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.