LOS ANGELES-The high tide of single-family city of los angeles office of finance home foreclosures has turned five million homeowners city of los angeles office of finance to renters, city of los angeles office of finance and likely longer-term, if not permanent, renters. So says Eric Sussman , managing partner at Sequoia Real Estate Partners. Sussman recently chatted with GlobeSt.com on the subject of multifamily investment and how investors can capitalize.
Eric Sussman: Generally, San Diego commercial real estate for sale has offered reasonable risk and stable returns over the long term, providing cash flows and the opportunity for growth, city of los angeles office of finance all while providing a hedge against inflation. city of los angeles office of finance We view multifamily housing as being far better positioned presently than other commercial real estate classes?office, retail, industrial, etc. for several reasons.?
* Office and retail investments face considerable headwinds looking city of los angeles office of finance forward, including the continued shift to on-line retailing, global city of los angeles office of finance economic uncertainty, city of los angeles office of finance and a reluctance of firms to increase city of los angeles office of finance their hiring in any meaningful way.?
GlobeSt.com: I have heard that investors sometimes find themselves ?locked-in? multifamily real estate deals for protracted periods of time, with little flexibility for liquidity/exit? Any thoughts on that subject?
Sussman: city of los angeles office of finance I don?t think so. A well-conceived city of los angeles office of finance private city of los angeles office of finance equity fund focusing city of los angeles office of finance on value-added, multi-family city of los angeles office of finance investment opportunities should not tie up the investor?s capital for more than five to seven years, and at times may be as short lived at two to three years. A fund needs enough time to identify and acquire opportunities, add value through renovations, and more effective city of los angeles office of finance management, and then monetize the assets (sale or refinance). Typically, city of los angeles office of finance the faster this cycle is completed, the higher the equity returns; a process that usually takes two to three years (to maximize city of los angeles office of finance the internal rate of return). So significant cash flows, or even a complete return of capital, city of los angeles office of finance can happen relatively quickly. Our funds are specifically designed not to lock in investors indefinitely, but to provide returns in excess of those offered by REITs, over a medium-term investment horizon.
Sussman: Several reasons. city of los angeles office of finance 1) Lower fees and costs: A properly structured fund has far more streamlined ownership structure, which should decrease operating costs, and hence, offer better returns. 2) Better financing: At present, debt financing for most San Diego commercial real estate for sale (e.g., office, retail, and industrial) is difficult to obtain, and underwriting standards are very strict.? On the other hand, Fannie Mae and Freddie Mac remain extremely valuable capital partners of multifamily asset investors, offering inexpensive financing, and a number of alternative financing vehicles.
Banks are also reluctant to lend to institutional investors in single-family homes, because of the perceived valuation risks caused by pending foreclosures and short sales and soft employment city of los angeles office of finance markets.
Sussman: The high tide of single-family home foreclosures has turned five million homeowners to renters, and likely longer-term, if not permanent, renters. Furthermore, city of los angeles office of finance relatively high unemployment in most urban markets is slowing the formation of traditional households (via marriage and child birth), substantially depressing the demand for conventional single-family homes. The slowdown in single-family home buying has been accompanied by acceleration in the demand for apartments, driving city of los angeles office of finance up rents in many markets. Twenty- and 30-somethings are postponing families and many younger and recently divorced adults are doubling or even tripling up in shared apartments (if not moving back home with their parents), as they experience lagging real wage growth and reduced employment or under-employment prospects. This lagging household formation won?t last forever city of los angeles office of finance and when the pendulum swings in the other direction, the vast majority of these individuals will become renters.
Most Gen Y and Gen X working adults will be changing jobs many more times in their work careers city of los angeles office of finance than prior generations, requiring significantly more mobility city of los angeles office of finance in their housing arrangements. Many of these workers cannot city of los angeles office of finance be constrained by the illiquidity of home ownership. These individuals will prefer to live in rental housing units, in close proximity to desired amenities.?
Meanwhile, rising gasoline pricing is increasing demand for higher-density, urban housing settings that are closer to employment centers. Downtown areas are no longer centers for the less affluent, but rather city of los angeles office of finance preferred lifestyle environments for younger workers seeking convenient city of los angeles office of finance access to work, restaurants, and entertainment. Gen Y?s and Gen Z?s value social fabric and density. Additionally, these groups are often burdened with significant student loans?the balance of which remain at record highs?reflecting the increased costs of higher education and declining real wages. This increased debt burden will significantly delay acquisition of single-family homes for many.
All of aforementioned changes in US housing consumption strongly favor apartment renting city of los angeles office of finance versus home ownership, and we believe these trends are longer-term and structural. Rental city of los angeles office of finance data, including San Diego commercial real estate city of los angeles office of finance for sale , home ownership rates, city of los angeles office of finance and apartment absorption statistics all speak to these trends, while new apartment construction lags. Increased demand and stagnant supply are recipes for real and sustainable growth in multifamily assets.
Sussman: With 10-year US Treasury Bond rates hovering below 1.65%, owners or acquirers of multifamily properties city of los angeles office of finance are able to obtain acquisition or recapitalization city of los angeles office of finance financing at record-low rates. While rates available to qualified homebuyers are also at all-time lows, low rates themselves will not create sustainable demand for single-family homes without employment and real wage growth. Meanwhile, we expect inflation to remain low for the foreseeable future, as a result of the weak employment levels, uninspiring wage increases, and anemic GDP growth rates. The Federal Reserve has publicly stated its intention of maintaining low rates through city of los angeles office of finance 2014. To the extent that inflation were to rear its head, the shorter-term nature of apartment leases should allow landlords to realize higher rents, while owners of commercial properties subject to longer-term leases would not have such flexibility.? Leading industry forecasts in San Diego commercial real estate for sale all point to multifamily real estate as the real estate investment/return growth opportunity for the next several years. We echo these sentiments.
Sussman: We believe that the greatest ?alpha? opportunity (returns relative to risk) resides in medium-sized city of los angeles office of finance (50 to 200 units), value-added, class B and C properties, and private equity funds for San Diego commercial real estate city of los angeles office of finance for sale focused on this particular niche. REITs and other institutional investment funds typically focus on larger, turnkey, class A projects, which have minimal, if any, opportunity to add value through active management and/or asset repositioning. Moreover, large institutional investors offer minimal management interface and bring with them high overhead, management, and marketing costs.?
For example, Sequoia Real Estate city of los angeles office of finance Partners offers access to the ?middle-market? multifamily niche, focusing on class B and C acquisitions (workforce, blue-collar housing), 50 to 200-unit properties (on average), located close to major employment centers. Such properties offer greater potential for rent increases, city of los angeles office of finance and improved cash flows after skillful repositioning (often via exterior and interior renovations, and added amenities) and re-marketing.
Sussman: ?Smart money? does not follow the investor herd. In the last commercial investment cycle, it was the early private real estate equity fund investors (circa 2001-2003) who enjoyed the strongest returns. Of course, these were the years when the least capital was raised, and people city of los angeles office of finance who dove in with the herd from 2004 through 2008?when capital raising peaked?lost money.? The current multifamily investment cycle may last another 24 to 36 months. Potential multifamily real estate investors should not wait to commit in 2014 or 2015.
Sussman: Lower cap rates and greater post-sale profit contributions accrue from skillfully executed, cost-efficient renovations and improved management efficiencies in our experience. After these improvements, Sequoia is typically able to increase rents 20% to 30%. Profit contributions from merely holding the property, what?s known as a ?core? strategy, typically generate only a minor share of post-sale profit. We specifically examined one of our projects for this breakdown and found only 16% of the profit was due to market improvements, while 84% was directly a function of smart renovations and improved management, both of which translated into substantially increased rents and a very large profit when sold in just three years.
DISCLAIMER: This blog has been curated from an alternate source and is designed for informational purposes city of los angeles office of finance to highlight the commercial real estate market. It solely represents the opinion of the specific blogger and does not necessarily represent the opinion of Pacific Coast Commercial.
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