WFMY Story on Apartment Construction in the Triad

Local CBS affiliate WFMY ran a fairly extensive story on the rise in apartment construction in the Piedmont Triad (link below).

WFMY Story About Apartment Construction in the Piedmont 

Branding Communities

In the Plots & Ploys section of today’s Wall Street Journal Property Report reporter Dawn Wotapka highlights AvaloyBay Communities’ efforts to brand its communities:

The company, which owns about 60,000 mostly upscale units in nearly 200 properties, on Wednesday plans to announce that it is launching two new brands. One, named AVA, will target younger tenants who want to live in cities. The buildings will feature smaller units and be designed for roommate living. Three properties that will carry the AVA flag are under construction.

The other new brand, eaves, will offer less-expensive apartments, mostly in the suburbs. In 2012, AvalonBay plans to reflag 20 to 25 properties as eaves and redevelop about 10 new communities with the brand. All the company’s other projects will keep the Avalon brand.

WSJ: Big Developers Dabble in Apartment Market

You’ve probably heard the saying that “misery loves company.”  Well, if misery loves company then success attracts company and according to the Wall Street Journal the recent strength of the apartment market is drawing in some large commercial property companies that haven’t traditionally been involved with apartments:

Fueled by the decline in home ownership, the boom in apartment building is attracting commercial-property companies such as Boston Properties Inc., Mack-Cali Realty Corp., SL Green Realty Corp.,Simon Property Group Inc. and MacerichCo. They all have either acquired, completed or broken ground on apartment buildings in recent months, or plan to do so next year.

The companies’ moves are helping fuel a boom in rental apartment development and investment. The Commerce Department said Tuesday that construction starts in the multifamily sector in November spurted 25.3% from the previous month. Single-family housing starts rose just 2.3%.

Many of the nation’s biggest office and retail developers are getting in the apartment game for the first time. For example, Macerich, a mall giant whose holdings include Scottsdale Fashion Square in Arizona and Queens Center, in New York, is building a 430-unit apartment tower at its Tysons Corner Mall in Virginia. The company says it also is exploring building apartment units at its Broadway Plaza mall in Walnut Creek, Calif.

As our members know managing apartments requires a unique skill set and that fact isn’t lost on some of the developers sticking their toes in apartment waters:

Apartments require a far different skill set than retail or offices. Turnover is high, so landlords constantly have to adjust prices to fill empty units. Tenants can easily be lured away by something newer, better located or offering more modern amenities. Landlords also have to worry about the economy worsening—plenty of apartment owners had to reduce rents after the financial crisis—and the for-sale market making a comeback.

Mr. Linde at Boston Properties said that because apartments aren’t the company’s expertise it has hired outside companies to be responsible for the leasing and day-to-day management of the properties. That will likely reduce profits, but the company won’t have to take on additional overhead, he pointed out.

Sounds like there might be some opportunities for third party management deals.

Renting is In

Over at the Daily Beast they’ve discovered that renting is what it’s all about:

For the first time since Herbert Hoover pushed homeownership as a way of staving off communism’s Red Menace, owning has lost its luster for the young. Since 2008, when the economy faltered, the percentage of young people who think that owning a home “is without a doubt always better than renting” has fallen by several percentage points, according to study (PDF) released in October by the Center for Behavioral Economics at the Federal Reserve of Boston.

Renting, it seems, once the province solely of the disenfranchised, has acquired a sort of cool respectability. Empty nesters got the same religion a couple of decades ago, when droves of them began cashing out of their high-maintenance houses, but the embrace of young professionals is a postrecession phenomenon. For developers, says the futurist Richard Florida, whose most recent book is The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, “multifamily is the only game in town.”

It’s an interesting article that looks at the cultural influences that are causing home ownership to lose some of its luster, as well as the economic influences that have been reported extensively over the last couple of year.

Cap Rate Disparity Between Primary, Secondary Markets Shrinks

The cap rate spreads between major metros and smaller cities are shrinking:

“Everybody wants to be in the gateway cities and Class A product, and they’ve driven the yields so far down that there’s been a rebound effect,” says Gary Mozer, principal and managing director of Los Angeles-based investment banking firm George Smith Partners. “Stuff was selling in Los Angeles at a 4.5 percent cap, and now it’s a 5 percent cap again.”

The risk premium in the multifamily industry remains healthy—the spread between the 10-year Treasury and cap rates is as wide as it’s ever been. But investors are increasingly questioning the elasticity of demand for Class A product, and finding better yielding opportunities in lower asset classes, and smaller markets, with less perceived risk.

“I don’t think cap rates are going to compress much more in the core, A-quality assets. We’re starting to see a little pushback—there’s caution in the wind, and that’s probably appropriate,” says Bill Hughes, managing director of Encino, Calif.-based Marcus & Millichap Capital Corp. “Where you could continue to see some cap rate compression is on some lesser quality assets in smaller markets.”

Wells Fargo’s Economic Outlook for 2012 – Apartment Development Lone, Unambiguous Bright Spot

Wells Fargo’s economic outlook for 2012 is posted on their website and they make some interesting observations, starting on page 5 of the report, about what they call “game changers” to the old economic framework:

From our viewpoint, three structural challenges in the domestic economy have limited the pace of economic growth in 2011 and are also likely to limit growth in the year ahead. In each case, the experience of this cycle is significantly different than in prior cycles, implying that decision makers must adjust to the new rules of the game.

First, the Great Recession exposed the credit dependency for the American consumer, the U.S. federal government and European sovereigns. Over the past 30 years, the broadening of credit availability provided the means for many households to spend beyond their income earnings in the hope of paying off those debts out of future income. This ended with the Great Recession.

Second, expectations for continued home price appreciation, built upon the experiences of the post-WWII period, set the tone for the strategy to buy a home today in anticipation of capital gains down the road. This ended with the Great Recession.

Finally, state and local governments had also anticipated that future retiree benefits and health care, woefully underfunded in many states and localities, could be paid out of future tax revenues.  Well, we know how this ended.

They go on to explain the thinking behind their hypotheses and it’s well worth the read if you want some insight into why this economic recovery has been so different from past recoveries, and how that might impact business in the coming years.  Of particular note is their outlook on housing – they see 2012 looking like 2011 – and their assessment of the prospects for apartment development:

Apartment construction remains the lone, unambiguous bright spot, and the recovery in that market still has quite a ways to go. Vacancy rates for apartments have fallen 1.5 percentage points to 5.6 percent over the past year and rents have increased 2.1 percent. Construction activity began to rev back up during the second half of the year and is expected to rise further in 2012.  Development activity is still being constrained by concerns about sluggish job growth and credit availability. Sales remain strong, however, and the relatively high prices apartment communities are fetching should keep the development pipeline growing.

Groundbreaking for Apartment Community at NewBridge Ballpark

Short story and photo spread of the groundbreaking for Lomax Properties’ development by the NewBridge Ballpark.  You’ll notice lots of Greensboro’s elected officials were on hand for the occasion.

Fayetteville Considering New Program That Targets Rental Housing

According to this article in the Fayetteville Observer the city is considering a new ordinance that targets “problem” rental properties:

A revised version is called the Rental Action Management Program, or RAMP, and a public hearing on the proposal is set for Monday.

According to the draft, landlords whose properties accumulate more than three code violations in a year – such as trashy lots or substandard construction – would face consequences. So would landlords whose rental houses rank in the top 10 percent of properties getting the most crime and police calls. Police would calculate the crime rankings every six months.

Among the consequences: Property owners would have to attend a meeting with city officials and, if necessary, develop a crime-management plan. They’d also have to pay a $1,000 fee to continue renting the property.

If the problems persist, the city could restrict the owners from receiving rental income from the property for one year.

Representatives of the Cumberland County Apartment Association have some issues with the proposal:

“We have some serious concerns, and we’ll be there at Monday’s night hearing,” said Carey Petricka of the Cumberland County Apartment Association, which has 125 members.

Bill Nye, chief executive officer for Caviness & Cates Property Management, likened the proposal to the city penalizing gas station owners when people drive off without paying. His company owns and manages six apartment complexes in Cumberland County.

“I don’t think bigger government is going to solve the problem,” Nye said Friday. “I just don’t think the city is in a better position to manage our properties than we are.”

Nye said the city should form a task force with people in the industry to re-examine the rental housing proposal. He said his company rigorously screens applicants and pays for on-site security.

The article goes on to compare Fayetteville’s proposal to Charlotte’s existing program and provides more details about the RAMP program.

Interesting Development for Student Housing Providers

It will be interesting to see if the University of Kentucky is starting a trend:

The University of Kentucky is getting out of the student-housing business and plans to turn over its dormitories to a private company that will upgrade and manage the aging properties.

The university said Monday it’s negotiating with Education Realty TrustInc. to transfer control of nearly 6,000 beds and apartments. The new owner will redevelop much of those rooms and build more than 2,500 beds in the next five to seven years…

The university won’t receive cash for its dorms but would get ground-lease payments for its land. In exchange, Education Realty will spend as much as $500 million on upgrades and construction of new dorms and will collect rent payments from students…

The school and Education Realty are still negotiating terms of the arrangement, such as who would set rental rates. Currently, the University of Kentucky charges between $2,255 and $3,327 per semester per student for traditional dorms. Rents increased 9% for 2011-12 academic school year.

The school cautions that the negotiations, which should be finalized in January are tentative and could be terminated at anytime. Some industry watchers expect other big schools to follow. “It’s a name school looking to the private sector,” said Brian Dinerstein, president of Sterling University Housing, a large developer of off-campus housing. “It could be a game changer.”

Worse Than They Thought

As bad as the National Association of Realtors’ home sales figures were, they’re about to get worse:

National home sales figures will be lowered dating back to 2007 after the private trade group that collects them said the numbers were too high.

The National Association of Realtors said Monday it will release the downward revisions for previously occupied homes on Dec. 21.

Among the reasons for the inflated figures, the Realtors group says: changes in the way the Census Bureau collects data, population shifts and some sales being counted twice. Last year’s total sales figure of 4.91 million was the worst in 13 years…

CoreLogic estimated that the Realtors group overstated sales in 2010 by at least 15 percent.