Miami Heat for Condo Man
Jorge Perez is the undisputed Miami condo king. What’s arguable is the viability of his realm, the beleaguered Related Group. Florida real estate, by turns, builds up rich empires and then thrashes them down, whether it’s a hurricane, a local economic bust, or a global financial meltdown.
Say this for Perez–he’s unbowed and undaunted as he fights the battle of his life to ward off financial oblivion. He spends time with Miami Herald writer Matthew Haggman to tell the tale of the rise-and hoped-for interrupted fall.
Here’s a short video clip that shows Perez’s determination in the face of $2 billion in debt he needs to renegotiate with lenders.
Video: Courtesy of the Miami Herald
DC Metro Market Minder
Here’s a six-minute wrap on what’s going on across for-sale and for-rent in the Washington, DC-metro area from a local real estate analyst.
Adam Lobst of A-Team Realty, LLC explains the latest real estate trends in the Washington DC Metro area. He explains what the trends are and how these trends impact todays Buyers, Seller, Renters, and Landlords.
Foreclosure Fluency the USA Today Way
35 U.S. counties are responsible for one out of two–or 1.5 million–foreclosure actions in 2008, per a USA Today analysis of RealtyTrak data. Great Flash infographic maps show the velocity of the foreclosure tsunami as it engulfed Rust Belt cities and bubble-market centers in the Southwest and Calilfornia in the two years from 2006 to 2008.
“This crisis was triggered by foreclosures, and a lot of those were in a very small number of areas,” says William Lucy, a University of Virginia professor who has studied the link between lenders and faltering home loans. Banks spread the risk and “it became like a car with no reverse gear. Once it starts to go over the cliff, it’s gone.”
In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.
Banks are at the nexus of the problem because their fully compromised investment in real estate has both a home mortgage and a commercial acquisition, construction and development dimension to the startling erosion of their capital base.
The weakening and ultimate failure of many banks burns housing on the non-for-sale side even though many of the multifamily for-rent companies interacting with lenders have maintained surer footing with their construction and development loans to date.
Multifamily Executive magazine senior editor Christopher Wood maps out two indirect but nasty impacts a pulverized lending and credit environment has on multifamily housing players in his article, “Bank Failures Expected to Continue: Multifamily is likely to suffer more indirect damage as financial stabilization efforts arrive too late to save lenders with high residential mortgage exposure.”
One indirect ramification is that–despite the fact that much of multifamily’s financing need is met from government sponsored entity and Wall Street funding–any curtailment in local bank funding pipelines through as a shrunken pool of capital to draw from. The other consequential effect of bank failures on multifamily is job loss, which whacks every part of every economy.
Here’s an excerpt from Wood’s analysis.
Matthew McManus: Click for access to bio. Note: No relation to Housingcrisis blog author.
“Notwithstanding those five- to 10-unit properties where a lot of local banks might have taken on deals, the vast majority of multifamily over the past 10 years has been financed through the agencies or through Wall Street,” says Matt McManus, chairman of NAI BlueStone Real Estate Capital, a Philadelphia-based commercial real estate investment banking and advisory firm that secures debt, mezzanine, equity, and sponsor equity financing for investors, operators, owners, and developers
“I don’t think that there is enough exposure to banks that the number of banks that are failing are going to really have any impact to the multifamily industry,” McManus continues. “But indirectly, whatever bank goes under, there are a few less dollars that can be loaned out to job-creating vehicles.”
Regional unemployment figures catalyzed by bank failure are certain to hit multifamily operators already struggling with tough property fundamentals. “The broader impact is being felt very clearly in higher vacancy rates and falling rents,” says report author Anderson. “But the other 800-pound gorilla is what happens with commercial [and multifamily] real estate. So far, multifamily delinquencies and defaults have not been that bad, but they have spiked significantly upward. By our calculations, there is $210 million in multifamily mortgages coming due between now and 2011. Quite a bit of that will face some difficulty in getting funded, despite the activity of the GSEs.”
Indeed, McManus reports a wide disparity between Freddie Mac re-financing terms and what is readily available in the market for a Class A stabilized apartment property in Philadelphia. “We can’t find a bank that is within 80 percent of Freddie Mac’s proceeds,” McManus says. “That’s how conservative banks are being today. They underwrite to shorter amortizations, higher debt service ratios, and sometimes artificially high constants to make a 60 percent LTV-type loan versus a 75 percent or 80 percent LTV.”
Multifamiliar? Woes Grow as Deal Flow Slows as Rent Trend Goes Who Knows How Low?
Atlanta Fed President Dennis Lockhart clocked in with a “we feel your pain” to multifamly players in his audience as he addressed the Greater Miami Chamber of Commerce yesterday . In the mess that is Miami’s multifamily market environment, Lockhart’s comments hit a nail on the head as he describes a softening business base as a result of massive dislocation in the supply of units, noting that vacancy rates had reached 7.5% by the end of 2008.
I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.2
Multifamily Executive senior editor Les Shaver reports on how demand destruction on the rent side is throwing apartment sale deal flow into nuclear winter. Just as in so many other industries, the fundamental asset building block through which valuations are done by buyers and sellers has been undermined by the fallout of the credit and consumer spending cliff-dive.
The problem: Sellers still aren’t adjusting their prices for the market. “Despite placing so much product on the market, sellers appear to be in denial as asking cap rates have increased only slightly since September to 6.4 percent,” the report said. “Deals have spiked by 50 basis points over the same period, reaching 7 percent in January. Clearly, with so few closed deals, the bid/ask gap remains wide, and it is sellers who must become more realistic.”
Until the gap between buyers and sellers closes, David Schwartz, managing member for Waterton Associates, an apartment firm based in Chicago, doesn’t see things improving. “It will be sellers dropping their prices and then you’ll start seeing transactions clear,” he says.
The deals that did clear in January were generally small. The largest was $67.4 million for a three-property deal sold by Home Properties, a REIT based in Rochester, N.Y. Only one other deal sold for more than $30 million.
The report also highlighted another trend. “Default and foreclosure filings involving significant apartment properties grew by almost $1.8 billion,” the report said. “At present, distressed apartment assets total $9.2 billion [906 properties], a figure that continues to grow rapidly. Troubled properties are now found in nearly every market.”
Glut, which is at the core of the for-sale new residential meltdown, is putting a hurt on multifamily players as well. Here’s Calculated Risk’s phrasing of the causes:
Although Lockhart mentioned that houses are competing with apartments as rentals, he doesn’t mention that this is happening for two reasons: 1) homeowners who can’t sell their homes (or are “waiting for a better market”) are renting their homes, and 2) many REOs are being purchased by cash flow investors as rentals helping to increase rental supply and push down rents.
Multifamily trade association leadership has been quick to pin the blame for this shadow inventory on the excesses of home builders. Simply, it’s a more complicated matter than that.
Less Distressed Than Thou, Perhaps: Good Fortune Rains on RE Standouts
Most-admired takes on new meaning at this moment, especially as regards those organizations who ply their trade in the world of residential real estate. Still, Fortune doesn’t make its fortune for the Time Warner folks by taking an on-again-off-again approach to editorial chestnuts the likes of the Fortune 500, or the World’s Most Admired Companies.
So, whether those in the real estate field are feeling admirable or not, Fortune’s come along with its list of those organizations who’re a cut above the rest.
Here’s their take, including some residential multifamily players we think a lot of ourselves.
| Rank | Company | Overall score |
|---|---|---|
| 1 | Host Hotels & Resorts | 6.59 |
| 1 | Simon Property Group | 6.59 |
| 3 | Vornado Realty Trust | 6.29 |
| 4 | Jones Lang LaSalle | 6.27 |
| 5 | CB Richard Ellis Group | 6.21 |
| Rank | Company | Overall score |
|---|---|---|
| 6 | ProLogis | 6.09 |
| 7 | Equity Residential | 5.77 |
| 8 | Realogy | 5.00 |
| 9 | AIMCO | 4.99 |
| 10 | General Growth Properties | 3.18 |
|
From the March 16, 2009 issue
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Rental Breakdown: Tenants Drive the For-Rent Bus Downward
Theoretically, the rent is the rule, a constant, with incremental increases built in to an inalterable profit model of management for 30-some percent of United States households, and countless businesses.
The rental model, it seems, has gotten the flu when the for-sale model sneezed.
Now the rent, which was once almost as certain as death and taxes, is not a slam dunk any more.
Michael Shedlock, a k a Mish, waxes prophetic in a post that springs off a rental mutiny among retail tenants at Grand Central Market in downtown Los Angeles.
The takeaway?
The mass mutiny at Grand Central Market provides a strong hint at what’s coming.
With rising unemployment and falling discretionary spending, the economy is not coming back anytime soon. Thus, tapping credit lines to pay rent is a tactic guaranteed to fail. Yet, the economic situation is such that using lines to pay bills will continue until every cent of those credit lines are used up. After all, what vendor will voluntarily go out of business now?
Those lines of credit will eventually be defaulted on and that in turn will sink the regional banks who made the loans.
This crisis was “resolved” for now, but how many more rounds like this can the tenants take? Equally important, how many more rounds like this can the Yellin Company take? Next, multiply this scene by every similar market in the US. A conclusion is not hard to reach: A massive fallout on commercial real estate is right around the corner.
This is not to say that Mish has been scooped, but Calculated Risk has been sounding the same alarm about rents–both residential and commercial–for several months.
CR’s spare comments accompany a chart that maps a stark reality ahead for those who’re trying to make a go of it in the for-rent trade who have exposure to tricky capital structures and heavy leverage.
Click on graph for access to original Calculated Risk analysis.
This shows three scenarios for rents in the U.S. over the next two years: Flat, a 10% decline in rents, and a 25% decline in rents.
As I noted yesterday, with the “more severe” scenario and flat rents, the price-to-rent ratio will be slightly below the normal range. If rents fall 10%, this metric would be in the normal range, and with a 25% decline in rents house prices would be too high.
With the largest bubble in history, I’d expect house prices to overshoot and the price-to-rent ratio to decline to the bottom of the normal range. This suggests even a 10% decline in rents would make the “more severe” scenario too mild.
For an applied take on what this heralds for those in the multifamily business, check out an analysis by Multifamily Executive senior editor Les Shaver: “Final Tally for Multifamily is Grim in the Fourth Quarter.”
“The really ugly performance seen for the end of 2008 was in line with what our models predicted in the worst-case scenario,” says Greg Willett, vice president of research and analysis for M/PF Yieldstar. “But you don’t usually expect that everything that can go wrong actually will.”
With massive slowing in places such as Atlanta (which is now in worse shape than any market in Florida), Charlotte, N.C., and Austin, Texas, the South’s vacancy rate rose to a whopping 8.5 percent. The Midwest fell just behind with an 8 percent vacancy rate, while the West had a 7.3 percent rate, and the Northeast returned a 6.2 percent vacancy rate at the end of the quarter.
“It was a little surprising to see just how quickly the Pacific Northwest markets, which had been in such great shape, lost momentum,” Willett says. “And the complete collapse of the performance in Los Angeles was stunning. That metro saw occupancy levels fall nearly five percentage points during 2008, translating to huge net move-outs for a market that contains more than 1 million units.”
Willet expects vacancies to reach their highest points in late 2009 or early 2010. With vacancies rising, it’s little wonder that rents also took a hit. In institutional-grade units, M/PF Yieldstar reported that rents dropped by 0.3 percent, which was the first decline since the third quarter of 2003. Without adjusting for inflation, rents increased in the Midwest (1.1 percent) and South (0.2 percent) and fell in the West (-1.7 percent) and Northeast (-0.1 percent). With inflation-related adjustments, rents fell in every region.
“Rents are going to be cut significantly during 2009,” Willett says. “We’re expecting rates to come down at least 3 percent for the nation as a whole, which would be the most severe annual slide ever seen.”
Apartment owners are seeing this as well. “We would trend almost every market down a little bit to a lot this year,” says Greg Mutz, CEO of AMLI Residential, an apartment owner with properties in the Midwest, Texas, California, the Northeast, Florida, and Atlanta.
Creative License
On one of our trips to the venue for residency activities, I even saw a lady, outside one of these developments, dressed as an ostrich and shouting entreaties to passers-by: “Come on in! Have a look! This is your new dream home!”
This quote, backed up with a bit of foto candy, is a slice of life take from the traveling wind and string ensemble that’s named itself from a Wallace Stevens poem of all things, Thirteen Ways.
Click on image for access to Thirteen Ways post.
GSE’s Not Having a Whole Lot of Fund Out There
From HOUSINGFINANCE.COM, By Jerry Ascierto: Distinguishing one government sponsored enterprise from another these days is getting more difficult. They’re both in government conservatorship; both still hemorrhaging money; and both still trying to offset mountains of bad investments with some good ones.
Housingfinance.com senior editor Jerry Ascierto tackles the issue of GSE parity on rates, and what it might ultimately mean for those who’re trying to get access to their capital for affordable housing community projects in a credit-crunched environment.
Immediate funding deals for tax credit properties were quoting in the mid- to upper 6 percent range in late February.
But rates on forward commitments from the government-sponsored enterprises remain high. Interest rates for funded forward commitments are in the high 7 percent range, and prices are above 8 percent for unfunded forward commitments.
“They’re pricing in a significant amount of risk premium into forward pricing at the moment,” said Phil Melton, senior vice president of Grandbridge Real Estate Capital. “That’s driven by the fact that there is a significant amount of forwards that are not converting at the time that they’re supposed to.”
Forward commitments are loans on 9 percent tax credit deals undergoing new construction or substantial rehabilitation. In a funded forward, Fannie Mae agrees to purchase the permanent loan and also provides funds to the deal’s construction lender; an unfunded forward commitment provides a rate-lock and commitment to fund the permanent mortgage once construction is complete.
Meanwhile, ahem, we call them results these days because there are so few earnings, and here’s what they amounted to in Fannie’s latest financial period, thanks mostly in part to a 3-year insanity spree into risky home mortgages. The Wall Street Journal reports:
Graphic: Courtesy of the Wall Street Journal
The deepening financial problems at the companies set up some tough choices for the Obama administration, which will have to decide whether to continue pumping taxpayer money into the firms to keep them operating or break them into pieces and strip them of their government support. Another unsettled question is how long to retain as their regulator Mr. Lockhart, a friend of former President George W. Bush since their high school days.
Fannie and Freddie were battered by the worst wave of mortgage defaults since the 1930s and recorded combined losses of nearly $60 billion for the first three quarters of 2008. The government seized management control in September under a legal process known as conservatorship, and has since agreed to make as much as $400 billion of capital available to them. Under conservatorship, the regulator is charged with “conserving” the companies’ operations and nursing them back to financial health.
The conservatorship hasn’t produced all the results the government sought. Thus far, the two companies have rewritten just a tiny fraction of the 31 million mortgages they own or guarantee.
Multifamily is where the GSEs actually still have viability, but that scarcely appears to matter, since they’re on a different performance scorecard.
In an interview [with the WSJ's James B. Hagerty and Damian Paletta], Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”
Condo Phobia Grips MultiFamily Starts
From MultiFamily Executive, By Les Shaver: In the the single-family for-sale world, a certain level of speculative building practically needs to go on, seeing as how about half of the half-a-million intrepid souls a year who are still buying new homes want one that’s ready to move into.
That’s not the case with multifamily, where development and construction capitalization and business modeling are night and day different than for single family.
The starts that are still starting are ones that got funding well before credit became as rare as three-dollar bills, and before skittish prospective home buyers’ feet went from cold to frozen.
Multifamily Executive senior editor Les Shaver offers this analysis of multifamily housing starts as reported by the National Association of Home Builders.
The National Association of Home Builders (NAHB) reported yesterday that multifamily starts fell nearly 28 percent to a rate of 119,000 units-the lowest number the trade association has ever recorded.
To some, that news was better than expected. “I could have seen it [the decline in starts] being higher than that,” says Greg Bonifield, a principal with Woodfield Investments, based in Ashburn, Va.
Bonifield isn’t alone. In last week’s Multifamily Rental Market Index (MRMI) and Multifamily Condo Market Index (MCMI), which surveys builder confidence, market conditions fell to 22.4 for affordable apartments and 18.6 for market-rate apartments, compared to 45.3 and 40, respectively, at the same time a year ago.
On the condo side, the supply component fell 11 points from the fourth quarter of 2007, to hit a new record low of 7.8. (These quarterly NAHB surveys have a scale of 0 to 100, with a rating of 50 generally meaning positive and negative responses are the same level.)
The vaunted credit squeeze is behind the cliff dive in recent months, but it’s going to take longer than that to sort out normalized supply and demand levels.
New HUD Chief Stokes Expectations to Stabilize Housing
From HOUSINGFINANCE.COM, By Jerry Ascierto: Lower expectations and then overdeliver on them. It may be wise advice, but the new Secretary of Housing and Urban Development, Shaun Donovan, ain’t havin’ none of it.
Making it clear that he didn’t come this far in his career to be daunted by the task in front of him, Donovan yesterday laid out a framework for breakthroughs, sustainable progress, and bureaucratic streamlining in describing his agenda for HUD in the coming months and years.
Housingfinance.com senior editor Jerry Ascierto reports from the scene in New York City, as the fledgling HUD Secretary came out on familiar turf but in uncharted economic waters.
HUD Secretary Shaun Donovan
Donovan made it clear that the production of new affordable multifamily housing will be a key component of the new administration. “The president will keep his pledge to fund, at significant levels this year, the National Housing Trust Fund,” said Donovan. “We must begin to build new tools and resources particularly focused on the extremely low-income families that suffer the most in our rental markets today.”
The National Housing Trust Fund, the first new federal production program for low-income housing in decades, was passed into law last year. The fund was to be seeded by money from Fannie Mae and Freddie Mac, but their conservator, the Federal Housing Finance Agency, suspended contributions to the fund in December.
Donovan also called for a wide-ranging modernization of HUD’s multifamily programs, which have been neglected for decades. “When I think of HUD’s programs, it’s as if the low-income housing tax credit was never invented, as if the evolution of HUD’s programs stopped a generation ago,” said Donovan.
Donovan also touted several measures in the economic stimulus package that would help stabilize communities hardest hit by the single-family foreclosure crisis. The stimulus bill contains $1.5 billion for HUD’s Emergency Shelter Grants, to help combat rising homelessness, particularly among families. The bill also has $2 billion for the department’s Neighborhood Stabilization Program, which provides emergency assistance to state and local governments to acquire and redevelop foreclosed properties.
Multifamily is where a fair amount of the new stimulus package upside focuses, but Donovan will also be involved in Treasury and Fed efforts to stanch the tide of foreclosures on the single-family side. Builderonline senior editor John Caulfield was on hand at the event in New York to report on that part of the HUD Secretary’s plans:
Within the first 100 days of the Obama administration, Donovan intends for HUD to start accelerating loan modifications and institute industry-wide standards for those modifications. He also plans to initiate targeted bankruptcy reform that will serve as a safety net that keeps as few homeowners as possible from going into foreclosure in the first place.
HUD will take measures to minimize the impact of foreclosures on families and on communities and will work to ensure the continued availability of private capital for mortgages for home purchases and refinancing.
Donovan’s long term plans for HUD are far more ambitious. He outlined a series of five strategic goals designed to not only remediate the current crisis but also deal with future housing needs.
The first involves remaking the mortgage system. With bank and mortgage company lending standards currently untenably stringent, Fannie Mae, Freddie Mac, and FHA are originating 95% of all home loans. To break this logjam, HUD will need to take steps to ensure liquidity and leadership in the private sector and make the loan process simpler and more transparent for buyers.
The kid hardly looks like he needs to shave, so if he accomplishes all he plans, he’s right on track to become known as a housing “wunderkind,” or possibly cannonization.