Weekly News Digest

Portland home prices have never been better, at least in the last seven years. Home prices are Up 10.5 percent since last March in the U.S., while Portland boasts gains of 15.4 percent over the same period. Freddie Mac, Fannie Mae and congressional representatives are still digesting reports, from the FHFA, highlighting the rising value of government-sponsored entities and single family homes as debate continues to rage over whether to privatize the  mortgage giants. Medical office buildings are seeing their cap rates compress through 2013, says a survey of 70 companies in the industry. Portland apartments are seeing of the best rent growth and have achieved occupancy above 96% for six consecutive quarters. Portland State is moving to add 42,000 sf to its business school after an anonymous $8 million dollar donation from an alum. The Langer family have purchased Tanasbourne Central in a deal for $12.4 million with major development plans in mind. (Click Titles for Full Story)

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Home Prices Jump, See Biggest Gains in Seven Years

A survey shows U.S. home prices rose 10.5 percent in March compared with a year ago, the biggest gain since March 2006. Core Logic, a real estate data provider, said annual home prices have now increased for 13 straight months. Prices are rising in part because more buyers are bidding on a limited supply of homes for sale.

 

Ground Shifts for Fannie, Freddie

Since they were seized by the federal government and bailed out with more than $200 billion in taxpayer funds, government-sponsored entities (GSEs) Fannie Mae and Freddie Mac have been in a kind of limbo.  The Fannie Mae and Freddie Mac programs continue to be the leading source of permanent financing for the apartment business. But they are controlled by the Federal Housing Finance Agency (FHFA), which is committed to shrinking their market presence. Moreover, debate has rung through Congress for years about what to do with the agencies—whether to privatize them, wind them down or continue to run them in their current versions.

 

MOB Cap Rates Continue Compressing

For professionals involved in selling, or investing in, medical office buildings, learning where capitalization rates are how – and where they’re heading — is important. Knowing such information can help buyers and sellers prepare for transactions involving income-producing buildings, as the cap rate is typically used to set the return on an investment by using a property’s net operating income, value, and, in some instances, other factors. As most people in the business know, the lower the cap rate the higher the demand for such properties, meaning returns will also be lower.

 

Portland Apartment Market Continues to Put Up Impressive Numbers

Portland’s apartment market remains one of the best in the country for annual rent growth and occupancy. And neither the moderately large volume of new supply nor the spike in single-family home sales notably weakened Portland’s apartment market fundamentals. Rent Growth: In the year-ending 1st quarter 2013, same-store rental rates in Portland jumped 3.9%, placing Portland in the seventh spot among major U.S. metros. Annual rent growth levels have held strong in Portland, which hasn’t fallen off as quickly as most other major U.S. metros.

 

Portland State to More than Double Size of Business School

Portland State University plans to more than double the physical size of its School of Business Administration thanks largely to an $8 million anonymous gift from an alum. The project will add 42,000 square feet of new construction and renovations to the school’s existing 52,000 square feet.

Hillsboro Shopping  Center Sells for $12.4 Million

The Langer family, which is partnering with Gramor Development on a $50 million retail development in Sherwood, has used the proceeds of a recent sale to Walmart to purchase a shopping center in Hillsboro. This week, Gramor announced that a 145,000-square-foot Walmart will anchor its Sherwood Town Center planned for the former Langer Farms property off of Tualatin-Sherwood Road. Now, the Langers have purchased Tanasbourne Central, a 43,827-square-foot retail and office center, for $12.4 million.

 

 

 

Oregon is an interesting state.  Not only do we have an economy that is dependent on farms, ranches, timber, tourism and food processing but we also have a strong manufacturing base (think Intel, Precision Castparts, Esco, Greenbrier Cos, Freightliner, Western Star, Boeing, Flir, Epson as examples) and being a port city, Portland acts as a conduit for goods travelling out of the United States and generates jobs moving freight. To that end, the Portland Metro area has exercised a magnetic influence for people seeking employment as those from rural Oregon and other parts of the United States come here to find a home.  This growth is accelerated because sixty two percent (62%) of Portland’s jobs and sixty nine (69%) of Beaverton’s jobs are family wage jobs as compared to Bend (and other rural areas) where only 55% of the jobs are family wage jobs (see attached chart).

Yes, there are a lot of baristas in Portland but other industries (other than retail) have slowly grown as well. For example, construction has grown by 7.4% over the last 12 months (thank you Intel for a new 3 billion dollar fab, and all of the apartment developers). The vacancy rate for apartments is between 2% to 4% in the Portland metro area and rents have slowly been increasing.  This has motivated apartment developers to build. In the short term we see over 2000 apartment units under construction, many as urban infill projects.

Is there demand for all of these units?  

Developers and bankers seem to think so.  Older baby boomers (ages 55 to 64) are preparing for retirement by selling their suburban homes and moving into the city (where many of them still work), and yes, into condominiums and apartments.  They want to be in neighborhoods with good walk ability scores, close to restaurants, entertainment, stores, medical care, and public transportation (busses and street cars). Those that like to bike also want to live in bike friendly areas.

Additionally, Gen Y cohort (late teens to early 30s) are graduating from colleges and are looking for employment opportunities. They are tired of living with roommates or mom and dad and want a place of their own.   As an example, I just read a rental application last week for a one bedroom unit.  Question:  Why are you moving?  Answer:  I want to have my own bathroom.  This cohort is tired of sharing space, they want a small space of their own.  They too want to move into the city.

 Do they make enough money to pay the rents for these new units?

If you consider that many of them will not have a car and therefore will not have car insurance, car payments, fuel expenses or car repairs, they most probably will have enough cash to justify the higher rents that these units (being new) will command. Consider also, that many of these units will be “environmentally sustainable” thus they will have lesser environmental impact, meaning that they will be smaller and have lower utility expenses.

Most of the Gen Y cohort will choose to live in apartments, because they will not have enough money for a down payment on a new house.  Reflecting at the losses of home value (equity)  in the current recession Gen Y’ers are also sensing that they may not want to own a home, and that they might be better off, at least in the short term, to be apartment renters. At a recent Portland State University  real estate conference (30 May, 2012) Mary Ludgin, Director of Global Investment research for Heitman said “We will see a long term future of apartment dwellers  vs. homeowners, home ownership will stay at lower rates.”

Given these environmental factors developers should do well on these new “smaller and environmentally friendly units”.  An additional saving for developers is that many of the units will have fewer parking spaces (a real boon for developers that have to pay for the land), and many more bike parking spaces.  It remains to be seen if that will work.  A good place to compare is Northwest Portland between 21st and 23rd street and Burnside to Overton.  Most of those apartment units are studios or one bedroom units and have a dearth of parking available, it seems to work there, but tenants with cars tend to park on adjoining streets much to the chagrin of their neighbors.  The apartment density in Northwest is shared with single family housing and commercial tenants, so there might be a little more parking elasticity.

In the past, suburban developers planned 1.5 to 2 spaces per apartment unit, which has shrunken to about 1.1 cars per unit (due to the high cost of land).    If you live in downtown, don’t bother inviting your friends for dinner, and don’t plan on being a two car family.  Urban developers are planning on 2 bikes per unit and guests that want to visit you, come via mass transit or on their bikes.   Newer apartment units will be so small that you will find tenants taking their friends out to eat dinner, which ought to be good for the restaurant trade.

The addition of new jobs is still necessary for the economy to rebound but as the economy reset’s itself, we will find that there  currently is sufficient demand for additional apartment housing in the Portland Metro area (for approximately 2000 units on the drawing boards.)

How does this affect apartment housing already in place?

New units coming into the market place will cost more to rent.  Those that can afford them will gravitate to those units; other tenants will stick with the existing units in the market place which, in most cases, will have a lower basis and lower rents.  The good news is that  as new units command higher rents the older units will also be able to ask more especially in the inner east side of Portland.  Key to investor’s success is a focus on continual upgrading of their units.  You cannot afford to let your units age out.  New paint, new carpeting, new appliances (that are more efficient), cabinetry and lighting upgrades will give real estate owners of older properties the opportunity to compete with new product and for good quality tenants.

The biggest challenges Landlords face are crime related.  Tenant screening is critical. Bad tenants can make life miserable for you and adjoining tenants. Help the police. Trim your landscaping down. Have your onsite managers (if you have one) establish neighborhood watch programs.  Make sure you have lots of lighting. Keep your units in excellent repair. Be proactive in caring for your property. Evict tenants involved with drug dealing.  In these ways, you can protect the value of your real estate investment and create islands of desirable property in tough neighborhoods.

The big picture glows brightly for those that invest in multifamily in the Portland Metro area even with the sudden burst of new unit development.  I would encourage you to keep investing and as usual keep your eye on the competition.

new story

Sale

David and Fiorella Featherston has purchased a 6 unit apartment complex at 8902 SE Woodstock Blvd in Portland, OR from Jesse and Brandy Gaomali. Charles Barker of Bluestone & Hockley Real Estate Services represented the buyer.

Challenge:

An apartment owner who is a value investor and willing to take on challenging properties wanted to find the best buys in a slow-moving market.

Solution:

Through Bluestone & Hockley’s Receivership Management Group, we discovered a 20-unit failed condo conversion that had been foreclosed. Exteriors were in good condition with new vinyl windows, however, interiors were only sheetrock, subfloor and without fixtures. The apartment sales group went through their database and located several potential buyers with the wherewithal to bring this property to a rentable state. More importantly, they assessed the current market condition and translated this into a value proposition for the buyers to make an excellent return on their investment.

Result:

We determined price and terms and won over 6 other bidders at a price of only $20,000/unit – well below current resale prices for 3 bed units.

new story

Sale

NFN Investments purchased a 20 unit apartment community for $400,000 at 2601 Rositer Ln. in Vancouver, WA from Imperial Bank of California. Steve Morris of Bluestone & Hockley Real Estate Services represented the buyer.

Challenge:

We began managing the 33 unit apartment complex during an economic downturn.

Solution:

We replaced the onsite manager, adjusted the rents to market and offered competitive promotional specials.

Result:

Within six months we had successfully rented all of the apartments.

Challenge:

When we began managing the fifty-five unit apartment complex there were ten vacant units.

Solution:

Within one month we successfully rented all of the vacant units, without having to use expensive promotional inducements.

Result:

A fully rented complex.

Bluestone and Hockley Real Estate Services

Tom and Irma spent a lifetime buying real estate. By the time they were in their sixties they owned 4 houses, a 30 unit apartment building, three commercial buildings, and had additionally invested with a couple of friends in some real estate partnerships.

Their cash flow was pretty good. They had almost paid off all of their investments. They kept their properties up. You could call them pride-of-ownership owners. They even found a property management firm that helped them care for their investments so that they only had to read the monthly reports, help prepare annual budgets, and inspect their properties from time to time. Things were going pretty well.

Their three kids had all finished high school. One daughter had gone on to graduate school and was working for a real estate developer. The middle child, a son, was a carpenter and an artist. Their youngest daughter was a school teacher. All were comfortable and did not need money from their parents.

Tom and Irma had focused on buying real estate when they were young and had developed their holding with a goal towards retirement. They were concerned that social security was under funded and doubted that there would really be any income or medical care for them, in their retirement. See excerpt from May 2, 2006 Yahoo news article below:

“The annual (Social Security) trustees’ report moved up the date that the Social Security trust fund will be depleted by one year to 2040 and moved up the date that the Medicare hospital insurance trust fund will be depleted by two years to 2018.

The problems in Medicare were depicted as far more serious because of the skyrocketing costs of health care, but the trustees presented a somber assessment of both programs facing the looming retirement of 78 million baby boomers.”

At this point in their life, they were healthy — relatively speaking. Irma had been struggling with diabetes for 10 years and Tom had some arthritis in his knees. They had been traveling all over the world and loved going to sea on cruise ships. They took two cruises a year all over the world. They were very happy except for one nagging question. What were they going to do with their real estate assets as they got older and it became tougher for them to take care of their investments?

Roger and Janine
Tom and Irma had always taken care of their real estate together. They had learned a valuable lesson when their close friend Roger passed away and his wife Janine was left with great real estate assets but no understanding how to manage them. Janine sold all of their assets within 12 months after his death because she just did not understand all of the details. She wanted all of her money in cash where she could see it. She had no idea that she was going to get taxed by the state and the federal government when she sold her real estate and ended up with almost 30% less than she had started with. In addition she was no negotiator and lost some of the value of her assets because she just did not want to be bothered with the process of going back and forth.

What was most important to Tom and Irma was to maintain their independence for as long as they could so they would not be a burden on their children. They had been able do this so far. As their friends grew older they noticed a disturbing trend.

As their friends gave significant financial gifts to their children, the children began to expect more and more cash or other gifts: stocks, real estate, cash, etc. This was most likely due to the increase in the standard of living and the struggle for every one to keep up with the Joneses. Real estate values had skyrocketed and only the fewest of their friends’ children were able to own homes.

Tom and Irma noticed significant skirmishes between children who wanted a piece of their parents rock (i.e. real estate or other estate holdings). The word “greed “came to their mind. This concept disturbed them. Most of these skirmishes were driven by the kids not seeing the future in real estate, and not seeing themselves as real estate investors. They definitely wanted the cash to spend and not real estate to care for.

Dolores
One of Tom & Irma’s friends, Dolores, was in her 80s and owned 3 homes in a trust. The cash flow from these homes paid for her stay in a senior assisted care facility. Her daughter Margaret was the trustee of her estate. Margaret took good care of her mother and in return charged the trust $500 a month to look after her mother and the properties. This was okay for a while, but Dolores had five children who wanted to know what was going on. They asked Margaret for monthly financial reports. Margaret refused to share the information, so they banded together and got an attorney involved. They just wanted to know what was going on, but Margaret became defensive and it became all-out sibling war. Margaret used Dolores’ cash reserves to hire an attorney. As a result Dolores’ asset values dropped to the point where they had to sell one the rental houses to pay the bills.

The Plan
Tom and Irma realized that not every child is the same. They decided that they needed to get all of their kids on the same playing field with them, so they decided to skip their next cruise and arranged for all of their children to meet them for two days without their families for a “business” retreat. Their intent was to plan for the next twenty years and the end of their lives. First they needed to make the kids relax and make sure they still got along. Then they explained to their children that one of them needed to be the real estate point person and another, the senior care point person. They laid out their plans for their investments and also asked the kids whet their needs would be.

Critical to the success of the business meeting was that the kids saw their future as tied together at least through their parents lives and then also after the parents deaths. Tom & Irma invited their property manager, their stock broker, their insurance agent, their CPA and their attorney to the meetings so the kids could see the whole picture.

What was extremely important was to make sure that the kids established common and a way to communicate. Then they discussed the issue of spouses, the potential for future divorce, and how to plan the future. None of the kids saw divorce on the horizon, but they did agree that one spouse had a very strong personality and could be very pushy and intimidating. They also agreed that the husband of the teacher was a good conciliator and could be very helpful to the group once the parents passed away.

This was a very difficult meeting, mostly because the kids had to come to grips with the mortality of their parents — something no one wants to do. At the end of the meeting they had hammered out a plan and an agreement to meet once a year make sure all were still on the same page. The kids also agreed that the daughter with the development experience would work closest with the parents and would give the rest of the siblings a monthly update.

At the end of the two days Tom turned to Irma and said, “I feel much better now.” She agreed.

Tom and Irma managed to plan a strategy. But what happens if you do not have children, or your children are not old enough, don’t have the skills or are not capable? What happens if the kids have no desire to be involved at all? If you find yourself in this situation, you may want to involve hired help. Trust companies, trust departments of banks, attorneys, friends, partners, and charities can provide help here. If you need to use one of these resources, you need to be aware that there is a significant additional cost involved. In addition you need to set annual investment goals, and develop a double check system of people you trust to administer the funds for you. For example, if you could set up a trust and have a board of advisors make decisions. This board must be selected by people that do not have a vested interest in your decisions or the implementation of your decisions. In other words, they should not be employees of the trust organization due to conflicts of interest.

At this point Tom and Irma are back to being semi-retired, paying attention to their investments, and planning their next cruise, knowing that their future is planned for.

Bluestone and Hockley Real Estate Services

Liberal pundits and city managers have been concerned over the cost of growth. They rightfully claim that urban growth places heavy demands on urban infrastructure and they have trouble financing that growth through the existing tax base. This is especially true in the current environment of tax limitations and lowered tax receipts caused by the current recession. Therefore, they have instituted a series of Systems Development Charges (SDCs) to ease their pain and have used this as an additional source of tax revenues to fund projects for their growing cities.

System development charges include:

  • Roads
  • Water
  • Sewer
  • Storm water
  • Fire protection
  • Libraries
  • Parks and recreation facilities
  • Schools

Those of you who have played the Sim City game will realize that cities cannot grow without any of the above items, and that they cost money to develop.

The challenge for developers is to find a piece of land that is inexpensive enough that, once an apartment building hits the market, it can be priced at a rent that tenants can afford. As the costs of construction, land, and the SDCs continue to rise, the rents will need to increase in order for a developer to make a profit.

Due to the current recession, we may see taxes increase at the city, county, state, and federal level. In order to deliver a new product to the market, developers are forced to increase rents to make the properties cash flow. (If projects don’t cash flow, banks will not finance them.) Therein lies the challenge to our future.

In many market places you can purchase older apartment properties in great locations and spend $5,000 to $10,000 a unit to renovate them. Lets assume you buy a 50-unit property for $40,000 per unit and spend $10,000 per unit renovating them to a like-new condition, which leaves you with a cost of $50,000 a unit. If new construction costs over $65,000 per unit to build, and the cost of land and the SDCs keep escalating—as is true in Oregon—then you have a great investment because the rents keep moving up. The keys to success in doing this are finding the right location and understanding the local building codes for your community. With some buildings, no matter how much money you spend to renovate, either you will never get it to be earthquake proof, or the asbestos removal could cost you more than the renovation. This means that it is important to do a thorough job of due diligence before closing the deal.

You also need to keep rental rates in mind and have a target rent. Those that rent apartments are often on a fixed income or have just started in the work force. According to the United States Census Department, roughly 30% of Americans live in multifamily housing of one kind or another: apartments, student housing, senior housing, etc. As our population keeps growing, there will be a continual need for apartment housing. There will also be a need for condominiums, and some developers will be able to take an apartment off line and convert it to a condominium project to make even more of a profit per unit.

In the Portland, Oregon marketplace we have seen a decrease in apartment construction because job growth is down (unemployment here is the highest in the nation at 8%) and demand for units is down. Vacancy rates hover between six and ten percent depending on the sub-market. Market concessions are rampant. But this is a short-term market adjustment, and once the economy rebounds, the rents will stabilize. With the low interest rates it makes sense to buy a property to renovate.

Newly constructed units will force the rent levels even higher than they are today, which means there is a niche in the market for a developer to renovate a building to “almost new” condition.

Apartment dwellers typically cannot afford to buy a house and earn less than $13.00 per hour. A quick check of entry-level jobs on the Oregon Employment department web site reveals that the average employee earns from $9.00 to $12.000 per hour. This means that most can afford monthly rent between $500 and $700.

The increase in population will increase demand for housing over the next few years, but developers will struggle to respond to the need because of the low wages, the high price of development, and the high cost of land. As wages continue to inch up, it will be easier to make new construction pencil out. This means that in the short term, renovation is the name of the game for apartment developers.

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