APARTMENT RENTS UP UP UP

Well it is happening. Just as it does nearly every time. When the housing market slumps and money for housing purchases is scarce, the demand for multi-family rental units increases. With that increase in demand the rents rise and vacancy rates fall.

People who would like to purchase homes simply can’t get qualified. There are a great deal of foreclosures to be purchased but a large percentage of would be buyers simply can’t get the money to make the purchase. They have very few alternatives such as obtain seller financing, tap mom, dad uncle… or RENT.

Supply becomes scarce because of this increased demand and occupancy levels rise. In the multi-family industry, when occupancies to 95% rents are to low. In many areas of the country 15% vacancies have been reduced to levels below the 5% mark.

There is now an increase in permits and building of multi-family units in many areas. Now is the time to get in. A year form now will be a great time for cash flow and 9 to 12 months from then would begin the time to sell or crank cash for investments of another venue.

PLACES WHERE HOUSING IS HOT

Forbes reported yesterday on 10 markets where housing is hot and where the “bubble� effect hasnot been felt significantly.  The list with annual price increases through the second quarter of 2007includes:

 Salt Lake City, UT    +21%
 Binghamton, NY    +20%
 Salem, OR     +17%
 Farmington, NM    +14%
 Allentown-Bethlehem-Easton, PA-NJ +13%
 Beaumont-Port Arthur, TX   +12%
 Reading, PA     +11%
 Glens Falls, NY    +11%
 Spokane, WA    +10%
 Cumberland, MD-WV   +  9%

The author suggests several reasons for these markets performing differently than many other areasof the country. One is that these markets avoided the “get-rich real estate frenzy of recent years.  Another is that local job growth which is above average for the U.S. has driven the real estate markets in these locations in recent months.  A third factor is that a number of the locations are in the sun belt which has become increasingly popular.

The following article from Moody’s was released yesterday (November 20) and discusses commercial property value changes.

By Parke M. Chapman

Nov 20, 2007 5:06 PM

The impressive run-up in commercial real estate values may have finally run its course.   This week, Moody’s Investors Service reports that U.S. commercial property values posted a 1.2% decline in September.
While the drop is relatively small, the monthly decline “might represent the inflection point in commercial real estate values given the ongoing liquidity crunch,� writes Moody’s.
Unlike other surveys that process appraised values, Moody’s monthly Commercial Property Price Index measures how the same assets trade over time. 
“Given the current capital market environment, the prospect of a singular, one-quarter blip in prices seems unlikely,� reads one excerpt. Moody’s predicts greater price volatility and says prices may fluctuate downward over several periods in the near future.
The survey also finds that the values of individual property classes aren’t moving in lockstep. Prices for industrial properties, for example, climbed 3% between the end of the second and third quarters. Retail values also climbed 2.6% over the same period. But in the apartment and office markets, prices fell by 1% and 0.5% respectively during that period.

Big-city factor

Another finding: Assets located in the 10 largest cities outperformed the national average. During the third quarter, big city apartments posted a 0.1% price increase versus the national apartment market where values declined by 1%.
Office properties in the 10 largest cities sustained a 0.2% decline while the nation as a whole saw office values slip by 0.5%. The same dynamic unfolded among retail properties where prices for big city assets increased by 4.1% versus 2.6% growth for the national market.
If weaker economic growth pushes rental rates down over the coming months, property-level cash flow will suffer. For landlords who own high-value properties, that could be especially problematic, since so many of them are grappling with expensive mortgage payments.
Covering their costs may not get any easier. Boston-based Property & Portfolio Research (PPR) reports that the third quarter brought “stagnant or rising vacancies� throughout all property classes. The translation is that vacancy rates are no longer tightening in any property type — and PPR doesn’t expect “tightening� conditions to return until 2009 at the earliest.
Demand appears to be cooling. During the third quarter, office demand registered 22.6 million sq. ft. down 16% from the 26.8 million sq. ft. of net absorption posted in the second quarter.
“But demand is expected to fall off a cliff in the fourth quarter [due to] the slowing economy most notably,� reports PPR, which is calling for a paltry 15.2 million sq. ft. of office absorption this quarter.
In all property types, quarterly rent growth has passed its peak, PPR reports, saying that the slowdown is expected to continue.

(WOMEN)

Investor’s on the rise

That’s right Female investor’s numbers are on the rise! In fact the amount of Single Women are buying homes at twice the rate as single men. They have more disposable income then single men and are becoming more and more savvy to business in general and to investing to be specific.

Since 1993 Percentage of Women purchasing investment properties stayed steady on a yearly basis at around 16% . This last year it jumped to 22%, the largest gain since we started keeping track.

The primary factors leading to this rise are cited to be: Women are earning more and finding better jobs, their education and sophistication level are rising rapidly and there are more women living alone then in any time in the past.

Interesting information for all investors! Gee, as an investor How could I use this information to assist me to be more effective?????????

The following article explaining the current issues affecting Commercial Mortgage Backed Securities (CMBS) and Colateralized Debt Obligations (CDO) is very timely given the current turmoil in both the residential and commercial secondary mortgage markets.  It offers some excellent information about how the commercial mortgage markets work and also draws some comparisons between the residential and commercial secondary mortgage markets.  This article, written by Parke M. Chapman appeared in the October 2007 issue of “National Real Estate Investor”

A CMBS AND CDO PRIMER by Parke M. Chapman

The commercial mortgage market faces one of its toughest credit climates in more than a decade. The most complex corners of the securitized mortgage market are getting hammered. Products that flew off shelves 12 months ago now are piling up: As of mid-September, investment banks were having a tough time bringing to market roughly $21 billion in commercial mortgage-backed securities that have been issued but not yet sold to investors.

While the Federal Reserve’s half-percentage point interest rate cut on Sept. 17 lured some reticent buyers back into the CMBS market, the same cannot be said for commercial real estate collateralized debt obligations (CDOs). As of mid-September, issuers weren’t packaging any commercial real estate CDOs because investors have been showing no interest.

Charlotte, N.C.-based investment bank Wachovia expects monthly fixed-rate conduit origination volume to fall 75% during the second half of 2007 due to tighter lending standards. Even worse, as of mid-September more economists were upping the odds of a recession.

Given the complexity of these securitized debt instruments amid the backdrop of choppy economic conditions, NREI asked three real estate finance veterans to educate readers on the different ways that these structured finance products are created and sold to investors as bonds.

The experts include Brian Lancaster, senior analyst at Wachovia Capital Markets and Darrell Wheeler, CMBS analyst at Manhattan-based Citigroup. Both investment banks are active players in the commercial real estate debt market. Wachovia issued $20.5 billion in CMBS during the first half of 2007, up from $9.7 billion over the same period in 2006.

Citigroup nearly doubled its CMBS issuance to $8.8 billion over the same period of time. The third expert, Jamie Woodwell, who serves as senior director of commercial and multifamily research at the Mortgage Bankers Association, a trade group based in Washington, D.C.

The following answers were compiled based on responses from these experts.

Q: What types of buyers have historically bought CMBS and commercial real estate CDOs? Are these mutually exclusive groups, or do both markets draw similar buyers?

A: The two markets do share some clients. Sophisticated investors such as life insurance companies and pension funds have gravitated toward CMBS in recent years. These institutional investors historically chased the top of the CMBS capital stack, despite lower yields. Both CMBS and commercial real estate CDOs share similar structures whereby the highest-rated tranches are AAA through AAA-, followed by BBB on down.

While these buyers have dabbled in the commercial real estate CDO market, foreign investors were far more active leading up to the recent downturn. Leveraged players, such as hedge funds and private equity firms, were also enthusiastic buyers of commercial real estate CDOs. In fact, foreign investors — the majority of them European — bought roughly 45% of all commercial real estate CDOs in 2006, according to Wachovia.

Q: What types of loans back CMBS and commercial real estate CDOs?

A: Two key differences center on the fixed- and floating-rate nature of the collateral. Commercial real estate CDOs are typically backed by floating-rate loans whereas CMBS collateral is backed by first-mortgage loans. A commercial real estate CDO can be backed by all sorts of collateral. CMBS, preferred equity and construction loans are commonly held by commercial real estate CDOs. REIT bonds and various other types of exotic debt such as second-lien loans and unsecured debt can get lumped into these pools.

Q: How have the returns varied between CMBS and commercial real estate CDOs?

A: Before the securitized debt market ground to a halt this summer, commercial real estate CDOs were consistently generating higher yields for investors. Active buyers, such as hedge funds, achieved returns approaching 20% from the market in recent years. These buyers were snapping up highly leveraged pieces of commercial real estate CDOs.

The now-defunct strategy, which centered on borrowing the funds to secure stakes in these bonds, or buying on margin, allowed these investors to amplify returns. But rising debt costs have made that approach less lucrative. At the same time, debt issuers were forced to push up yields in an attempt to drum up buyer interest. CMBS spreads over the 10-year Treasury rate jumped from roughly 25 basis points in February to 87 basis points in mid-September, reports Citigroup.

Q: What led to the formation of the first commercial real estate CDO in 1999?

A: Commercial real estate CDOs were a major innovation in part driven by the need to diversify risk after the 1998 Russian financial crisis sparked a global liquidity crunch. Unlike CMBS, which adhere to strict rules on the type and quality of collateral, the commercial real estate CDO market allowed lenders and investors to introduce a debt vehicle with more flexibility. What this means is that commercial real estate CDO managers can swap collateral out of the pool, making these highly managed pools of debt.

Q: The subprime debacle has affected both the CMBS and commercial real estate CDO market. Which segment has sustained the most damage so far?

A: The commercial real estate CDO market has undoubtedly been hit hardest by the market turmoil. One reason that demand for commercial real estate CDOs has dried up faster is leverage. Commercial real estate CDOs are backed by the riskiest types of commercial real estate debt, leaving them more vulnerable to wild swings in the debt markets.

Not only are short-term financing tools such as construction loans and mezzanine debt exposed to rising interest rates, but the very buyers of these commercial real estate CDOs were using debt to finance their stakes in this market. CMBS, which are typically backed by longer-term debt and bought with cash, aren’t as sensitive to increased financing costs. So, the volatile debt markets have undermined both the collateral quality and buyers’ appetite for commercial real estate CDOs.

CMBS are more transparent than commercial real estate CDOs, too, which likely makes rattled investors more comfortable about buying these bonds. Commercial real estate CDOs often contain so many different types of risky debt that quantifying the value and risk of the entire pool is challenging. The ratings agencies began rating commercial real estate CDOs in 2004, but they often note that the instruments are highly complex.

Q: Given the challenges that the commercial real estate CDO market is now facing, how likely is it that another similar investment vehicle will emerge in coming years? Will the commercial real estate CDO structure be modified?

A: This credit crisis could easily inspire Wall Street to devise some new investment vehicle backed by commercial mortgage debt. If commercial real estate CDOs were partly born out of the 1998 credit downturn, then such an evolution would seem likely. Undoubtedly, both the CMBS and commercial real estate CDO markets will continue to adapt to changing market conditions and standards.

Q: What is the connection between the residential mortgage-backed securities (RMBS) market and CMBS market?

A: RMBS predates CMBS by roughly four years and was born out of the multi-billion dollar savings and loan crisis of the 1980s. After roughly $150 billion in home mortgages defaulted, liquidity dried up for thousands of thinly-capitalized banks. The securitization of these home loans helped bring needed liquidity back to the market over a period of several years. The RMBS template was then adapted for commercial mortgages in the early 1990s during an economic recession.

The mechanisms governing commercial and residential mortgage-backed securities are similar, though each has vastly different underlying collateral. While commercial properties such as office buildings and shopping centers generate income from multiple tenants, single-family homes rely on monthly mortgage payments. RMBS are also more vulnerable to pre-payment risk, when borrowers pay off the entire mortgage before it has fully matured.

— Parke M. Chapman is senior editor.

TOP APARTMENT MARKETS IN THE U.S.

“Apartment Finance Today” in its October issue rated apartment markets around the United States and ranked the top 50 markets.  The top 10 are:
 1.  San Jose, CA
 2.  Inland Empire, CA
 3.  New York City, NY
 4.  New Orleans, LA
 5.  Boulder, CO
 6.  Los Angeles, CA
 7.  Abiline, TX
 8.  Orange County, CA
 9.  Tucson, AZ
 10.Salt Lake City, UT

For details on their study and a complete list of the top 50 markets go to “Apartment Finance Today” (October 2007 issue) at www.housingfinance.com/aft/

The Bank of America announced on October 29th that it will stop using loan brokers to originate home loans starting the first of 2008.  It is expected that some other large banks may follow suit in coming months. 

B of A stated that this move will allow it to expand its retail lending channels including its own banking centers and loan officers.  Mortgage brokers have historically been involved in about 25% or the loans that the B of A originates.

Some other large banks including Washington Mutual and Wells Fargo have recently moved to rely less on mortgage brokers in order to have more control over loan quality.

What this movement may mean to residential borrowers is that they will need to spend more time talking to multiple lenders rather than relying on loan brokers to search out the best options for them.  Investors should watch these changes to be more aware of where to concentrate their efforts in finding financing for their investments.