Archive for the ‘multifamily’ Category

Multifamily Appreciation: Finding the Baseline

July 16, 2015 Leave a comment

Multifamily Appreciation: Finding the Baseline

How do we forecast or project real estate appreciation levels and identify a baseline data point? Is there a measure that can provide quantitative authority on the subject?

Housing and multifamily appreciation has returned with upward spikes.  All markets are not equal, of course, yet some have seen double-digit price increases and apparent strong support for believing this rate of increasing value is the norm. Yet for those of us that have lived through the recent cycle we realize that what comes up can go down.

One cause of the recent run up in home prices  is years of housing construction levels below those necessary to maintain pace with population increases.  As the pendulum swings some markets may experience over-building, or an over-supply, but this will be the exception as many markets are enjoying a rebound in new construction that is warranted.

What gauge can we use to measures future appreciation?

Setting aside construction levels what gauge can we use to measures future appreciation?  Job growth and personal income growth.

Like appreciation, job growth is uneven; some markets experience increases in jobs while other markets lose jobs. Probability dictates that appreciation levels are going to be higher in markets that are experiencing job growth.

Long-term, however, there is no better predictor of real property appreciation than income growth.  Note the emphasis on long-term.  Select a market, then begin to segregate it by income.  Then over-lay income growth. The resulting analysis will present a high degree of correlation between property appreciation and increases in personal income.

Two categories that will damper appreciation is increases in interest rates and mortgage under-writing standards. Therein lies the tug-of-war on price.  Prices shrink as interest rates rise, prices rise with personal income. The saga continues…

by John Wilhoit Jr. on


Categories: multifamily, Uncategorized

Houston’s apartment boom won’t last forever

June 16, 2015 Leave a comment

Houston apartment rental rates rose to an all-time high in 2014, but experts predict a slowdown in the multifamily market this year.

The Bayou City saw strong rent growth since 2009, when apartment construction and rental rates fell amid the Great Recession. Average monthly rents grew from $721 in 2009 to $923 in 2014, according to data from Apartment Data Services and CBRE Research released this week.

Last year, apartment rental rate growth hit 8.1 percent, a record high for Houston, according to CBRE. The international commercial real estate firm attributed the rental growth to Houston’s rapid population and job growth, which has boosted occupancy rates well above 90 percent, and a flood of new luxury apartments, which can charge a higher premium for upscale amenities.

Although apartment rents showed no signs of slowing down earlier this year, this multifamily boom isn’t expected to last, according to industry experts. Apartment analysts, brokers and developers predict Houston’s apartment boom will cool down this year, amid low oil prices and concerns about overbuilding.

“We’re at a time when certainly there will be no rental growth,” said Marvy Finger, president and CEO of The Finger Cos., a longtime Houston developer. “It’s about how much contraction will there be?”

In recent months, several Houston-area apartments have ramped up their marketing efforts, offering rent concessions, referral bonuses and other incentives to drum up leasing and occupancy rates. Class A rents are expected to flatten or dip slightly while Class B and C rents may still have room to grow, said Bruce McClenny, president of Houston-based Apartment Data Services Inc.

On the construction side, some developers have stalled their projects as financing for new projects dried up. The oil slump has claimed an estimated 40 to 70 proposed apartment projects, said Pat Duffy, president of Colliers International’s Houston office. As a result, new apartment construction is estimated to fall by about a quarter this year, according to CMD Group, an Atlanta-based construction industry research firm.

Developers differ on how the oil slump and influx of new apartments will ultimately affect Houston’s multifamily market this year. Some developers, like Finger, paint a dire picture, describing the market in a “spiral down.” Others, like Scot Davis of Trammell Crow Residential, feel that while developers are keeping a wary eye on oil prices, they’re not overly concerned about it and are pressing forward.

Most however agree that the slowdown in apartment construction and rent growth will give the frenzied Houston apartment industry a much needed “correction.”

“It’s creating a pause,” said Ryan Epstein, executive vice president of CBRE Houston’s multifamily capital markets group, in an interview last month. “We needed something to slow us down and give us a chance to catch our breath.”

Paul Takahashi covers residential and multifamily commercial real estate for the Houston Business Journal.

Dear New Tenant

May 27, 2015 Leave a comment

Dear New Tenant…


You could just hand your new tenants the keys, but it’s a good idea to put together a welcome kit to help them get settled in. Your locality may also require you to provide them with information about the landlord-tenant relationship and how housing disputes are addressed.
Getting Ready to Move In
Give your tenants the numbers they need to contact service providers to have utilities, telephone, and cable turned on. Let them know how to schedule their move in date and if there are any restrictions on how or when to reserve the elevator. If you require a certificate of insurance from their moving company, let them know the information needed: the amount of coverage, the names of the additional insured, and where the certificate should be sent.
You may have discussed your  policies with the tenants when they looked at the property before signing the lease, but chances are they won’t remember them. Putting the rules in writing means there won’t be any misunderstanding and will help protect you if there’s any dispute.
Garbage and Recycling
Let the new tenant know how you handles garbage and recycling. The rules vary from one location to the next, and every property manager has their own approach.
What happens if a tenant loses their key or is locked out? Whether you provide emergency access or the tenant needs to call a locksmith, let them know how to obtain access when they are locked out. Also let tenants know if they are required to provide keys to you when they change the locks or if there is a limit on the number of keys allowed.
Laundry Facilities
If you manage a building and it has shared laundry facilities, let your tenants know how the machines operate, who to call if there is a problem, and the hours the laundry room is open.
Let tenants know if packages will be held for them, how long they will be held, and how they should claim them.
Common Spaces
Specify the hours and any regulations for using the pool, gym, and similar facilities that may be available to the tenants, and whether these amenities are restricted to residents or can be shared with their guests. If you have facilities like a party room or barbecue grills, let the new tenants know how to reserve them.
While tenants have a right to privacy, you have a right to access the rental to make necessary repairs, show the property to prospective tenants when the lease is ending, or in case of emergency. Let tenants know the circumstances in which you’ll need access and how you’ll inform them you were in their home.
Repairs and maintenance
Let tenants know how to report problems with the home or on the property, and how to request repairs.
Will you provide a reminder each month, or are tenants expected to submit payment without prompting? Do you take credit cards, checks, or cash? Tell your tenants where, when, and how rent payments are to be made.
Add other topics to your welcome pack depending on your location, your property’s features, and your building’s policies. Help your new renters settle in easily and happily, and you’ll increase the chances of turning them into long-term tenants.

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Multifamily Acquisitions: How to Measure a Winning Purchase

April 26, 2015 Leave a comment

Multifamily Acquisitions: How to Measure a Winning Purchase

by John Wilhoit Jr. on December 2, 2014

How do buyers measure their purchase? How do they know if they have a winner? Almost any measure requires the use of a timeline.  Buying a deal for a $1 and selling it for $2 requires knowing when the dollar was invested and the hold time to determine yield.  The dollar invested may have additional dollars added during the hold time. The timing of these additional dollars is also required to determine yield.

Everyone has a different measuring stick when it comes to defining a winning acquisition.  Depending on what side of the coin you represent, just the fact that a deal closed means many people were paid for their good efforts; appraisers, mortgage bankers, legal professionals.  That’s fine as they all represent pieces on the chess board of an acquisition.

Then there is the buyer.  This person or entity has just signed on for an extended relationship with the asset. For many, their relationship with the asset ends on closing day; for the buyer their relationship is just beginning.

And you cannot just “figure” like the old farmer that “figured” if he sold a crop for double the costs then he must be making money. Costs include more than labor, material and overhead. There is cost of capital and opportunity cost to take into consideration.

A tried and true formula for measuring yield is to predetermine your risk premium.  For some investors this baseline is cash the yield.  This seldom plays out well as this is a comparison of apples to oranges (attempting to compare yield on a liquid asset versus an hard asset). The risk premium curve requires a comparison of like assets.

Here are some methods, some numerical, to measure a winning purchase.  All require knowing the invested dollars and timeline to determine outcomes.

Land value.  Too many people, when looking at income producing assets, fail to consider the land value as a stand-alone asset. Granted, the valuation of income property is predicated on income.  However, land value can sometimes outstrip income production based on the highest and best use for the underlying land.  Just a point to ponder. Consider the strawberry farms across the street from Disneyland.  This from the Los Angeles Times, August 16, 1998:

The Walt Disney Company announces it has acquired an option to buy the last large development site in the resort district of Anaheim- a 52.5 acre strawberry farm that the  Fujishige family has refused to sell for decades. Several real estate experts speculate the land will costs Disney from $65-78 million dollars.

Long-term value.  We recognize real estate as a store of value. While prices do not always go up, they seldom go to zero. Real estate is also a hard asset, one that represents a physical plant that can produce income. This separates it from other stores of value like gold and diamonds…and we like income!

Occupancy and historic occupancy. A well occupied development is perceived to have good value.  Historic occupancy is a factor in the decision-making process. More importantly is current market dynamics that convey going-forward market strength and occupancy potential.

Relative NOI.  Relative here is just another word for guess.  It’s ok to perform that back-of-the-envelope analysis for a minute, but this should give way to empirical number crunching long before an offer is on the table.  When NOI is rising there is a presumption that value is rising. This form of thinking precludes performance of quality due diligence. Use  actual, projected and forecast numbers. Yes, these are estimates, but estimates built on quality research.

Yield – IRR and cash-on-cash. Ah- now we have some hard and fast numbers to capture. . These two measures, while separate and distinct from each other, provide a number from which to compare other investments alternatives. To determine each of these read Frank Gallinelli’s book “What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures“.

Upside potential. Penciling upside potential has as many outcomes as the people doing the penciling. And “value” is calculated in so many different ways based on the experience and expertise of the person completing this determination. Here is a basic rule of thumb for determining upside potential:

  1. Compare cost per square foot (acquisition price) to current market price per square foot.
  2. Add costs to redevelop to the acquisition price.
  3.  Compare total landing costs per square foot (acquisition price plus redevelopment expenses) to current market price.
  4. Determine percentage gain in value. If this number is less than 20%, depending redevelopment costs, the risk is out of line with the potential profit margin. A lower acquisition price is necessary to compensate for this risk.

The moral to this story is that there are several methods of determining value and gain on sale. As a buyer, your job is to select those methods that best represent an honest framework to capture the output yield for investors.  There is no glory in producing inaccurate information as if the yield is sub-par one would think your objective is to not repeat this behavior and when you find a winning formula- repeat often.  You have to study the details to be able to tell the difference.

This post is intended to spark your thinking on the topic.  Please add your comments and suggestions. I am always willing to update articles with thoughts, suggestions and new ideas from our loyal readers.

Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.

For 50+ hours of property management audio training, 3 books and live weekly leadership academy–surf here,

About This Blog:

Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel.

Categories: multifamily

Vacancies up, Rents Moderate, but 2015 still Looks Solid for Multifamily

April 2, 2015 Leave a comment

The multifamily market outperformed many predictions in 2014; vacancy levels, despite a flood of new properties, declined by 10 basis points from 2013 to a 13-year low of 4.2 percent. Revenue per unit rose, continuing the pattern that has led to a 20 percent increase over the last five years.

Freddie Mac’s economists are predicting that, while easing a bit from 2014, this year will be another strong one for the sector.  Its 2015 Multifamily Outlook projects that demand, driven by the millennial generation, will remain strong but construction of units in buildings with five or more will continue to trend upward so vacancies will rise.

Supply, they say, could actually outpace demand this year and the vacancy rate will probably rise by 60 basis points to 4.8 percent by year-end.  This however is still below the historic average of 5.4 percent.  This negative is tempered by an unknown; how much pend-up demand will be unleashed as households form that would have been formed earlier were it not for the recession.

Adding to the favorable outlook is the overall economy which is expected to grow 3 percent this year and an unemployment rate that is closing in on the Federal Reserve’s definition of full employment.  The later should translate into rising wages which in turn should encourage more household formation and increasing demand for rentals.

Other factors that could drive the multifamily market in one direction of the other is how the price of oil will impact employment in energy-dependent economies and the trajectory of interest rates.

Completions of multi-family units are expected to surpass their long-run average this year and remain above average for several more years while at the same time demand, due to favorable demographic trends and expansion of the labor market, will remain strong and result in continued rent growth this year driven by the coming of age of peak number of millennials which should continue through 2023.

There is considerable lag between starts and completions of multi-family housing.  In 2014 completions increased by about 67,000 units or 36 percent year-over-year to a total of 251,000 units.  This was 18,000 below the long-run average from 1995-2007.  The pace of construction is expected to slow but permits are still increasing so starts and completions will continue to increase for several more years.

Vacancy rates will not only rise nationally but in most Metropolitan Statistical Areas (MSAs) as well as new construction comes on line and rents are expected to respond accordingly.  While growth will moderate from 2014, rents will still rise by 3.1 percent.  They will, however grow more slowly in many areas and become flat or even decline in some markets.

The report says Freddie Mac estimated last year that the supply of new multi-family units needs to be around 440,000 annual to meet demand including that from households that delayed formation during the recession.  While completions will rise above the historic average of 270,000 this will not meet long-term demand.  “While the timing of the realization of pent-up demand is hard to predict, they expect that the wave of current supply will not disrupt the market and will be absorbed within the mid-term.”

Consistent with the revenue growth noted above, property prices also advanced robustly in 2015, rising about 15 percent and this appreciation is expected to continue.   Cap rates decreased by 16 basis points during the year, ending at 6 percent and Freddie Mac anticipates that cap rates will stay below that rate for the year.

Multi-family origination volume ended the year about $185 billion, $13 billion more than in 2014 due to a strong second half of the year.  That finish can be attributed to declining interest rates, increasing construction completions, and increasing property prices.  Freddie Mac expects that investors will take advantage of low rates by refinancing debt or funding new completions and expects another substantial year for multifamily originations.  It also expects that the sharp increase in commercial mortgage-backed security conduits, while still only a small share, will continue.

Another unknown is energy prices.  A continued decline could affect the economy in contradictory ways; lower prices are likely to lead to more economic growth but energy dependent areas could be hurt by layoffs and cuts in capital spending.  The biggest concern is in Texas, especially Houston but the area is more diversified than during the last energy crisis so it is unlikely it will fall into a recession.

The report contained a special section analyzing manufactured housing which has seen growing popularity in response to the growing unaffordability of traditional housing.  Average rent for manufactured housing in was $450, which was 42 percent lower than the median for a traditional multifamily unit.

Nationwide 6.7 million households reside in this housing or 5.8 percent of total households.  About one-third of these are renters.  More than half of manufactured units are located in six states in the Southeast Region and California and Texas and is more prevalent in smaller cities and municipalities.  After falling during the recession, occupancy in this housing is trending up while rent growth remains below pre-recession levels.

Freddie Mac says it expects the supply of manufactured housing that will be delivered this year to surpass pre-recession levels; market dispersion will become more pronounced, and the housing is expected to be a vehicle to help bridge the housing affordability gap.

Reprint from     by Jann Swanson

Houston a top commercial real estate market, report says

April 2, 2015 Leave a comment

Houston ranks among the top U.S. commercial real estate markets in another report.

Coldwell Banker Commercial’s “Top CRE Markets 2014” report, released Feb. 4, ranked Houston No. 3, behind Denver and San Francisco.

Houston ranked No. 2 for multifamily, No. 13 for retail and No. 26 for office. The report considered percent change in vacancy and percent change in rental rates between the third quarter of 2013 and the third quarter of 2014.

Percent change in population and percent change in unemployment for the same time period were also considered. Houston ranked No. 8 and No. 30, respectively, in those categories.

Dallas came in at No. 4 on the overall rankings, San Antonio is No. 7, Austin is No. 9, and Fort Worth rounds out the Texas cities at No. 16. The report ranked 40 markets in total.

The high ranking is not surprising for Houston.

In October, the Urban Land Institute and PwC named Houston the No. 1 real estate market to watch in 2015. Houston ranked No. 1 in both investment and development prospects, and it came in second to Austin for homebuilding prospects in that report.

The Bayou City also took the top spot on Forbes’ recent fastest-growing cities list, though Houston is not expected to grow as fast this year, due to the oil price slump.

Olivia Pulsinelli is the web producer for the Houston Business Journal’s award-winning website

Never Mind the Oil: Med Center Area Y-Plan Apartment Tower To Start Climbing in Less Than 2 Weeks

March 12, 2015 Leave a comment


The Millennium Tower


The Dinerstein Cos. will break ground Jan. 26 on a new luxury apartment tower near the Texas Medical Center.

The 22-story high-rise will be located at 1911 Holcombe Blvd., between MacGregor Way and Cambridge Street, just south of Hermann Park. The tower joins several new residential and commercial projects planned for Houston’s medical sector.

The Millennium Tower

The yet-unnamed project — dubbed The Millennium Tower on its website for now — will feature 375 apartment units on 16 floors over a six-story parking garage.

Common amenities include a deck with an infinity-edge pool, fitness center with separate yoga area and an outdoor fitness area. Residents will have views of Hermann Park, the Texas Medical Center and downtown Houston.


The Millennium Tower

Solomon Cordwell Buenz, based in Chicago, is the architect. Gilbane Inc., based in Providence, Rhode Island, is the general contractor.

Dinerstein, a Houston-based apartment and student housing developer, is building another midrise apartment project nearby. The Millennium Kirby is under construction at 7600 Kirby Drive, near Main Street southwest of Hermann Park. It is expected to be completed later this year or early 2016.

Dinerstein’s marketing director Emily Prevost said the company is pushing ahead with its high-rise project despite economic concerns stemming from the plunging oil prices.


The Millennium Tower

In the past six months, crude oil prices have dropped from more than $100 a barrel to below $50 a barrel. While consumers are rejoicing at the pump, Houston’s oil and gas companies are announcing budget and job cuts. If low oil prices are sustained, observers fear the energy cuts may trickle down to the multifamily market.

Prevost said Dinerstein is banking on the high-rise’s location near Houston’s other major industry — health care — to mitigate the effect of falling oil prices.

“The medical center will shield us from the oil situation,” Prevost said. “It’s one of the best medical centers in the world.”

The Texas Medical Center is spurring new residential and commercial development in the area.

The Millennium Tower


In November, TMC officials announced plans for a new research campus on a parking lot near the Baylor College of Medicine’s new McNair campus along Old Spanish Trail. The following month, the Urban Land Institute presented plans to redevelop the vacant Astrodome into an indoor park with rock climbing walls, zip lines, skatepark, run/bike trails and a swimming pool. Earlier this month, the Hermann Park Conservancy opened the door to its new gardens and pavilion.

Developers have begun to take notice, and are planning new luxury homes and apartments in the area, including hundreds of single-family lots near the Texas Medical Center. Olf 7171 Grand LLC, Medistar 521/90 LLC and Ardmore Property LLC are listed on a city of Houston plat record for Ardmore Court, located on 26.8 acres northwest of State Highway 288 and the Interstate 610 Loop. The community will feature 433 single-family lots ranging in size from about 1,630 square feet to 2,400 square feet.

Paul Takahashi covers residential and multifamily commercial real estate for the Houston Business




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