| FEATURE ARTICLE, AUGUST 2005
THE MONEY IN MULTIFAMILY
Different factors are motivating investors to seek out multifamily properties in Texas.
Cheryl Schnieders
The marginal performance of the equity and bond markets over the past couple of years has investors shifting toward real estate in order to achieve the yield they desire — and Texas continues interest investors looking to monetize their portfolio. New buyer groups of real estate include 1031 exchanges, private REITS and TIC buyers. The influx of money coupled with low interest rates have helped bring cap rates to a 25-year low, making real estate an attractive investment.
Although the economy has been on the upswing for several years, there is uncertainty as to what has been driving the expansion as consumer spending has been at the heart of it and personal debt levels have been at historical highs. With innovative financing programs on the residential real estate side, consumers have been given a new lease on life and the economy has responded in kind.
Low interest rates on home loans and increased home buying in the first quarter of 2005 have put significant pressure on the rental market; however, multifamily lending continues to ascend at a good rate. In reality, renters-turned-owners mostly affect the Class A market, which is only a fraction of the larger multifamily market in question. (The National Association of Realtors has recently increased its forecast for 2005 home sales, predicting another year of record volume.)
Commercial real estate actually continues to benefit from the increased liquidity. Multifamily lending has increased more than 30 percent during the first quarter of 2005, compared to the same quarter in 2004, according to the Mortgage Bankers Association. Multifamily continues to dominate originations in 2005, compared to other product types. What has changed over the past year? One idea is that commercial lenders have responded to the market and have increased their willingness over the past couple of years to “buy into” the perceived value creation stories. Investors buying or selling this type of asset can still purchase apartment complexes at an 8 to 10 percent cap rate, making them feel like there is still an opportunity to improve the asset quality, the resident profile and flip the transaction one more time, thus selling the asset for a lower cap rate and making a profitable return.
Texas remains a market where borrowers have plenty of loan products to choose from. Each multifamily product class is viewed differently depending on the investment horizon. Class A investors are willing to hold onto the asset for a longer period of time, thus looking for a permanent loan of 10 years or longer and they typically go with a life insurance or CMBS lender. Class B and C investors appear to hover around the 5-year product so they have more flexibility. Investors buying or selling this type of asset can still purchase apartment complexes at an 8 to 10 percent cap rate, making them feel like there is still upside in the deal. These investors are ideal candidates for the popular LIBOR-based product with step-down prepays.
Cheryl Schnieders is regional manager of the Multifamily Finance Group in the Dallas office of Chicago-based LaSalle Bank, N.A.
PUT YOUR MONEY IN TEXAS
Whether or not to invest is not the issue at hand, but rather where to invest. Because each Texas city has its own lending environment, it can be difficult to decide where to invest. In the first quarter of 2005, Dallas had a slowdown in new construction permits, which has helped occupancy rates in the area for all property classes. However, large employers pulling out of the market, such as Delta Airlines’ closing of its hub at DFW Airport, hurts the economy and surrounding submarkets. Houston developers continue to deliver an abundance of new rental property in spite of elevated vacancy rates in the Class A sector. Class B and C apartments remain unaffected. In Austin, two-thirds of the properties continue to offer incentives. Residents are benefiting as the state capital remains one of the favorite places for Texans to live in terms of quality of life. San Antonio remains the center of stability in the state of Texas where strong job growth has helped apartment occupancies hold steady. The city of San Antonio is taking a proactive approach to sustain growth and diversity to the local economy by focusing on continued growth in local manufacturing, healthcare and biosciences, information technology, and logistics.
— Cheryl Schnieders |
©2005 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.
|
