APRIL, 2009
Apartment sales volume and values declined in 2008. Total sales volume last year was a meager 11 million as reported by the Coeur d’Alene MLS (Multiple Listing Service), as compared to 16 million in 2007 and 35 million is 2006. Although it is hard to measure the exact decrease in values because of the low number of sales, it is generally safe to say that cap rates are up about 50 basis points for Class A properties, and roughly 150 basis points for Class B & C.
“For Sale” stock remained about 150% as compared to our peak sales year of 2006. There is still a disconnect between what Buyers are willing to pay and what Sellers are asking. Having said that, it is interesting to note that there are surprisingly few larger apartment projects for sale in the area, leaving one to conclude that this sector in general, is in a healthy condition.
New construction permits for apartments checked in at a paltry 12 million in 2008 compared with 51 million in 2007 and 91 million in 2006. This bit of information, together with the vacancy data, shows that Kootenai County is definitely not over-built. Supply is expected to be limited in the immediate future.
For the few transactions that did take place during 2008, financing was the big element in closing the sale. FNME continues to be the primary source of capital in the 2-4 unit category, and is primarily responsible for the majority of loans over $500,000 in the 5 unit and up niche. Loans under $500,000 were funded by local or regional banks. Underwriting criteria in all cases tightened with lenders requiring real comps, historical income & expense data, and higher debt coverage ratios.
Vacancy rates were a very healthy 3.5% over-all, down from 4.3% in 2007. Interestingly, 1 bedroom apartments were the least vacant units and 3 bedroom stock was the most vacant as evidenced by a 10% vacancy number reported in September of 2008. In as much as 3 bedroom units compete with “shadow stock” (vacant and distressed houses & condos), that particular type of unit will continue to struggle until the excess housing inventory is sold off and the housing sector recovers to equilibrium.
Rents were up over-all in 2008 – approximately 2.5% with few, if any, concessions to tenants. With the economy continuing to struggle however, tenants have been cutting back on higher end units. Some have doubled up or down-sized, leaving one to conclude that upward pressure on rents has softened for now.
So far, the apartment sector has weathered the financial storm. This product is not, and should not be considered “distressed” in general. Yes, values are down and capital is hard to get, but cash flow is steady and occupancy rates are high for well-managed projects in our area.
Having said that, mis-managed properties or undercapitalized projects will present real buying opportunities in 2009. These two conditions would have been bailed out by rising values in the past, but not so today. There will be some forced selling in 2009 and beyond. Additionally, imminent resets on adjustable rate mortgages, together with those Owners who will be forced to refinance properties with short fuses, will cause more stress for undercapitalized owners.
There seems to be conditions in place today that will result in a shortage of rental stock. Because of the extreme conditions in the capital markets, there has been a dramatic decline in new starts. Or put another way, there is very limited new apartment construction in the pipeline. Furthermore, echo boomers are reaching their peak rental years and many former home owners are returning to the rental pool.
For 2009, it is all about tenant retention, efficiencies, and improved operations. If you are liquid or have access to equity, there will be some very, very good buying opportunities to be had this year to expand upon your wealth.
For those who have compelling reasons to sell, such as management issues, distance, marginal building performance, location, or otherwise personal issues, there will be successful deals made if the property is priced and marketed properly.
In closing, if 2009 is your year to evaluate options for your apartment units, why not maximize the return on your investment by consulting a professional apartment specialist. Call me, I’d be happy to help you evaluate your options.
Best Regards,
Glenn
