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.

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.

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.

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.

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.

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.