Friday, November 21, 2008

How much rent can the Reno tenant really pay ?

Morgan Walsh - Multi-Family Specialist
Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646

Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.

Developers, landlords and apartment investors all try to pin down which renter can pay the highest rent and how many can be attracted to a rental property. But everyone knows that high-end renters also have choices which include single-family home ownership. For the subset of high-end renters who can't or won't buy homes, how many are out there and what will they real pay ? Professionals in the apartment business track Class A apartment properties built in the last 5 years which have yet to stabilize at current asking rates. Occupancy can be boosted with concessions, but once they burn off, vacancy creeps up unless rents meet the level at available demand. As 2009 approaches, it's still cheaper to buy than build in every submarket regionally. Developers who model the projected cost and performance of new construction are focused on opportunities to acquire vacant land at drastically low values because development fees, water rights, construction costs and cost of funds are material factors largely beyond their control. By contrast, higher gross rents would sharply expand their return on investment. But how high will the tenant go ? Most landlords don't expect to compete with new construction because demand for their product is determined by the location of their building and the price point they offer tenants. And most tenants still prefer the convenience of proximity to schools, shopping and employment centers. For the tenant who tries to minimize her housing cost in a safe, pleasant environment, some existing apartment properties offer a very good alternative. Apartment investors view the same metrics with an eye to forecasting rent growth and investment performance. Traditionally, Reno/Sparks rents rise with inflation because new construction is not constrained by geography, rent control, density limitations or prohibitive land cost. In 2005, new household formation was projected to increase sharply over the succeeding 15 years. But recession, job loss, a slow exodus of Hispanic families and the dramatic loss of economic mobility among retireds have now reduced demand in all but a few enclave rental submarkets. Currently, the market is telling us most tenants will pay up to $ 1.00/SF in apartment rent, with a median rent of $0.92/SF on a minimum annual income of $ 28,000. Today, twice as many households have income in the range of $10,000 to $ 30,000 as those who have household income in the range of $ 30,000 to $ 50,000. When does the tenant in the latter category convert to home ownership ? Many already own condo and single-family detached product. How many continue to rent ? Will steeply falling home prices further reduce that cohort ? In the current re-sale housing market, foreclosure property at or below a $ 200,000 price point is increasingly available. For the buyer renting at $ 1,050/ mo. who can put down 10% on a home purchase for $ 175,000, financed at 6% (with the benefit of deductible interest roughly off-setting ad valorem real property taxes and the lender or seller paying closing costs) would not see an increase in his effective monthly housing cost. That buyer would qualify at a gross income of $ 35,000/year. But, does the buyer have the down payment, the tenacity to get the deal, the credit and overall debt ratios to satisfy a lender and the desire to own when further price declines are forecast ? Moreover, the typical buyer of distressed for-sale product is the small landlord who plans to add that unit to the shadow market competing for tenants with apartment properties. With isolated exceptions in the central business district and Lake Tahoe, the lifestyle renter who could afford to own and chooses not to is a negligible segment of renter demand. In 2006, the overall vacancy for 3BR/2BA units was under 4% from which average rent has risen 10% to $ 1,130 in 2008. Townhouse rents above $ 1,115 routinely run at vacancy rates above 7%, Of the roughly 25,000 households who have household income in the range of $ 30,000 to $ 50,000, fewer than 2,500 are currently lodging in apartment properties, and those units have an overall vacancy at 8%. What does all this tell us ? The tenant who can comfortably pay more than $ 1.00/SF either converts to buying or accepts lodging at a lower price point than she can afford. We invite your comments and look forward to discussing these trends.


Friday, November 14, 2008

Where do your tenants come from in a recession and where are they going ?

Morgan Walsh - Multi-Family Specialist
Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646

Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.

Apartment managers are reporting a curious phenomenon in the rental market—the borrowers in foreclosed property are not showing up to lease an apartment. One conjecture is that such tenants would prefer a single-family residence and they can still find housing in the rental shadow market. Others are leaving the area entirely to house with family members, especially if job loss led to the foreclosure. An apartment owner might not want to target a marketing effort to capture this business, but in a recession the tenant who can pay and has solid employment could be a good bet if the price is right. Data for defaulting borrowers by residential address is widely available and can be sorted for neighborhoods near the apartment complex. Defaulting homeowners could show up later in the cycle when the shadow market for single family dwellings is nearly absorbed, but that’s months off.

Astute managers are being very pro-active with tenants who deliver notices to vacate. First, they qualify the tenant with questions to identify whether the motivation is financial and the cause of the problem. Then they engage the tenant in negotiation. Can the tenant trade down within the complex to a smaller unit ? Can the tenant move in with a friend in the complex ? Can the rent be adjusted to keep the tenant through the winter season ? Owners really appreciate this skill because it maintains occupancy with tenants who have a track record of payment and performance. Transfers within the complex conserve occupancy and build incredible goodwill among tenants.

Owners can do several things to keep pulse on the turnover in their buildings. Managers could be instructed to categorically track where tenants reside as applicants and to ask their motivation for the move. Tenants on notice can be asked to complete a simple questionnaire to track why the tenant is vacating, pertinent attitudes toward management and facilities and what kind of housing the tenant is relocating into. A polite expression of concern for vacating tenant can lead to a discussion about staying in the building if that can be done. Why not make this part of the traffic and showings report ?

Unfortunately, skip-outs are way up and that leaves ownership in the lurch if they compromised receipt of a full security deposit as a move-in special. Frequently, the manager has lost valuable time in recovering possession and lease-up when the unit is abandoned without notice. This may be a time to qualify tenants even more carefully, not relax standards across the board. No tenant is always preferable to the bad tenant, but vacancy management is the watchword this winter.

What are you seeing at the street level now ? What have you done to slow down the vacancy ? We look forward to your comments and impressions.


Friday, November 7, 2008

A Quiet Exodus to Mexico

Morgan Walsh - Multi-Family Specialist
Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646

Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.

Managers in every rental submarket are reporting a steady rise in notices to vacate from Hispanic families returning to Mexico. The Holidays have always been a time to return to family, with presents and some cash, especially for young men who had not established a household in America. Now, though, job loss has meant that young families are returning too, and they may not be back in February. After all, jobs brought them to the region and jobs alone will bring them back again. In past recessions, there were always particular regions said to be hiring and willing workers traveled to take new work. Now the perception is widespread that opportunities are few and unlikely to last. And the families are leaving.

For the apartment market as a whole, February and March will be a bellwether of overall vacancy throughout 2009. That will coincide with another wave of demand from tenants in single-family and condo rentals who lose possession in a foreclosure and show up at the rental office with a job, good credit and an eviction on their records. Will they be disqualified ? For the apartment complex whose tenant profile is Hispanic families, this may fill the gap. But a tenant who has been through an eviction is three times more likely to default than one who has not, simply because they have traded the temporary free rent of default before dispossession against the black mark that's already on their record. Often, they have left the house or condo in deplorable condition but the rental manager cannot confirm with a prior landlord who lost the property to the bank.

For owners, now is the time to reassess the rentability of your units and ask exactly who you want to attract as a tenant and how to reach them. Owners who wait and suffer double-digit vacancy risk de-stabilizing their asset, demoralizing the manager and jeopardize the tenant quality profile.

Do you own or manage units where this trend is a factor ? We welcome your thoughts, comments and predictions.