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).

 

 

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.

Huh?

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.

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.

Hotel Chains EXPLOIT Social Media

I've always been a fan of the word "exploit." Others will say it is negative, but in my lexicon it is a very positive word. Sort of like synergy. And similar in a sense.

Synergy takes the best attributes of two items or services, combines them to make something even more powerful. Another name, actually, for heterosis -- an old term from plant and animal agriculture.

But I digress ....

Exploiting a problem is coming up with a solution that no one has thought of. Exploiting new technology is forward thinking, progress (no, this isn't political) in the application of new tools to solve problems. Exploiting new ideas? It simply means you got there first.

So the hotel industry recently has latched onto social media in a BIG way. So much so, in fact, that a number of chains are not using their websites so much to push lodging specials. Oh sure, they still promote their many locations regionally, nationally or globally, using it as a central communications portal.

But ... the real action is now found on Facebook and Twitter. Hotels are pushing special deals, promotions, packages with airfare and auto rental, and "limited-window-of-opportunity-to-book" getaways via these tools. Think auto rental, when you book over the phone or online and a CSR or online window informs you, "hey, because you are booking now, you get a free upgrade to a larger car!" Specials just come and go depending on the time.

Hospitality groups are using social media to offer various incentives -- offers that constantly change and come and go -- to build excitement among their customers, with the goal being to entice repeat lodging stays.

For the more technologically savvy, often higher-end hotel chains, "Liking" one of their Facebook sites may get you entered into special drawings for free night's lodging, or t-shirts, or discounts. "Share" or "Retweet" a site or offer on Facebook or Twitter and you may get more. Viral marketing on a global scale.

Business Insider notes that a number of forward-looking hotel groups are linking their intimate knowledge of what existing customers like with bleeding-edge tech. Says one such operator, "Web strategy is only a part of what makes the company industry leaders. First and foremost, we have a keen understanding of what our customers like because we focus on so many different aspects and touch points on service. We firmly believe that there's nothing easier than to keep an existing customer relationship than building a new one."

Lessons many businesses can use. As well as investors and managers of, say, in multifamily projects. In fact, savvy multi-unit housing operators are using Twitter and Facebook to promote community events, help with resident retention, promote special events -- all of which encourage a sense of excitement and opportunity.

For operators of hotels and apartment communities, that spells repeat visits, and lease renewals, respectively.

Commercial Real Estate Is Our Economy's Foundation

There are concerns at the national level that in the zeal to raise revenue, the first place certain factions in Washington always look is to increase taxes or eliminate tax deductions. "Loopholes," as the uninformed will often call them.

But right now, as capital continues to only dribble in for availability for commercial real estate acquisitions, increasingly there are calls for Congress to "do something." Frankly, when that happens, that is one damn scary proposition. Because, often, in that same zeal to be "seen" as "doing something," real damage is done, with scads of unforseen unintended consequences.

IMHO, banks are -- largely -- being unfairly blamed for the slow trickle of capital available for CRE acquisition. The same reasons that businesses aren't hiring (do NOT believe the stats coming out of the Department of Labor; they are revised downward every month after an initial splash) is because regulations coming out of Washington DC are a moving target.

No business can efficiently create a business plan for a 24 month cycle because of the byzantine number -- and nature -- of new regs that continue to be piled on. Its no wonder private enterprise is stagnant. Corporate officers -- who have a legal, fiduciary duty to their shareholders (many of which are unions, pension funds, public employee retirement funds, mutual funds, individual investors, etc.) -- are unwilling to take risk to grow or expand their businesses because they may be penalized next month, or next year, for that same growth. For making acceptable business decisions today that might be viewed by overzealous bureaucrats, who frequently don't understand capitalism let alone know how to spell it, as "unfair."

But in our commercial real estate world, there need to be concerted efforts to significantly increase the flow of capital. Why? Commercial Real Estate is the foundation upon which much, if not all, of our economy rests. How, you ask? Consider the following:
- Without land development, there are no new housing developments to employ construction workers, architects and drywallers.
- Without land development, there are no new retail, office or industrial buildings being built -- all of which employee people in new construction, but later, in product distribution, business, and consumer retail opportunities.
- Without office, industrial, multifamily and retail development, it is more difficult for businesses and individuals to locate in areas convenient for their work or family needs.
- Without commercial real estate investors and business entities having access to the capital to fund acquisitions, it is more difficult for businesses to grow and expand.....

Shall I go on?
A part of me says Washington needs to do something. And yet, I shudder at the thought of those very words. What Washington really needs to do -- and this is what separates statesmen from politicians -- is to GET OUT OF THE WAY. Knock off the senseless nanny-state reg passage.

Only then will we see a loosening of capital, and natural, market-driven stimulus.

My two cents ....

Tax Court Blesses Tax-Free Technique For Parents To Transfer Family Business, Wealth To Their Children

Paul Caron, a law professor at the University of Cincinnati who edits the TaxProf Blog, has a great piece out this week. Its not real estate related, but concerns passing wealth onto heirs. And that often includes commercial real estate.

Specifically, Caron notes that the U.S. Tax Court has essentially blessed a technique for parents to transfer a closely held business or assets to their children with a mnimum of taxes of  complications. The ruling in the case, Wandry v Commissioner, says Caron, is stirring up excitement among experts.

In his blog, he quotes David Kautter, a director of American University's Kogod Tax Center, as saying the ruling is a "landmark decision, becuase it allows tax-free ownership transfers from one generation with certaintyand in an orderly manner.

Currently, our system imposes a gift tax up to 35 percent when taxpayers give assets away, with exceptions. In the Wandry case, Dean and Joanne Wandry, a Colorado couple, each gave units in a family owned limited liability company worth $1.099 million to their heirs in 2004. To avoid paying tas, they specified the gifts should equal the dollar value of their exemtions. At the time, the lifetime exemption was $1 million and the annual exclusion $11,000.

There was a gift. And their was a professional appraisal. The Internal Revenue Service challenged the appraisal after the gift. In the Wandry case, the value rose approximately 20 percent above the exemption after the gift.

The IRS lost its case because the judge held the couple intended to make a gift equal to their exemptions, so any excess was never actually given by then. And no tax was due.

I make no claims, real or implied, as I am neither a tax adviser nor an attorney. But as a commercial real estate practitioner, I find this to be a fascinating and insightful article, especially for those business owners and wealthy families with family limited partnersships, who want to pass wealth or that closely held family business to their heirs.

Read it and pass it on.