Tuesday, August 23, 2011

Leverage Uncertainty a Hidden Asset Risk

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 devepment and the development of affordable housing projects.

Apartment investors model asset returns based on rents, occupancy, expenses and leverage assumptions, and every leveraged acquisition begins with known terms of debt service. But while rents, occupancy and expenses are highly predictable factors based on rental demand, household formation and inflation, the terms of future leverage remain disquietingly uncertain. That uncertainty jeopardizes not only the successful operator who can’t re-finance, but also the buyer with a holding horizon beyond five years, and the owner of a weakly performing asset with substantial debt.

Historically, owners, investors and lenders to the apartment industry valued predictable terms of leverage because it permitted a forecast of investment returns over long maturities, a value especially useful in a commodity apartment market like Reno. The advent of GSE financing added further predictability by guaranteeing the availability of financing. In the current market, financing remains readily available with a steadily mounting list of caveats. Does the loan term fall short of the investor’s holding horizon ? Can the loan be re-underwritten at maturity without a principal reduction ? Will the buyer’s leverage deal support the seller’s future asking price ? How will debt service be handled if the asset value declines ?

Strongly capitalized, sophisticated investors buying stabilized, well-located investments still command leverage offering long maturities, low spreads and little flexibility. The investor who relies on a ready re-finance market, a net revenue stream that can withstand re-underwriting, a rising rental demand, controllable variable expenses, and the availability of new equity if needed is facing unprecedented uncertainty in handling debt service. Some investors respond by changing their acquisition metrics to create a value cushion in return, basis, asset quality and market, or all four. Buy right and you have pricing power, staying power and leverage opportunity. Unlike buyers in the 2003-2006 era, few investors now predicate their acquisitions based on a fixed, short-term exit. But the median apartment buyer with a reasonable return objective still needs to re-finance the loan deal, still needs to manage debt service until robust employment returns and still needs to deal with the buyer’s return objective when the owner goes to market in the future lending market which drives the cap rate for apartment assets.

Leverage uncertainty used to be discounted by owners and investors who held through the financing heyday of rising asset values. Massive deleveraging now shows that uncertainty is present in all of the factors which control credit availability: underwriting, asset strength and performance, personal liability, loan ratios, maturities, and property market performance and forecasts. Buyers in the current market are quantifying that risk by bidding up cap rates aggressively, by treating the computation of net operating income with all the deductions now applied by the loan underwriter, or modeling returns based on modest leverage. What few investors are doing is discounting the availability of GSE financing as we know it, yet FNMA and FHLMC just received an S&P downgrade and the long-term solvency of the agencies is in question.

Apartment investment has always been seen as the safest way to own commercial property. When leverage uncertainty is fully worked into the market demand for apartment property, the asset value needed to deliver that safety may lower prices more significantly than owners and buyers now expect. And in the background of these events is a lending industry refining a nimble, robust machinery for efficiently transferring distressed loan assets from borrowers without re-finance opportunities to large players in the distressed property markets.

Thursday, August 11, 2011

New Property Listing - 5355 Kietzke Lane

Posted by: NAI Alliance Office Group
775 336 4600

The Office Properties Group is proud to announce a new property listing for 5355 Kietzke Lane in Reno, Nevada.

This two story class A office building is located in the premier Kietzke Lane business corridor. Quiet location, close to amenities and near the freeway. The building has 3,180 square feet available. The lease price is $1.45 per square foot modified gross.

For more information on this property or to view all of our listings please visit us at http://naialliance.com/

Tuesday, August 9, 2011

Reno/Sparks Office Market Q2 2011

Chase Whittemore, MS
Associate Office Properties Group

Reno/Sparks Office Market Q2 2011:

Slight increases in the vacancy rates of the Central Reno and Airport Submarkets were not nearly deep enough to cut into the overall positive quarter that the Reno/Sparks Office market experienced in Q2. Overall, the office market saw 39,421SF of positive net absorption, which decreased the overall vacancy in Q1 from 18.23% to 17.71% in Q2. If this trend in positive net absorption continues, we should see a 2% drop in vacancy this year. These positive signs in decreased vacancy rates were the result of the South Meadows and Downtown Submarkets, which had 30,391SF and 17,127SF respectively, of positive net absorption. Even though the South Meadows Submarket experienced a very positive quarter, there is still a cautionary tale in the form of shadow vacancy-space available for sublease- within this submarket. The Downtown Submarket continues to pick up steam. New tech companies, new restaurants, and private investments all added to the buzz surrounding downtown Reno. The Downtown Submarket continues to benefit from low relative rental rates and companies relocating into Downtown from Class A, B, or even C properties previously in other submarkets.

Rental Rates:
Until the office market experiences several positive quarters in a row of declining vacancy, rental rates should stay relatively flat. Moreover, we could even see a slight decrease in rental rates within some submarkets. The South Meadows Submarket poses the most threat to decreased rental rates as thousands of square feet are set to hit the market in the coming months. The arrival of space by years end, coupled with the continuous shadow inventory that seems to plague this submarket, rental rates should remain flat. Do not be surprised if a few buildings even lower the asking rental rate in the South Meadows Submarket. In that submarket, rental rates are $1.30-$1.65/sf/mo full service gross. In the Meadowood Submarket, rental rates remained flat in Q2, ranging from $1.45-$1.85/sf/mo on a full service gross lease. In the Central Reno Submarket, rates did not change, ranging from $1.25-$1.45/sf/mo full service gross. The Downtown Submarket remained flat in Q2, ranging from $1.40-$2.00/sf/mo full service gross.

Tuesday, August 2, 2011

Lakeridge Centre Office Park - New Property Listing

Posted by: NAI Alliance Office Group
775 336 4600

The Office Properties Group is proud to announce a new property listing for Lakeridge Centre Office Park located at 6005 Plumas Street in Reno, Nevada.

This office park offers a prime location situated at the corner of McCarran Boulevard and Plumas Street. Close to amenities and near the freeway. The building is 37,410 square feet with 19,997 square feet currently available. The lease price is $1.85 per square foot.

For more information on this property please visit us at www.naialliance.com.

100% Leased Investment Opportunity

Posted by: NAI Alliance Office Group
775 336 4600

The Office Properties Group is pleased to announce a 100% Leased Investment Opportunity at
455 Somersett Parkway in Reno, Nevada. The building is 8,161 square feet on .963 of an acre. This investment is offered for sale at $2,600,000.

For more information please visit our website at www.naialliance.com

    Office Properties Group Lease Transactions for July 2011

    Posted by: NAI Alliance Office Group 775 336 4600

    The Office Properties Group welcomes:

    • Cpmplete Family Care, LTD - 800 South Meadows, Reno
    • H Dhindsa Retina Eye Center, LTD -5470 Kietzke Lane, Suite 205, Reno