Multifamily

Multifamily Trends in 2006

Four CCIMs share their insights on the market.

By Peter L. Mosca |

The multifamily sector has experienced steady growth and returns during the past few years, fueled by the hot commercial real estate market and low interest rates. But many in the industry wonder: How long can the good times last?

Peter L. Mosca, president of BAK Communications in Howell, N.J., and consultant to the CCIM Institute, sat down with four multifamily industry experts to get their perspectives on what’s ahead in 2006 as well as how to develop business in this competitive market. Participants included Mike Anderson, CCIM, principal of RealSource in Salt Lake City; Brian Cook, CCIM, president of Bridge Partners Realty in Cleveland; Mary A. Sawyer-Hutchins, CCIM, chief executive officer of Real Estate Cash Flow Network in Bakersfield, Calif.; and Steven A. Woodyard, CCIM, president of Woodyard Realty Corp. in Memphis, Tenn.

Mosca: Commercial real estate as an investment class is being viewed in a new light and is considered to be an increasingly important asset in the financial world. Will 2006 be a good year for investors in multifamily properties?

Anderson: The year 2006 is probably the most promising we’ve had in the last three or four, especially in class A apartment investments, which will eventually trickle down to class B and C grades. Hyperinflationary trends in the housing market due to excessive demand, fueled in part by low interest rates, have forced most would-be first-time buyers out of the market.

Sawyer-Hutchins: This year was the highest in the last 12 for new home starts; however, skyrocketing construction costs and rising prices are combining to transform affordability of entry-level housing into an oxymoron. Class A and B rental properties are increasingly becoming the answer.

Woodyard: In addition to the lack of housing affordability, city and county governments nationwide are placing temporary moratoria on new growth, encouraging buyers to go back into cities. With construction of new apartments down and absorption up, this is a good time to get into market cities like Memphis.

Mosca: If the time to invest is now, what should prospective investors entering a new market look for?

Cook: Primarily, good, stable population growth and an employment base in the areas their apartment building is serving. Modern amenities such as separate utilities are popular as well as close public transportation systems.

Sawyer-Hutchins: From a transaction standpoint, knowledgeable professionals such as CCIMs are very important. I recently helped a Phoenix-based client on an acquisition in which after explaining the benefits of positive leverage in a transaction, we were able to come to an arrangement to best meet his needs.

Anderson: There is great opportunity all over the country, but investors and brokers alike have to know where to look. For example, my company has an in-house economist and research team to help identify secondary and tertiary markets for our clients.

Woodyard: Our niche is apartment sales. In the past 20 years, we have built significant partnerships with developers, builders, and property owners. Specialization, networking, and professional affiliations are three keys to success.

Cook: Real estate markets also have gotten very specialized. It’s critical to understand items such as generational turnover in older markets such as Cleveland, where population growth was in the 1950s and to some extent the early 1960s. Many of those owners are now transitioning out of their properties due to estate planning or relocation. Understanding that history, knowing those owners and their track records on operations, occupancy, and vacancy allows us to give specialized information to an investor considering our market.

Mosca: A Wall Street Journal article about real estate investing mentioned an agent who took investors on bus tours to see investment properties. Is this something you’re witnessing in your marketplace?

Anderson: That is very similar to what RealSource does. Through the CCIM network, we introduce investors in overly ripe markets -- where there is a lack of investment opportunity -- to CCIMs in markets that do make investment sense. This creates an ideal business situation for both sides.

Sawyer-Hutchins: I talk to small, niche investors about freeing up the equity in their investment portfolio and replanting that money in another state. I have even referred investors into the RealSource program due to their past successes.

Mosca: Are clients troubled by investing in markets they don’t necessarily live or work in?

Cook: Yes, because quite often it is the first time they are investing in a city that is more than a drive away from their specific state. With bus tours, investors are able to partner with brokers, financing, property management, title, leasing, and construction professionals who are the best in that market. Also, they may meet other investors who have already been through the process helping to eliminate the fear of the unknown.

Mosca: Has technology helped to alleviate some of that fear?

Anderson: By nature, all of our clients are absentee landlords. We have technology that allows them to “virtually connect” to their properties. We provide handheld, Internet-based camera systems to our property managers. Through this system, clients can conduct real-time virtual tours of their properties, giving them the comfort that the property is being managed correctly. We also provide our clients with online site verification and accounting systems so they can view their properties via pan, tilt, and zoom cameras.

Woodyard: My clients also are watching their accounts online. For instance, there is a number of banking institutions in the Memphis area that will literally account unit by unit if a particular tenant has paid its rent.

Mosca: Is there a sure-fire way to know how long to let an investment mature in these markets before advising the investor to sell?

Cook: Matching an investor’s risk return expectations, their ability to manage and deal with critical management issues, and their long-term play on the building is the most difficult but also the most important thing to do.

Sawyer-Hutchins: Timing in the marketplace, understanding market cycles, and taking advantage of recovery cycles where there is strong job and economic growth is crucial to success. You must look at the individual investor and his or her investment. If they have had substantial equity growth or the tax benefits of the property are depleted, it may behoove them to look at the opportunity of moving that out into alternative investments.

Woodyard: CCIMs are taught to always listen to clients. We hear what their goals and objectives are and combine that with market timing. These factors will determine the difference between a fast profit or a long-term hold.

Mosca: Is there a business strategy you’ve employed that has proven successful for both you and your clients?

Woodyard: Specialization, know one aspect of multifamily and know it better than anyone else in your market.

Cook: Working as a collaborative team, I work with three other brokers. Individually we do not know everything about our markets and property owners, but together we align our strengths and are able to tailor our services accordingly.

Sawyer-Hutchins: Learn about the significant advantages of 1031 tax-deferred exchanges and other subtleties of our tax laws. It is a part of today’s economic environment, which creates many opportunities for investors. Networking with other CCIMs is also a good business strategy.

Mosca: Any last comments?

Cook: Overlooked secondary and tertiary markets are going to continue to be attractive to investors as they offer positive cash flow opportunities. Finding the appropriate product for the specific investor is going to continue to be important but typically cash flow is king.

Anderson: Real estate professionals not only should focus on specialization but also networking together within those specialties. Future successes will depend on looking for opportunities beyond a local marketplace and networking most definitely will be a success factor.

Sawyer-Hutchins: Networking, working with another CCIM is the best thing we can do to ensure our clients are successful.

Woodyard: Timing is everything in finding markets and getting in early. Find a professional, get with a group that can assist you with your real estate acquisitions, and don’t dive into markets that are already overpriced.