The Multifamily "Perfect Storm" By Monte Lee-Wen At Isnare.com Ezine Articles

Have you ever heard the saying "Red Sky at Night... Sailors Delight"?

Well as the sun goes down on the bursting Residential Real Estate Bubble there is a lovely red sunset visible to those of us who are active in the Multifamily markets. In fact, conditions are shaping up for what we're going to call a "Perfect Storm" in Multifamily Real Estate.

We all know the Residential Housing Market is in the midst of a full-scale collapse. Commercial Real Estate Transactions are also in a major slowdown and multiple national publications have recently predicted bubbles bursting in both Retail and Office Property.

And yet everyone is surprisingly silent about Multifamily. Most traditional reporters don't even include Multifamily in their designation of "Commercial Real Estate". And it would be easy to think that Multifamily is having just as hard a time as every other real estate sector. Not true...

There are only a very few markets in the country where the flood of repossessed houses affects the Apartment market at all.

- Occupancy rates are holding up
- Rent growth projections are positive
- And sellers are becoming so much more flexible

Here are a number of the factors contributing to what is becoming a strong multifamily investment market.

Higher Demand:

- High foreclosures and stricter lending policies mean fewer people are living in their own homes

- The available pool of renters is growing in many locations especially those with ongoing population and job growth

- Occupancy rates are solid in most markets and little to no drop is projected in the coming recession

- Despite the swooning of the general economy, rental growth projections are still strong. Just last week the Seattle area projected a 6% rental growth rate in 2009.

Stable Supply:

The current economic and lending environment is keeping Apartment starts very low. There are very few new Apartments coming online in most markets.

Falling Prices and more Flexible Sellers:

- Distressed property is on the market and widely available for aggressive investors.

- There have been a number of bank repossessions and foreclosures in the Apartment Market as well. And motivated sellers have been unable to sell for the last 12 months or so.

- And Cap Rates are rising slightly. Seller's are beginning to lower their prices in many markets ... they are becoming more flexible.

So if occupancy is stable, rents are increasing, no new product is in the pipeline and Seller's are more flexible ...why isn't the perfect storm here right now?

It's all about the Lenders...

The Credit Crunch is still in full swing in the Commercial Financing Markets. It is darned difficult to get a loan out there right now and if you do you will have to put more money down, pay more points upfront and most likely have a higher interest rate.

Lenders are also being much more conservative in their underwriting so you must have a "good, solid deal" to get through committee.

Now, there are two Silver Linings in the Credit Crunch.

1) The more difficult it is to get a loan, the more flexible a distressed seller will become. There's a backlog of distressed sellers at the moment. With commercial transactions down 70% in 2008 over 2007 numbers there are a number of distressed sellers who would've unloaded their properties before now if there had been willing lenders.

The longer the credit crunch goes on, the bigger this group of distressed sellers gets and the more flexible they become. They become more willing to carry paper and help you finance the deal. Their price also becomes more flexible

2) The more conservative the lenders underwrite a deal, the more profitable it has to be to get a loan. This means when you do close on a project is much more likely to be a solid performer down the road than projects purchased in the days of more aggressive underwriting.

Here's what the Perfect Storm looks like.

1. The fundamentals of Supply and Demand will remain stable.

2. At some point in the future there will be a time when loans become easier to obtain.

3. At that point the backlog of us distressed sellers meets an easier lending environment and we expect Multifamily deals to be flying off the shelves at very attractive prices.

We are predicting that the earliest this will happen is in the second quarter of 2009.

In the meantime ...

- Keep your lead generators working.
- Keep making offers on properties.
- Watch the financial markets closely and have a chat with your commercial mortgage broker and at least twice a month.
- Keep your powder dry and your eyes on the horizon.

To your investing success.

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