so hard up they have no other choice.