Apartment Vacancy Rate Hits 22-Year High

It's no secret that the real estate market is pitiful right now. But that spells opportunity for those who understand how market cycles work. Imagine what will happen after you buy a property that produces more cash flow than most people make in a year--with little or no money and without the management headaches--during a time when vacancies are at 20-year highs....

What will happen to the value of your property when vacancy rates drop? (Which they will!) The value of your property will increase, and fast! It just makes sense. That's why investing in apartment buildings is one of the best investments you can make today. Let us know if we can help.

Below is the article from the Wall Street Journal. Enjoy.

By NICK TIMIRAOS

The vacancy rate for U.S. apartments hit a 22-year high in the second quarter as rising unemployment reduced demand during what is usually the peak leasing season.

Rents fell the fastest in markets that have shed white-collar jobs, such as New York and San Jose, Calif., and in markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas and Orange County, Calif.

Vacancy levels nationally rose to 7.5% in the April-to-June period, up from 6.1% a year earlier, according to Reis Inc., a New York real-estate research firm. Of the 79 markets tracked by Reis, 45 showed an increase in vacancies.

Generally more rental units turn over during the spring and summer than in any other time of the year, which means that the declines could have an outsized impact on revenue for apartment owners.

"Everybody expected spring leasing to save apartment landlords. That hasn't happened," said Victor Calanog, director of research at Reis.

The housing downturn initially offered landlords the chance to lure troubled homeowners into the rental market. But the pace of job losses shattered any inroads that apartments might have gained from the housing bust. Apartment vacancies began to rise at the end of 2007 before accelerating further as the economy deteriorated last fall.

Rents, meanwhile, are falling at the fastest pace in at least a decade. Effective rents, which include landlord concessions such as one month free rent, fell 1.1% in the first quarter and 0.9% in the second quarter to an average of $975 a month. The combined decline for the first half of the year was the largest since Reis began tracking the data in 1999.

Effective rents were down 2.9% in San Jose, the sharpest quarterly drop, to $1,430 a month. New York City had the largest 12-month rent decline, at 5.8%, to an average of $2,680.

"It is one of the worst second-quarter performances that we've seen," said Ron Johnsey, president of Axiometrics Inc., an apartment-research firm.

Vacancies tend to rise during periods of high unemployment because household formation slows, as would-be renters double up or move in with family members. Those who do rent are more cost-conscious.

"Do they absolutely need that extra bedroom, the balcony, or the pool view?" said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Meanwhile, shadow inventory of foreclosed properties and condominiums for rent continues to compete with rental apartments in the most oversupplied housing markets. While rental demand grew by 2.1% during the first quarter, apartments didn't benefit, in part because former homeowners chose to live in vacant homes for rent, said Gleb Nechayev, senior economist at CBRE Torto Wheaton Research.

There are signs that the shadow inventory may be leveling off. The number of vacant-housing units for rent declined to less than one million in the second quarter, from more than 1.1 million through most of 2008, according to Ron Witten, who runs a Dallas-based apartment-research firm.

Falling home prices could hit landlords in two ways. They could force landlords to lower rents to keep up, and could spur some renters to purchase homes. Still, the number of renters who move out to purchase homes isn't expected to surpass levels seen during the housing boom earlier this decade.

From 2000 to 2003, around 30% of renters who moved out of apartments were becoming home buyers, while just 15% of move-outs left to buy homes during the first quarter of 2009, AvalonBay Communities Chief Executive Bryce Blair told investors at a real-estate conference last month.

Markets with better employment prospects saw modest rent growth during the second quarter. Effective rents increased in the second quarter by 0.3% in suburban Maryland and in Washington, D.C.

Poorer-than-expected rental growth could push landlords who piled on debt during the years of easy credit into default on their mortgages.

Sometimes You Just Feel Like You're Running Into Walls

You've got to watch this video! This is exactly how most investors (and agents) feel in today's market!

Let's be honest. It's slow out there right now. Very few apartment buildings are selling today. And it's not because good investments don't exist--in fact good investments are EVERYWHERE! The reason few properties are selling is because there are very few buyers! They don't know what to do or how to do it. They're not sure how to put together a successful transaction. They feel like they're running into walls.

That's good news for you and I. It's bad news for sellers. Those who want to sell (both sellers and lenders--yes, even a few apartment buildings have fallen victim of foreclosure) need to be very flexible in price and terms if they have any hope of selling the property.

Flexibility. It should be one of your new favorite words.

This window of opportunity will not last forever. A few years ago agents were begging property owners to sell. The market was on fire and prices were sky high. Agents did anything and everything to sell property. Today it's the other way around. Credible buyers--those that will perform, those who know how to put together the transaction--are golden.

But just like the window to sell at the peak of the market came to a screeching halt, so will the window to buy.

That's why I have the best offer EVER available right now at http://www.apartmentscanmakeyourich.com. When the market picks up and more people start buying apartment buildings again, demand will increase and so will the price of this program. You should check it out and see what it is we're offering in this incredible package. Get yours while you can!

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Brokerage Industry Hard Hit by Losses

Expense Cuts of 20% to 30% Have Been the Norm in Face of Drop Off in Transaction Pace, Focus Remains on Revenue-Generating Opportunities


By Mark Heschmeyer


Major U.S. commercial real estate brokerage houses are reporting first quarter net losses across the board, reflecting the ongoing impact of the current recession and dearth of transaction activity. This is believed to be the first time in recent memory that all the major brokerage firms reported a quarterly loss, an occurrence that can’t be recalled even during the last major recession following the dotcom bust in 2001.

Jones Lang LaSalle reported a net loss of $61 million for the first quarter; FirstService (which owns a majority of Colliers International) reported a net loss of $44.7 million in the first quarter; CB Richard Ellis posted a first quarter net loss of $36.7 million; and HFF (Holliday Fenoglio Fowler) posted a first quarter net loss of $6.1 million.


This article courtesy of the CoStar Group. To get the full story, click here.


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Marcus & Millichap Apartment Overview & Forecast

This is yet another excellent presentation by Marcus & Millichap describing some of the current challenges in the apartment and financial markets. The presentation will take about an hour. If this is too small for you to view, you can also find it at www.stevesteadele.com/ApartmentOverview2




The firm has not scheduled the next presentation yet. For more information, go to www.marcusmillichap.com.

Never Get Caught Off Guard In A Recession Again!

How would you like to start earning the income you deserve so you can do what you want, when you want?

How would you like a clear, easy-to-use system to build your own nest egg? Is there a way to protect your family and safeguard your future?

You can. It starts with a sincere, overwhelming desire to make the kind of money most people only dream about. If that's you, keep reading.

There are a lot of "how-to" products on the market, but few of them explain what to do, why to do it, when you'll receive the benefit, who to talk to and what to say. When you understand that, the how becomes very simple!

Five years from now many investors will look back and say, "I'm sure glad I started investing in apartments in 2009 and 2010!" And others will say, "I sure wish I would've started investing in apartments 5 years ago." Which one will you be?

Most people don't understand apartment investing. If they did, they'd be watching the market like a hawk right now! There's a TON of money to be made, and the window of opportunity is short. You don't need money or stellar credit either. It's times like these where motivated sellers are especially creative!

This is probably one of the best times to invest in apartment buildings we've seen in over 20 years. If you've been sitting on the fence, unsure of where to start and how to begin, visit www.stevesteadele.net/mp.html to learn more about my coaching program. We have at home study programs available as well--but please, don't let this opportunity pass you by.

We also have an internet special available at www.apartmentbuildingriches.com.

Obituary - Common Sense

A friend of mine emailed this to me the other day and while I don't normally post stuff like this, it is.... well, I'll let you fill in the blank.


Obituary

Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as:

- Knowing when to come in out of the rain;
- Why the early bird gets the worm;
- Life isn't always fair;
- And maybe it was my fault.

Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge).

His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.

It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.

Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims.

Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault.

Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.

Common Sense was preceded in death, by his parents, Truth and Trust, by his wife, Discretion, by his daughter, Responsibility, and by his son, Reason.

He is survived by his 4 stepbrothers;

-I Know My Rights
-I Want It Now
-Someone Else Is To Blame
-I'm A Victim

Not many attended his funeral because so few realized he was gone.

Keep Your Eye On Apartment REITs

Keep Your Eye on Apartment REITs

It’s no secret that the housing market has suffered huge setbacks over the past 24 months. Americans have already lost $13 trillion in net worth and the blood bath doesn’t appear to be over. Real estate markets that went on a building binge during the expansion phase are projected to lose as much as 25 percent in housing value in 2009. It’s the talk of the town and most of us are sick of hearing about it.

But what does it mean for the apartment market? At one point it seemed a corpse could apply for a home loan and get approved in a matter of days. That put enormous pressure on apartment communities as they battled for anyone with a pulse to fill vacant units.

A few years later and well into the housing boom, apartment rents increased dramatically as home prices escalated out of control. Now fast forward to the housing bust. At first rental rates surged further and concessions were nearly nonexistent. Foreclosures soared in 2007 and 2008 and consumers were tossed back into the renter pool. Vacancy fell and cash flow increased.

Today, however, the multifamily sector faces new challenges, like the “shadow” market, which consists of homes and condos that compete with apartments for renters. Apartment communities are again offering free rent and other bonuses to attract potential residents.

Net Operating Income (NOI) is decreasing and fearful investors are panicking. During a webinar on February 24, 2009 Managing Director, Linwood C. Thompson of the National Multi Housing Group of Marcus & Millichap said vacancy rates are, “Going to go up on average about 100 basis points (bps) across the entire portfolio. That’s a significant move.”

Thompson continued: “It’s very difficult to get a 50 bps move across that average in a given 12 months, but with unemployment the way it is we see the vacancy rate going up 1 percent, which is going to be a challenge.”

Indeed it will be; and investors know it. Bad news spreads like wildfire and fearful investors bail in an already volatile market. Many of the largest apartment Real Estate Investment Trusts (REITs) including BRE Properties, Inc. (NYSE:BRE), Equity Residential (NYSE:EQR), Apartment Investment and Management Company (NYSE:AIV), Essex Property Trust, Inc. (NYSE:ESS) and AvalonBay Communities, Inc. (NYSE:AVB) have been pounded in recent months. All of them are at five-year lows.

Many investors and real estate enthusiasts believe commercial properties will face widespread vacancies as a result of rampant overdevelopment like those of the 1980s and 1990s, but the only sector to enter the downturn with too much construction is retail. According to the National Association of Home Builders (NAHB) multifamily starts fell to the lowest number the association has on record with just 119,000 units.

That should bode well for the multifamily housing market. The recent increase in apartment vacancies is the result of rising unemployment and the competing shadow market; not new development. “We’re in the early middle stages of this 20-year expansion of rental demand,” Thompson said, referring to the echo boomers as they mature into their prime rental years. “We believe that once we hit bottom and once we start climbing out of this recession we’re going to see a fairly steep recovery.”

Commercial real estate sales have dropped significantly even though prudent investors know this is the time to buy. Apartment REITs like AVB and BRE have canceled or postponed development projects throughout the country. REITs, and private investors alike, cite the cost and availability of capital coupled with job losses and slumping housing prices as top concerns.

All that said, the long-term outlook for apartment REITs still looks good. Although demand is hampered somewhat by the housing and job market, roughly 4 million people will turn 18 every year for the next 10 years. Combine demand with limited supply and the apartment market will rebound relatively quickly, albeit job growth is the key ingredient.



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Marcus & Millichap Apartment Overview & Outlook

This is an excellent presentation by Marcus & Millichap describing some of the current challenges the apartment market is facing as well as an overview and forecast of where the market is expected to go in the coming years. The presentation will take about an hour. If this is too small for you to view, you can also find it at www.stevesteadele.com/ApartmentOverview





The firm has scheduled the next presentation April 21, 2009. For more information, go to www.marcusmillichap.com.

We are definitely entering one of the best times to begin investing in apartment buildings. If you've been sitting on the fence, unsure of where to start and how to begin, start by visiting www.stevesteadele.net/mp.html to learn more about my coaching program where I'll help you raise the money and we'll buy large multifamily properties together--I'll even refund your money when we buy our first building!


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The Apartment Building Cycle

One question I receive quite often is, "Where are we in the apartment building cycle, right now?"

Well, that depends on where you are. Below you'll find a graph provided by the great folks at Integra Realty Resources, Inc. This will give you an idea of where different regions throughout the country are in the apartment building cycle. Enjoy.




Although the multifamily market is a less stable than it was last year due to the numerous economic factors affecting unemployment, apartments still offer investors favorable returns with considerably reduced risk when compared to other assets. Vacancies have increased slightly because residents are doubling up or moving in with parents or friends.

The good news is educated apartment investors can pick up property for substantially less than they could a few years ago. Many uneducated sellers bought at the peak of the market and are now selling for much less than they paid--in some cases by as much as 50%. Cap rates have increased and fewer buyers are writing offers. 2009 and 2010 look to be incredible years to buy apartments.

Don't know what to do or need more information? Check out my how to courses at www.SteveSteadele.com.

If you'd rather a passive investment with no tenant hassles, mortgage, property management or maintenance headaches but want the ability to earn 12%-20% on your money secured by real estate, visit www.SteveSteadelePartners.com.

Do you have a question? Email me at steve@stevesteadele.com.


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How Much Due Diligence Should I Do Before Writing An Offer?

Hi Steve,

I have gone through your course and have a question. At what point do I need to complete a rent and sale comparable study if I am looking to invest in an apartment building? Your course makes a lot of sense and it breaks everything down but I am confused about how much time to spend working on that information before I write an offer. It seems like I would spend a ton of time doing that with no time to do anything else. Do I need to do it all before writing an offer?--Brian J******, Louisville, KY

Brian,

When I work with coaching students I have them complete a rent and sale comparable analysis using the Apartment Evaluator just to get use to doing it. Yes, you need to understand sale comparables somewhat before writing an offer and, by default, you’ll learn a little bit about the rental market. How do you do that? More than a half dozen agents in any given region will be more than happy to get some information to you in hope that you’ll eventually do business with them. You don’t need to do a full analysis initially. Begin by locating motivated sellers who own properties that are within your price range. When you find a property and qualify it as worthy of your time get it under contract and then get more specific during due diligence. That's when you'll make the most money. For more information, check out How to Turn Due Diligence Into BIG PROFITS!

Thanks for the question.

Do you have a question for Steve? Email him at steve@stevesteadele.com.

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Apartment Investing: Value Indicators

Question:

Steve,

I have Fast Track to Millions. In there you talk about the five different value indicators. Which one is more common to use when comparing properties? What do sellers usually go by? Do they understand what they mean? --Gary P****, Vancouver, WA


Answer:

Gary,

No, most sellers have no idea what the value indicators are or how to calculate them. Just about anyone can figure out the $/Ft and the $/Unit, but most sellers do not know or understand the meaning of a GRM/GIM or Cap rate. That’s where the challenge comes in. A lot of sellers will price their property based on a “gut feeling” of what the market is doing. Rarely is it ever realistically supported by comparable properties unless an agent managed to earn enough credibility to list it that way. (Or the property is large enough that sellers understand the income and expenses must make enough sense to attract potential investors.) Sometimes you’ll find a property that is worth much more but because the seller is motivated, they’ll sell for less. Those are great situations to be in, and in those cases the five value indicators will usually make some kind of sense even if it’s found in substantial upside. As far as which indicators are more important—it depends. All of them are important to some degree. Properties that are closer to the city core are heavily influenced by the price per foot. Properties in outlying premium markets tend to lean toward cap rates or price per unit. And properties in cash flow markets are heavily influenced by the current cash flow generated by the asset. Those are the basic, generic answers. All of them are important. It really depends on the market and the property. Thanks for the question.

Is it a good time to start apartment investing?

Question:

Steve,

The financial market is a mess. Lenders are hard to work with and sellers are still asking high prices. Is it really a good time to start apartment investing right now?--Lynn P******, Amarillo, Texas


Answer:

Lynn,

Thanks for the question Lynn. This is a huge topic. I’ll try to keep it short, but I could go on and on about this for hours.

Although apartment buildings have cycles similar to the economy, they don’t necessarily experience the same ups and downs at the same time. If you had asked this question a year ago, my answer would have been, “It’s always a good time to buy apartment buildings, somewhere.” Someday we’ll get back to that answer, but not today. Instead, the answer is more like, “It’s a good time to buy almost everywhere.” Here’s why.

If you know how to determine what phase any given market is in you can make a lot of money. We all know that. It doesn’t matter if you call it buyer’s phase 1 or emerging market or whatever you want to call it—if the market is near the bottom of the cycle (or beginning to go back up) you can make a fortune. But we’re facing something today that is unprecedented. We’ve never seen an apartment investing market like this before.

When the economy tanks (like it has) real estate has historically suffered with it. Years ago developers didn’t have the kind of information they have at their fingertips today. As a result, the number of new units to enter the market at the end of the expansion phase was enormous—meaning we were stuck with massive oversupply. Developers didn’t know it was time to stop building until it was too late. That’s when knowledgeable investors started buying. The rental market suffered until demand eventually caught up with the extra supply. Then they sold.

Today the surplus of information has resulted in shorter, more manageable apartment building cycles. (The single family market is another story. Today it suffers not because of oversupply, but because lender criteria has changed. More on that another day.) Apartment cycles are not nearly as turbulent as they were decades ago (which makes cycles harder to identify). Over the past 3-4 years the amount of new apartment development has been very, very low. That’s the main reason the apartment market is not experiencing the same issues as single family homes, retail, and office buildings. Values have suffered somewhat depending on the asset and MSA (Metropolitan Statistical Area). Condo conversions are no longer pressing prices and tighter lender criteria has made it more difficult to invest. This has caused prices to decline a little bit, but other economic factors are actually helping apartment owners. Many are experiencing more cash flow than they’ve seen in years because everyone was buying a home.

There are very few new units scheduled to come out of the ground over the next 2-3 years. Meanwhile, demand continues to accelerate. Foreclosures are at an all time high and over 4 million people turn 18 every year. Demand is shooting through the roof while supply remains nearly constant. To top it off, it’s a buyers market.

So the short answer is yes—it’s a great time to start investing in apartment buildings. For the most detailed information available, check out the Complete Course


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Do I Need Good Credit To Buy Apartment Buildings?

I received the following question via email recently and given the current financial environment, I thought I should try to shed some light on this very important topic.

Question:

I've heard a lot of people say I can buy apartments with no money down. If I can do that, how important is my credit? I don't have great credit and I'm not sure how that affects me. Can I buy apartment property with no money if my credit is less than perfect? Thanks Steve--I'm really enjoying the book. -Tom L***, Florida


Answer:

Tom,

This is a good question because the answer has changed somewhat. A few years ago you could buy apartments all over the country with little or no money and horrible credit, but times have changed. Lenders are licking their wounds. Underwriting criteria has tightened up a lot over the past 6 months to a year. A few years ago people with credit scores under 600 were still getting conventional loans. Today it's pretty tough.

The good news is banks are more forgiving with regard to your personal credit report when purchasing commercial property than they are when you buy a single family home. Lenders start by assessing the income and expenses of the property and then look at the borrower. If the property supports the loan (meaning the Debt Service Coverage Ratio using realistic numbers is favorable) and you have great credit your chances of securing financing are better than average.

For more information on how to find quality investments using various creative strategies, check out When, Where and How to Buy.

When, Where and How to Buy


Market Analysis

* 3 Basic Questions a Market Analysis Should Answer
* How Micro and Macro Economics Impact Real Estate
* How Understanding Market Cycles Will Make You Rich
* 4 Phases of the Business Cycle
* How the Real Estate System Works

Defining the Investor

* Investor Motivation
* 2 Fundamental Reasons Investors Buy Any Type of Investment
* 5 Major Constraints to Investing in Real Estate
* How Do I Know How Much to Pay?
* 3 Major Factors to Consider When Buying Investment Property
* 5 Different Types of Real Estate Markets

Simplified Economics

* Simple Steps to Discovering Top Markets to Invest
* Top 6 Variables the Impact the Rental Demand
* Easy Ways to Understand Supply and Demand Variables
* How to Determine Where the Market is in the Apartment Building Cycle

Profit Analysis

* 4 Major Categories of Seller Motivation
* 3 Ways to Maximize Profitability When You’re Buying at the Right Time
* 5 Types of Property to Avoid
* Questions to Ask Yourself to Maximize Performance of Your Investment
* Top Money Making Indicators and Why Other Investors Avoid Them

Finding Quality Investments

* Top Resources to Finding Money Making Opportunities
* How to Find the Best Real Estate Agent

Creative Ways to Buy Apartments

* Can You Buy Large Apartments With Little or No Money Down?
* The Pros and Cons of Leverage
* Seller First or Second Mortgage
* Partnership Opportunities
* Subject To Investing
* Master Lease Option
* Other Great Ways to Minimize Out of Pocket Expense

Private Lending Strategies

I've just released a brand new Web site for investors who are looking for a place to put their money in today's highly volatile financial market. The website is www.PrivateLendingStrategies.com. It's a simple site that will give you information about becoming a private lender. You can even invest using your IRA or 401(k).

Many Americans are hesitant to put their money in real estate, and understandably so. We will be paying for the financial crisis of 2008 for many, many years to come. Just understand that it doesn't mean real estate is a bad investment. In fact, if you work with real estate investors, private lending can be one of the most lucrative, hassle-free investments you can ever make.

Those of you that know me know that I invest in apartment buildings, so I of course have another Web site that will give you additional information on what we do. This site is www.SteveSteadelePartners.com.

Check out both sites and let us know what you think. If I can help you in any way, please do not hesitate to contact me at steve@stevesteadele.com.

Have a healthy and wealthy New Year!

Steve