Real Estate Live T.V. Interview with Gary Banner: Multifamily Investment Environment

Las Vegas Market Special:
In a Real Estate Live TV programme broadcast on October 1st, 2008. J.C. Melvin talks to multifamily specialist Gary Banner about the current market environment in Las Vegas Multifamily Real Estate. Click on the above link and look for multifamily with Gary Banner.

A Siren Call ... things are about to get much worse!

Las Vegas Business Press - June 25, 2008

Recently, I was invited to be a Guest Columnist for the Las Vegas Business Press regarding my speciality as a Commercial Apartment Broker. Entitled "A Siren Call ... things are about to get much worse!"

I hope you enjoy.

Paul Krugman on Embedded Inflation

From the Conscience of a Liberal blog: Embedded vs. non-embedded inflation.

This is an excellent explanation of how price increases spread through an economy.

Skeptical CPI Index vs. "Real" Estate Values

PIMCO's Bill Gross makes an outstanding argument --U.S. CPI Index is understating inflation!

If you haven't heard, Crude Oil futures are on a run-away train headed for a "Super Pike" in price chart formation. Crude Oil Futures even after adjusted for inflation are higher than they were during 1970's Oil embargo. Friday's NYMEX close for the sweet crude hit $129.07/bbl with Boone Picken's (the legenday Guru Oil Trader) predicting crude at $150/bbl before the end of the 2008. I believe just about everyone can feel the effects of higher fuel costs and how inflation is starting to spread into everything we purchase. Higher fuels, foods, metal prices are reacting to the increase costs of production due to higher energy costs. So, as investors we have to take our heads out of the Canadian Oil Sands and consider the effects of energy inflation and what that means for our investments in real estate particularly in low cap rate markets like Las Vegas, Nevada.

First, you must realize that this inflationary cycle will rhyme with those of the past, but will be very different at the same time. You can and will have deflation in some assets while inflation in others which will confuse most investors about their investment allocations. Currently, we have deflation in residential real estate but inflation in commodities like corn, wheat and gold. Both are hard assets and when you listen to comments from CNBC commentators and analyst suggesting to buy hard assets, you might think...well my real estate is a hard asset...it's an inflation hedge...so I'm fine. This is could be a deadly misinterpetation ...for the following reasons.

The Cause....Inflationary Pressures are Growing Fast!

In the June 2008 outlook written by Bill Gross of PIMCO he clearly states an important hypothesis on how the U.S. consumer price index (CPI) is understated, and how the global inflation rate for most of the world is now 7 percent and how our government has manipulated our index to the benefit of themselves and corporations on Wall Street.

(Readers FYI: Bill is being critical of the Federal Reserve and Washington's economic policies ; Emerging economies were partly to blame for America's housing and credit bubble (the Minsky Credit Cycle). As China and Gulf oil exporters purchased American Treasury bonds in order to hold down their own currencies so that they could continue to import to the USA, this demand pushed down U.S. Treasury yields and helped to fuel the housing bubble with negative real interest rates).

"But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation".

Bill's point is very clear, Bond Yields and Cap Rates are too low for the amount of inflation risks investors are taking due to the government's understatement of the headline inflation. A readjustment is about to occur in our economy and with devastating consequences...many investors will blame our government just like homeowners are blaming their lenders for their dismisses. A readjustment in inflation expectations means a readjustment in asset prices...here's another quote from Bill's June report!

"A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate".

WOW! -- a downward adjustment of 10% in commercial real estate -- 5% in treasury bill/bonds can you imagine the devastation and havoc that would spread throughout the real estate industry -- the national economy? Bill Gross' opinions of headline inflation (CPI) is actually closer to the global 7% rate and he is not alone in his thinking. An article was written in the Wall Street Journal by David Ranson, head of research at H.C. Wainwright & Co. Economics titled "Inflation May Be Worse Than We Think." He too believes the "headline" consumer price index should be viewed with skepticism. The root of the confusion is the fact that the prices consumers actually pay change far more quickly than the CPI. His article goes on to claim, historically, CPI inflation is more closely related to prior changes in the price of gold than most people realize.

"There is a remarkable parallel between annual CPI Inflation and the cumulative change in the price of gold measured from eight years before".

This statement is worth its weight in gold...pardon the pun, but it gives an excellent formula for forecasting future inflation (or, correct inflation for us gold-bugs). Here's David Ranson's formula and calculations:

225% appreciation in gold ('2000-'2008)/80=2.8% + 3% = 5.8% Inflation

This formula above is the rule of thumb used by Ranson to estimate CPI Inflation at any given time: Divide the percentage change in the gold price from eight years in the past by 80, and add three. In the last eight years the price of gold has risen 225%. The rule therefore comes out with an answer that puts inflation a lot closer to 6% than 4% currently quoted. This makes perfect since as the U.S. Dollar has depreciated nearly 30% versus its competitors since the late 90's.

The Effect....Higher Treasury Yields and Cap Rates!

Can you imagine the consequences if investors some day woke up and realized that their compensation for risks were too low?. That the U.S. Government had understated the real rate of inflation? As everyone rushes to the exits...you would have simultaneous bouts of inflation and deflation in real estate. Lenders would adjust mortgage rates abruptly -- Spreads to them would nearly double and entry cap rates would need to increase immediately in order to regain positive leverage in real property values. Here are more possibilities...I bet you can think of others:

• Exporting countries would stop buying U.S. Treasuries increasing yeilds
• Gold prices begin to spike towards $2,500 per oz.
• Increased demand for real estate with short-term leases (Apartments!)
• Slacking demand for real estate with fresh long-term leases (Industrial, Retail)
• Increased demand for real estate with expiring long-term leases
• Difficulties in refinancing as values fall
• The drop in consumer spending would deepen (hurting Retail further)
• The return of creative financing as traditional sources become scarce

I'm sure your imagination can go on and on, or your memory of the early 1980's will flash before your eyes and you have to say...what is this real estate really worth?

Technical Analysis for Real Estate

Technical analysis is no longer just for Stocks and Commodities trading. The S&P/Case-Shiller Home Price Index was created by Robert Shiller of Project Syndicate blogging fame. Not only can you create your own custom index of real estate prices both regionally and nationally, but also chart where housing prices were historically.


For example, the most recent report, released in spring 2008, in home-buying time, says that prices in Las Vegas are down 20.76 percent back to their June 2004 pricing levels. So, if you are looking for real estate timing indicators, visit http://www.macromarkets.com/.

The above chart was created from a free down loadable excel file from macromarkets.com. Here I used, Los Angeles as the S&P/Case-Shiller Index and San Diego, Las Vegas and Phoenix for tier markets. This is an excellent tool to review the past real estate cycle and their correlations.

Value-Add Visionaries

In this month's edition of Commercial Investment Real Estate magazine published by the CCIM Institute. An article entitled Value-Add Visionaries , (Mar.Apr.08.pages 30-33), describes the approaches Brokers like myself take in the Value-Add Multi-Housing market.

My expertise lye's in identifying multifamily projects in strategic infill locations that are close to the Las Vegas Strip, Downtown Las Vegas or suburban-infill. These properties are usually Class B/C in nature and are ideal for acquisition rehabs or tear downs potential for higher density development. The goals for my clients is to "Value-Add" and this article describes one of my transactions, a 10-story project named "Cambridge Towers" that is just 1/2 mile from the Las Vegas Strip.

Apartments no option for Homebuilders

This topic appeared on Lanser on Real Estate Blog

Great topic discussing the current state of affairs and the Homebuilders Index with NAHB. Here's my comments on their blog:

"One of the reasons for the relative rental gloom is that incentives and concessions are beginning to hurt rents, NAHB said. The part of the index that tracks rents plummeted to 47.5 in the fourth quarter of 2007 from 61.3 in the last three months of 2006."

Gary Banner Says:
March 14, 2008 at 10:38am

One must realize their are important facts to consider regarding Multifamily Investment and Development. That is the ability to recognize the differences between “Short-term Technical Trends” and “Long-Term Fundamentals.” Today’s Builders and Developers have learned to time the market much better than their predecessors.

The Builders Index is reflecting current market conditions…Recessions leads to Job Losses…Job Losses leads to Rent Concessions and competition for renters (who can still pay on time) heats up! And its a Two-Sided Coin as Inflation is rising today and so are the costs of operating apartments…mcuh like corporations on Wall Street…a possible margin squeeze.

Today, heavy density areas of apartments in Las Veas, NV are now giving rent concessions in order to compete…this in essence is lowering rents…or “Effective Occupancy Levels” where the Rent Roll may say 95% occupancy but when a review of a trailing 12-months actually shows 85% due to turnover.

In Market Analysis, this is defined as “Short-Term Technical Trends” and is immediately reflected in underwriting for construction financing. Try getting construction financing at 80%LTV…very difficult…more like 75%-65% today.

Yes, the long-term “Fundamentals” reflects Echo-Boomers heading to household formations in excess of 75 Million. But, without Job formations these same prospects will delay moving out of their parents homes. And Yes, those who lose their homes to foreclosure will have to rent…but vacant houses are competing with Class-A apartments in price…especially here in Las Vegas.

Sir - A Gentleman Named "Margin Call" is on the Line!

Here's another top-ranked economist views of whats ahead for the U.S. and Global Economy. It supports my anecdotal views of last Fall.

Merrill Lynch's David Rosenberg: Recession to be Worst Since 1970s.

And of course more evidence....

Economy Hammered by Toxic Blend of Ailments

GSB-Las Vegas Apartment Investor's Blog

That '70s Show May Return...Stagflation!

Las Vegas Housing Authority - Increases Rents on Seniors

Board says costs to increase yearly after July

Published today in the Las Vegas Review Journal was an article entitle Seniors' subsidized rents rising and how the Authority can no longer withhold the increases to our county's low-income seniors. Residents will now face yearly rent increases tied to the U.S. Consume Price Index.

"We've tried to keep rents low enough that it...wasn't a hardship for
anybody," "But you have to keep pace. We have bills like every other
business. It was as fair as we could possibly make it."

The speaker, Carl Rowe, was booed by a number of senior citizen residents who attended the meeting.

This will become commonplace not only in Nevada, but nationwide as well. As State and Local government's budget shortfalls take place due to the current Recession and the drop in their collection revenues. And it couldn't happen at a worst time as rising energy costs are starting to feeding into operational expenses for apartment owners. This is how "Stagflation," the worst possible outcome of this recession, could hurt fixed-income retirees-renters and their landlords.

Las Vegas Apartment Vacancies Rise Again!

Apartment vacancy in Las Vegas rose to 9 percent in January, up from 8.4 percent in December. The breakdown by class shows 7.76 percent for Class A, 9.38 percent for Class B and 9.67 percent for Class C, as reported by CB Richard Ellis.

MBA Reports Multifamily Originations Down in Q4

This adds to Grubb & Ellis prediction's (previous post) showing tighter lending standards and falling demand for commercial real estate.

MBA Reports Multifamily Originations Down in Q4

Commercial and multifamily mortgage bankers' loan originations fell on a
year-over-year basis in the fourth quarter, according to the Mortgage Bankers
Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Fourth quarter originations were sixteen percent lower than during the same period last year.

The year-over-year decrease was seen across most property types and investor groups....The decrease in commercial/multifamily lending activity during the fourth quarter was driven by decreases in originations for most property types. When compared to the fourth quarter of 2006, the overall decrease included a 73 percent decrease in loans for office properties, a 50 percent decrease in loans for industrial properties, an 38 percent decrease in loans for retail properties, an 7 percent decrease in loans for multifamily properties, as well as a 349 percent increase in loans for hotel properties and a 3 percent increase in loans for health care properties. The increase in hotel originations was heavily influenced by large portfolio sales
during the period.

Sales Volume Down Big for Las Vegas Apartments

As posted by "The Ground Floor" the blog site for the Urban Land Institute-ULI

"In an interview with Commercial Property News, Grubb & Ellis chief economist said he expects a 40% decline in commercial real estate transaction volume in 2008 as compared to 2007. Among the factors underlying his comments was the recently released Federal Reserve Board survey of senior bank lending officers which noted that 80.3% are tightening lending requirements, the highest percentage in nearly 20 years".

And we have already begun experiencing the effects of this credit crisis in Las Vegas. Sales of apartment projects totaling +5 units or greater have fallen sharply in 2007. There has been nearly a -35 percent decline in units sold versus 2006.

Prices paid per unit has held steady in the Class-A/B sector with $/Unit increasing to $112,900, or +7 percent in the 4Q2007 vs. the same period a year ago. However, the Class-C segment has dropped nearly -13 percent to an average of $68,400/unit, according to the "Apartment Insider" newsletter.

The Las Vegas Strip Ignors the Slowing Economy

In today's business section of the Review Journal/Wall Street Journal Sunday was an article entitled "The R Word" describing the effects of a slowing economy here in Las Vegas. Of the three page article, I found the comments of Dick Rizzo, the Western Division chairman of Perini Building Co. comments best reflects the anecdotal evidence I use to time the cycle in our economy. Perini is building CityCenter and Cosmopolitan in Las Vegas and has a backlog of two more huge projects on the way, though Rizzo wouldn't identify them.

"We have a unique perspective into the future because we get invited to meetings two and three years in advance of these programs and I can tell you tha the list is significant," Rizzo said from his Las Vegas Office. "People are still able to justify and finance significant new programs in the next three to five years."

Meanwhile, Las Vegas' employment growth has slowed to 1.1 percent with a total work force of roughly 945,000. And unemployment has crept up to 5.6 percent. Roughly 15,000 jobs were lost in the construction industry, which accounts for 11 percent of total employment, twice the national average. Other posts on this blog point out that the recent construction lay-offs are resulting in Class - C apartment vacancies reaching 9 percent.

Rizzo siad it's important to distinguish that most of the job losses came from residential construction, not commercial. He tracks the union employment base monthly and said availble manpower for the mostly union crafts people used for Strip construction has increased.

The sheer size of Strip projects adds thousands of workers at each site. CityCenter has 6,000 to 7,000 workers now on site and will peak at 8,000 in mid-2009, Rizzo said.

Deutsche Bank; Las Vegas to Create 120,000 Jobs

Review-Journal Sunday, February 10th

"History has shown the Las Vegas economy rebounds from any slump when the Strip goes through a building boom. Observers believe today's extensive Strip makeover wil be no exception. Some 40,000 new hotel rooms are in phases of planning and construction along Las Vegas Boulevard that will keep a construction work force employed through 2012". says the article.

"Deutsche Bank, in a report to investors, said the building boom will create upward of 120,000 new jobs." "The Las Vegas Convention and Visitors Authority said the room inventory expansion could boost room tax collections to more than $571.8 million annually, 30 percent higher tha the current collections."

Las Vegas Job Growth Could be Around the Corner!

There's no doubts that Las Vegas and Nevada in general has been in a slump when it comes to job growth. Unemployment in Nevada has reached higher than the national average measuring 5.4%.

But not to fear...the Las Vegas Strip's "Job Engine" is about to kick in gear. The Strip's Trump International Hotel & Tower, with 1,300 suites, must hire for its March 31 opening. Palms Place, a 600-unit condo-hotel west of the Palms, will open in early March. Station Casions are ready to open Aliante Station in North Las Vegas in late 2008. Encore at Wynn Las Vegas is also set to launch later this year.

Plus, look for the mega resorts like the CityCenter Project and Echelon to begin recruiting workers by the end of 2008.

Las Vegas Apartment's Increase in Vacancy

CB Richard Ellis reported that Las Vegas apartment vacancy at 8.4 percent in December up from 8.11 percent in Novembers 2007. Vacancies for Class - A is 7.6 percent of the total 26,900 units in this segment; Class - B units were reported at 8.48 percent; and Class - C came in at 9.06 percent.

Take another look at the previous articles labeled "Charts" in the right margin. These reported vacancies substaniates my views regarding higher capitalization rates and vacancies for the Class - C market in 2008.

Las Vegas Apartments Projected to Lag National Forecast

Realtors Commercial Alliance - RCA; Washington D.C.

The fundamentals remain healthy for commercial real estate according to the latest COMMERCIAL REAL ESTATE OUTLOOK of the National Association of Realtors. NAR Cheif Economist Lawrence Yun said commercial fundamentals are essentially sound. "Although vacancy rates remain relatively low for all sectors, they are expected to rise slightly in the office and industrial markets during the coming year because much of the space being absorbed is in high-quality buildings or is built-to-suit," he said.

Reading further into the report regarding the multifamily market. The apartment rental market - multifamily housing - is experiencing increased demand from the slowdown in home sales. With a rising population and growing number of households, vacancies are tightening and rents are rising.

Multifamily vacancy rates are projected to average 5.4 percent in the current quarter, down from 5.9 percent in the fourth quarter of last year, and then continue to decline to 5.1 percent by the end of 2008. Average rent is likely to rise 3.1 percent for 2007 and 3.8 percent in 2008, following a 4.1 percent increase in 2006 according to the report.

Unfortunately, Las Vegas apartment rents are projected to be flat for 2008. With over 25,000 SFRs still on the market and nearly 50 percent are vacant looking for renters. Its difficult for new projects to push rents.

Nationwide, multifamily net absorption is expected to total 229,500 units in 59 tracked metro areas in 2007, below the 234,400 last year, but should rise to 245,800 in 2008. For Las Vegas, absorption continues to lag with only 474 units absorbed versus the 1,538 units constructed in the 4Q2007 for a construction/absorption ratio of 3.2 as reported by REIS.

The areas with the lowest apartment vacancies include Northern New Jersey, Salt Lake City, San Jose, San Diego, Nashville and Philadelphia, all with vacancy rates of 3.3 percent or less. In comparison, Las Vegas is expected to increase in vacancy from 6.1 percent in 4Q2007 to above 6.5 percent in 2008 according to the lastest REIS Report.

Multifamily transactions in the first 10 months of 2007 totaled $62.3 billion, nationally, compared with $87.4 billion for all of 2006, or nearly 29 percent drop in sales. The Las Vegas market experienced similar market conditions.

RERC's Reports on Las Vegas Apartment Sector

"Many respondents to RERC's third quarter 2007 institutional investment survey noted that the apartment sector continue to represent the best commercial investment opportunity during the next year, as demand is expected to remain strong due to the wave of delinquencies and defaults in the subprime residential market. However, some respondents see the apartment sector as less attractive due to the low capitalization rate and the likelihood that slow job growth will hurt demand."

RERC's required going in capitalization rate for Las Vegas apartments is 6.0% as of 3Q2007. The terminal (exit) capitalization rate is 6.8%. The required pre-tax yield rate for apartment properties for third quarter 2007 was 8.5%, a 20 percent increase from second quarter.

Nevada's Unemployment Rate Hits 5.4%

According to the Nevada Department of Employment, Training and Rehabilitation, Nevada’s seasonally adjusted unemployment rate was at 5.4% in November. The unadjusted rate for the Las Vegas area was 5.3%. The national rate remained unchanged at 4.7% in November, while California’s rate stayed at 5.6% in October (both rates seasonally adjusted). SurePayroll reported a 17% increase in small-business paychecks in Nevada during 2007. Nevada was the only state to have double-digit growth. The average salary in the state for workers at companies with 100 or fewer employees increased to $33,395, which is above the national average of $32,609.

Nevada Regains Title - Fastest-Growing State

Nearly 6,300 people moved to Clark County in December, for a total of just under 75,000 in 2007. The top feeder state, per the Nevada Department of Motor Vehicles, was California, with approximately one out of three new movers coming from our neighbor to the west. The state of Nevada has regained its title of the fastest-growing state in the nation. During the year ending July 1st, Nevada’s population increased 2.9% to more than 2.56 million. Census Bureau estimates list Arizona as the second-fastest growing state, after bumping Nevada off the top spot last year. Nevada has held the title of the fastest-growing state for 20 of the past 21 years.

Could Immigration Trends Hurt Las Vegas Apartments?

During a recent market study I noticed an alarming new trend. A trend that was confirmed by a recent phone conversation I had with a client, a substantial apartment owner here in Las Vegas and Phoenix. The trend of a slowing economy coupled by new immigration laws that are beginning spreading throughout the southwestern U.S., (i.e. Arizona & Texas) has suddenly caused properties with Hispanic demographics to increase in vacancies.This dilemma was brought further to light recently with the decision from Framers Branch, a suburb of Dallas Texas in their recent Ordinance 2952. Farmers Branch City Council unanimously approved the ordinance which would require all renters to pay $5 fee and claim US citizenship or legal immigration status to obtain an occupancy license from the city.

This new ordinance will bar illegal immigrants from renting homes and apartments in Farmer Branch. Key provisions:

*Prospective tenants would have to apply for an occupancy license.
*The application form will ask whether the person is in the U.S. legally.
*Anyone who completes the form and pays $5 will get a license and be allowed to move in.
*The city will verify noncitizens’ legal status through a federal database.
*Anyone identified as being in the U.S. illegally will get 60 days to prove otherwise.Violators – tenants or landlords – will face fines of $500 a day.

http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/012308dnmetfbrentals.2c1fcca.html

The State of Arizona as well, has a new law that went into effect January 1st, with strong penalties for employers hiring workers without legal status. Today, Arizona Employers hiring these workers could suffer a suspension of their business license for 10-days on the first offense plus fines; revocation of their business license on the second occurrence. Many hardworking Latino workers have begun leaving the Sun Devil State in the past few weeks, seeking employment elsewhere.

There are no such laws that I'm aware of in Las Vegas....Yet...but the word on the street is many employers are cracking-down on documentation for employment. When combining the slow-down in local housing construction where a great many Latino workers where employed and this budding trend against immigration. It is easy to build a hypothesis for higher vacancies going forward for Class - B/C apartments in Las Vegas. In today's apartment investment environment, investors demand purchasing buildings on actual operating income and expenses. Gone are the days of acquisitions based upon Pro Forma (a method of betting on the future) and higher vacancies equate to higher risks. 2008 could experience a widening spread in capitalization rates between Class - B/C apartments and their Class - A counterparts.

As reported by the RERC/CCIM report, surveyed institutional investors responses found the required going in capitalization rate for Las Vegas apartments is 6.0% as of 3Q2007. The terminal (exit) capitalization rate is 6.8%. The required pre-tax yield for Las Vegas apartment properties is 8.5%, a 20 percent increase from 2Q2007. I would suspect in 2008 Class – B/C properties should see an increase in spread of 130 basis points beyond a typical Class – A property. That would equate to approximately 7.3% capitalization rates for 2008 transactions. Guess what?...we’re already there and beyond!

Federal Reserve Emergency Rate Cut .75%

A sign that the Federal Reserve recognizes that the US economy is in a severe down turn. An inter meeting rate cut of 75 basis was made this morning after Asian and European markets sold off on Monday. The Fed has been viewed as being behind the curve in addressing the serious banking crisis and credit squeeze that has swept the US financial Markets.

Other news...Bank Issuer MBIA raised capital last week to avoid a downgrading by rating agencies and is still on the ropes this week. Should insurers for banks become insolvent, it will make life difficult for banks as their balance sheets are eroding due to the inability to value CDOs and other derivatives of the past financial engineering methods.

Generation "Y" in Las Vegas

A demographic of 75 million strong, generation Y - The population group born in the late 1980's through the 1990s - has the numbers to affect the housing market as profoundly as the baby boomer's did after World War II. This gives Multifamily Investors and Developers opportunities in Urban In-Fill locations where this demographic desires to live. In Southern Nevada, in-fill locations close to the Strip, Downtown Las Vegas and Downtown Henderson are such locations. Converting Older Class - C apartment sites to young hip attractions in the not-so-distant future will be the play. Here's what you should be looking for in your site selection:

1. Locations that fulfills their need for instant access and convenience to work and entertainment. Generation-Y will not want big houses on big lots, isolated from everything. They will want to be where the action is...think urban locations with bright lights, night-life and walkable locations.


2. Look for quirky, unique, and different designs...why not convert an old commercial building into housing such as a convenience-stores, or a well located 2-story office buildings/warehouses. How about a functional obsolete strip center close to the Las Vegas Strip. Turning these types of properties into urban town homes could be a home-run.


3. Create distinct architecture, bold colors, flexible floor space, and ample amenities tailored to their interest and tastes, (such as fitness centers, wireless internet connections, and gathering courtyards).

You should also be aware that changes in household formations are forcing developers and investors to think outside the box to attract renters and buyers. In the past, household formations on average were much larger requiring larger square footages per unit for housing families. Today, the average household is less that 2.5 persons per HH and they are forming much slower during the recession. I think this is the result of gender and practical economics.

Women today are more likely to be singles and are graduating from college at a faster rate than their men counterparts. Design with this fact in mind. That's because women will likely delay marriage to pursue their careers, and their housing choices will be far different from those made by their baby boomer mothers, with their likely favorite being close-in multifamily rental or for-sale units in mixed-use communities that emphasize communal space and social interaction.

The Good Old Days

That '70s Show May Return...Stagflation!

Last Fall in Las Vegas, I attended the annual convention hosted by the National Association of Realtors. Held at the Venetian Casino & Hotel, thousands of fellow Realtors from all across the country came to this event and I was glad to attend without the travel. Having taken part in these conventions for the past few years I usually attend the Realtors Commercial Alliance - RCA meetings and network dinners dealing with commercial real estate issues on a national level.

What made this particular convention the exception was a forum called "Economic Issues & Commercial Real Estate Business Trends" and its list of panelist; NAR Chief Economist, Lawrence Yun, and former NAR Chief Economist John Tuccillo. Also fellow Counselors of Real Estate-CRE, Stan Mullin of Newport Beach and Cynthia Shelton of Orlando, Florida.

The focus of course being the economic outlook for commercial real estate in 2008, where the opportunities may be and how to best prepare for what some view as a transitional year. I was most interested in hearing the views of the Chief Economist for the economy. But first an important disclaimer:

My views are the U.S. Economy has already entered a Recessionary Period that began most likely in the 4th quarter of 2007, or a Growth-Recession at the very least. Las Vegas' economy will follow the national trend in slowing economic output but to a lesser extent. Las Vegas will be one of the first metropolitan economies to exit this coming recession due to another building boom occurring on our Las Vegas STRIP...which creates enormous job growth.

Well, as you can imagine I was stunned to hear Lawrence Yun's forecast for the economy as not reaching a recession, GDP growth just below trend (that's 3 percent trendline growth!), and a bottoming of U.S. Housing in 2008. He also claimed corporate earnings will continue to grow and inflation as a non event. I just couldn't believe what I was hearing! Yun's forecast was probably the most rosey of the panel. Stan Mullin painted a more dire scenario quoting PIMCO's Bill Gross and the serious debt issues facing the global financial system. Cynthia Shelton gave her reasoning why commercial investment capitalization rates are sure to rise and why REITs buying interest may wane in 2008.

After these elaborate explanations, beautiful charts and enough credentials on the panel to give anyone academic-envy. It was time for the audience to ask the panelists questions. I ususally never participate in the question's portion of forum's but this time I just couldn't help myself. My opinions run strong and deep when discussing economics, particularly when I anticipate a turn in the real estate cycle. Finally, it was my turn at the mike...and after I addressed the panel with the following question I was known by the attendees in the forum as "The Guy with the Question"... Here goes;

"My name is Gary Banner, CCIM, CRE of Las Vegas, Nevada. And I'm not as optimistic about the U.S. Economy going forward in 2008. I see a secular bull-market in Oil...I see a secular bull-market in Gold. The U.S. Dollar continues to make multi-year lows and now it appears REITs are breaking into a new bear-market. Do you feel that we could be headed into an environment much like the 1970's with falling corporate profits and rising prices....Stagflation of some sorts?"

Yes, you guessed it...a stump-the-panel question to say the least. First, there was a puzzled look on the panelist faces. Then one after another they tackled the serious question I posed to them. I liked John Tuccillo's answer the best he said, "I can see an economy that is 6-and-6, meaning 6 percent unemployment and 6 percent U.S. Treasury yeilds, but nothing like the mid-70s or early 80s where these numbers where double digits."

Today, the stock market closed mixed at 13,056.72 up +12.76 as the price of Oil traded above $100 /bbl and Gold is well above $860 per oz. These are certainly inflationary signals. Plus, the 10-year treasury note which trades opposite its price, dipped to 3.89 percent from 3.91 percent yesterday. The notes are signaling a slowing economy. Look's like that '70s Show may return...Stagflation...or at least feel like it!

Look for Cap Rates to Head Higher

Click on Graphic to enlarge


With strong local fundamentals for apartment investment and healthy prospects for employment growth supporting apartment values. Cap rates were averaging in the mid-5 percent to low-6 percent range for most of 2007. The accompanied chart reflects data collected through 3Q2007 and primarily Class-A assets. Investor demand is strong for A product in A locations, and for B product in B locations of the valley. Only in the past few months of 2007 have I noticed that Class-C rates have begun to compress - in the high-7 percent range...I think they may head even higher.


I predict investors going forward will require higher yields on their investments...(cap rates), and acquisitions based upon pro forma is basically a non-starter. Especially for Class B/C properties under poor management or locations. If the property can't show a cash flow at acquisition it will be difficult for the investor to finance these deal, thus causing cap rates to increase in order to clear the market.


Cap Rates may rise across-the-board but the gap between Class-A and B/C may widen further. For the past few years B and sometimes C properties have been trading at the same cap rates as prime Class-A. For well located, well managed deals, I've been successful in selling those deals that are true value-add with prospects for redevelopment. That should continue for 2008 as well. But, owners in off-locations may need to buckle-up, their ride may get rough.


In summary, Class A in A locations - expect their cap rates to increase 25 to 50 basis points and Class C in challenging markets may reach 130 basis points higher.

Real Estate Forum Article

This morning I read an article titled "For Multifamily, Road to Prosperity Is Full of Obstacles" I couldn't help but recall what a year 2007 was for Las Vegas' real estate market. After a strong housing price appreciation for years 2004 - 2005, prices peaked in 2006 which was an obvious Real Estate Cycle Top. Here's an interesting quote from this article:

An oversupply of houses and condos is creating a glut of "shadow rental" product in some areas, and high-leverage investors and developers are finding it impossible to put together the extensive debt packages that were available a year ago.

This is precisely what has occurred for many developers in the Las Vegas real estate market. The thousands of Single-Family homes and Condo Conversions For Sale (approximately 25,000), have now recycled into our rental market. This has put a lid on rent increases for existing apartment properties and has caused "absorption" to nearly cease. I suspect this will lead to increases in vacancy and rent concessions for 2008.

Much like the recession years of '2000-'2001, owners and/or property managers will begin discount pricing in order to keep occupancy levels up. Trying to lessen "turn-over" which hammers the "effective occupancy" levels taken into account vacancy plus lease-up time.