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Bargains are thinning out, but that hasn’t dampened the enthusiasm of real estate investors who target multi-family properties in the Sunbelt.

In what many see as a sign of recovery in the small-scale apartment market, rents are moving higher and cash flow is improving. “Now is the best time [to own apartment properties] because the cash flow is a lot better,’’ says Kimbrough Gray, who owns multi-family properties in Austin, Texas.  More multi-family properties are becoming cash flow positive due to a combination of lower property values and mortgage costs (from continued low interest rates) and resilient rents.

Landlords Gaining Upper Hand

Rental income should only improve from here as the unemployment picture continues to improve and vacancy rates fall. The national vacancy rate fell from 7.1 percent to 6.6 percent in the fourth quarter of 2010, according to commercial real estate researcher Reis.

Areas hardest hit in the housing collapse are starting to show signs of recovery. Phoenix and Orlando saw vacancies fall 2.6 percent over the last year while vacancies dropped 2.1 percent in Las Vegas, and 2 percent in Fort Lauderdale, Tampa, and Tucson.

Looking ahead, multi-family vacancy rates are forecast to decline from 5.8 percent in the current quarter to 4.9 percent in the first quarter of 2012, according to the National Association of Realtors.

Lower vacancy rates give landlords more leeway to raise rents and reduce concessions such as one-month-free rent specials. Indeed, effective rents are also improving, with 76 of the 82 apartment markets tracked by Reis posting year-over-year rent increases through the fourth quarter.

The unprecedented breadth of this strengthening in apartment fundamentals, coupled with low-cost debt, will continue to fuel higher apartment investment activity.

Cash Flow is King

The collapse in property values, however, has spawned a shift in the approach of real estate investors from growth to income.

“No one is basing investments on equity appreciation like they were years ago,’’ says Joe Adkins, an investor and commercial broker in Altamonte Springs, Florida. “Five years ago an investor would take a negative cash flow because appreciation was so great. Now it’s all about cash flow.”

Properties of four units or less, so called four-doors, have features that can be particularly attractive to investors.

Properties of this size can still qualify for long-term mortgages up to 30 years. Buildings of five units or more, meanwhile, must be financed through commercial loans that typically mature in seven years or less, forcing owners to refinance at prevailing interest rates that could lead to higher mortgage payments.

Jeffrey  Sica, President of SICA Wealth Management in Morristown, N.J., says buying multi-family units now can be a good inflation hedge. He advises investors to lock in a long-term fixed-rate mortgage since this loan will be cheaper when interest rates rise.

Multi-unit properties can be easier to manage and maintain than a portfolio of individual properties too. And they can also present a stronger case to banks for a loan as multiple tenants are considered a safer investment than a single tenant.

Bargains in the Sunbelt

Despite the recovery in rental conditions, depressed property values still present investment opportunities. Bargains still exist in Arizona, where property values remain depressed and vacancy rates remain elevated compared to national averages.

“Deals exist in Arizona right now,” says Mark Mozilo, a broker with Calcap Advisors in Pasadena, California. “Sales prices are at levels we saw in the 70s.”

In California, where vacancy rates have remained low and rents are strong, you’ll need to dig deeper into the REO (bank owned) and foreclosure markets.

“There is still substantial inventory available from lenders, receivers, and investment groups,” says Matthew Hars, managing director of New York real estate advisory Varick Capital. “There are also large quantities of non-performing notes available for sale available in California, which, if you can foreclose on the property, are a good bargain. You can even buy these for 50 cents on the dollar in some cases.”

By: Mark McLaughlin

ULI 2013 emerging Trends

ULI 2013 emerging Trends

The enduring low-gear real estate recovery
should advance further in 2013: Emerging
Trends surveys suggest that modest gains
in leasing, rents, and pricing will extend across
U.S. markets from coast to coast and improve prospects for all property sectors, including housing,
which finally begins to recover. Most developers
and investors who seek quick wins will remain frustrated as return expectations continue to ratchet
down to more realistic but relatively attractive levels
providing income plus some appreciation. In fact,
real estate assets will almost certainly continue
to outperform fixed-income investments in the
ultralow-interest-rate environment induced by the
Federal Reserve, as well as offer a familiar refuge
from ever-seesawing stock markets.
Systemic global economic turmoil, hobbled
credit markets, and government deficits, meanwhile, will continue to restrain anxious industry
leaders who downplay chances for a faster-tracked
upturn amid uncertainty. Investors discouraged
about stratospherically priced core properties in gateway markets inevitably will “chase
yield,” stepping up activity in secondary markets
and acquiring more commodity assets. These
players will need to focus prudently on current
income–producing investments and avoid the
surfeit of properties edging toward obsolescence,
especially certain suburban office parks and some
half-empty second- or third-tier shopping centers.
Most areas can sustain little if any new commercial construction, given relatively lackluster
tenant demand and the generally weak employment outlook. Only the multifamily housing sector
continues to offer solid development opportunities,
although interviewees grow more concerned about
potential overbuilding in markets with low barriers
to entry—probably occurring by 2014 or 2015.
The real estate capital markets maintain a
turtle’s pace for resolving legacy-loan problems as
the wave of maturing commercial mortgages gains
force over the next three years. Low interest rates
have bailed out lenders and underwater borrowers, but interviewees warn against complacency
and recommend preparation for eventual rate
increases. Under the circumstances, low rates
and high core real estate prices lead investors to
find the best risk-adjusted returns in the middle of
the capital stack—mezzanine debt and preferred
equity. Equity pipelines will have ample capital
from well-positioned, cash-rich REITs; yield-hungry
pension funds; and foreign players parking money
in safe North American havens. These investors
will need to remain disciplined and sidestep risk
outside of major markets, probably partnering with
local operators who have an edge in ferreting out
the best deals.
The industry must continue to grapple with
unprecedented changes in tenant demand driven
by technology and a relentless pursuit to temper
costs in a less vibrant economy. Office users
squeeze more people into less square footage, preferring green buildings with operating efficiencies,
while retailers reduce store size in favor of various
integrated e-commerce strategies. The large generation-Y demographic cohort orients away from the
suburbs to more urban lifestyles, and these young
adults willingly rent shoebox-sized apartment units
as long as neighborhoods have enticing amenities
with access to mass transit. And more intergenerational sharing of housing occurs to pool resources
among children (seeking employment), their parents
(reduced wages and benefits), and grandparents
(limited pensions and savings

To read full paper:

http://www.uli.org/wp-content/uploads/ULI-Documents/Emerging-Trends-in-Real-Estate-US-2013.pdf

sailboat

SIG Equity Partners will be attending Opal’s annual Family Office/Private Wealth Management Forum in Newport, Rhode Island July 18-21st this year. Hope to see you there. 

As part of the Private Wealth Series, the Family Office Conference is Opal’s premier conference for high net worth individuals and family offices in North America. Private investors and money managers from around the globe will return to this picturesque setting for three days of engaging discussions on the latest investment trends.

The Private Wealth Conference will explore the challenges and opportunities associated with investing in emerging markets, alternative investments, distressed real estate, direct energy and numerous other asset types. Opal will kick off the event with its 5th Annual America’s Cup Regatta, in which attendees will have the opportunity to work with a professional sailing charter crew while competing against industry peers.

US Real Estate Market Set To Boom In 2013
By Jake Simpson

Law360, New York (January 01, 2013, 2:53 PM ET) — The recovery of the commercial mortgage-backed
securities industry and the entry of new capital from both domestic and foreign sources should spur a
surge of activity in the U.S. real estate market in 2013, attorneys say.
With the overall U.S. economy growing stronger and unemployment at its lowest level since December
2008, the U.S. property market has become an attractive investment target for traditional lenders,
private equity firms and foreign sovereign wealth funds, among others. Though the market is still far
from the peak it reached before the housing collapse in 2008, deal activity picked up strongly in 2012 in
several key submarkets, including New York, San Francisco and Chicago.
Dechert LLP Partner Richard Jones, co-chair of the firm’s real estate and finance group, said that the U.S.
market would see a steady stream of acquisition financing in 2013. He estimated that governmentsponsored entities such as Fannie Mae and Freddie Mac would provide roughly $55 million for the
multifamily sector, with commercial banks providing between $150 billion and $200 billion more.
Insurance companies will inject about $60 billion to $70 billion into the industry, with an additional $50
billion to $60 billion coming from the CMBS market, he said.
The rush comes as low interest rates and demand for higher returns have spurred investors to seek out
profitable investments from all corners of the market, particularly real estate, according to several
partners.
“There’s a ton of money chasing yield,” Jones said. “We’re recapitulating the mid-2000s decade.
Everyone’s trying to be careful and hold the line, but everyone’s inclined to see the glass as half full.”
Here are some of the trends that will be driving the real estate market in 2013:
CMBS Market Poised for Bounce-Back
The burgeoning recovery of the commercial mortgage-backed securities sector underscores the overall
health of the U.S. property market, attorneys said. A glut of debt maturing in the coming years and the
lack of yield in the marketplace is fueling investor demand for CMBS products, according to Katten
Muchin Rosenman LLP Partner Dan Huffenus.
Roughly $48 billion in CMBS have been or will be issued in 2012, according to market projections, and
the issuance surge is expected to continue in the first quarter of 2013.”CMBS flow follows economic activity broadly — if rents are going up and occupancy is strong, it’s a very
liquid market,” said Jay Epstien, global co-head of DLA Piper’s real estate practice and head of its U.S.
real estate group. “The opportunity to get financing is very good right now, and the rates are
unbelievable.”
Many traditional lenders such as Goldman Sachs Group Inc. have relaunched their CMBS practices,
though loan underwriting standards are much more stringent than they were in the mid-2000s. While
several global banks, including Credit Suisse AG, have stayed out of the CMBS market, most partners
said they believed that would change.
“When I hear firms like Credit Suisse say they are not going back into CMBS, I hear a big ‘yet’ on the end
of it,” said Manatt Phelps & Phillips LLP Partner Tom Muller, head of the firm’s real estate and land-use
practice.
Private Equity Zeroes In On Real Estate
The peak of CMBS maturities is expected to occur in 2013, and many of those loans are currently in
special servicing or have defaulted. The abundance of distressed real estate debt in the market has
attracted a swath of private equity firms looking to find value and long-term returns, attorneys said.
“There are remain a fair number of properties in CMBS trusts that were purchased and financed at the
peak of the markets in 2005-2007 where people are out over their skis based on current valuations,”
Epstien said. “As a result, there are opportunities to come in and revalue those [CMBS] properties in the
major cities.”
Kramer Levin Naftalis & Frankel LLP Partner Jay Neveloff said private equity firms were aggressively
looking for single-asset deals, particularly in the single-family residential sector. Some of the largest
private equity firms, such as Blackstone Group LP, have raised record amounts of capital for real estate
investments, allowing them to buy portfolios of distressed property assets and sell those assets one at a
time.
Blackstone announced in October that it had closed its Blackstone Real Estate Partners VII LP fund with
$13.3 billion in assets, making the massive investment vehicle the largest real estate opportunity fund
ever.
“A lot of [real estate investment trusts] are major property owners in sectors, including Manhattan, that
the market is moving toward,” Neveloff said. “But intuitively I think the private equity funds will be
driving the market more.”
While single-family homes are gaining in popularity among private equity firms, demand continues to be
strong for multifamily properties in select U.S. markets, particularly Miami, a trend that most attorneys
expect to continue in 2013.
“A lot of capital has been invested in multifamily,” said Kirkland & Ellis LLP Partner Scott Berger. “We
continue to see the core players in that space making acquisitions and doing strategic dispositions.”
However, Orrick Herrington & Sutcliffe LLP partner Dennis Martin, head of the firm’s real estate practice,
said private equity investment in real estate could be stymied by U.S. Federal Reserve Chairman Ben
Bernanke’s statement in early December that interest rates would remain near zero until the federal
unemployment rate drops below 6.5 percent. It is currently at 7.7 percent, according to the most recent
federal jobs report.”The private equity funds are able to move quickly to buy [real-estate-owned] or distressed assets
because they have the capital and don’t need to leverage as much,” Martin said. “But you can keep
distressed assets on your books a little longer because of the low rate of borrowing, which could slow
down the sale of those distressed assets.”
And some real estate partners disputed the claim that private equity funds would outperform real
estate investment trusts in 2013.
“Access to capital is still easier for REITs because of liquidity issues and access to capital issues for
private equity funds,” said Morgan Lewis & Bockius LLP Partner Tracey Steele. “Placing capital in the
private equity groups is becoming more challenging. We know a lot of [private equity] people who have
been out in fundraising mode for two years and haven’t quite been able to close.”
Industry-Driven Growth Boosts Office Market Hotspots
The hottest single market in the U.S. continues to be New York’s Midtown South neighborhood, which
grew at a record pace in 2012. Average asking rents for Class A office properties in Midtown South
neared their 2008 record high of $65 per square foot in late 2012 and are expected to comfortably
eclipse that mark in 2013.
Buoyed by its abundance of the loft-type, nontraditional office space coveted by most digital media
firms and online startup companies, Midtown South has become a global hotbed for commercial leasing
activity.
“Midtown South is probably the hottest office market in the world,” said Hunton & Williams LLP partner
Carl Schwartz, chair of the firm’s New York real estate group. “Jobs are being created in New York in
markets that demand that kind of space: media, technology, advertising and others. I don’t see any
reason that this is a trend that’s going to stop.”
Houston has experienced similar industry-driven real estate growth due to the rise of global energy
firms headquartered in the city. The Silicon Valley and San Francisco office markets in California have
boomed behind the growth of technology companies in the region, attorneys said.
Other attractive urban real estate markets include Charlotte, N.C., and Austin, Texas, two cities that will
likely see increased inbound investment in 2013. Attorneys had mixed views on the state of ground-up
developments in 2013, with some partners saying they had seen more financing made available to
developers and others arguing that the ground-up sector had yet to pick up.
Foreign Firms Eye U.S. Real Estate
The U.S. real estate market will be a major safe-harbor destination for inbound investment in 2013,
attorneys said. While traditional sources such as European firms will provide much of the foreign capital,
a growing number of private Asian investors such as Chinese banks are interested in U.S. property
acquisitions and developments, as well.
On Dec. 11, the China Development Bank approved a $1.7 billion loan to construct more than 20,000
housing units at the Hunters Point Shipyard, Candlestick Point and Treasure Island in San Francisco. The
deal is contingent on a Chinese contractor being named a general contracting partner for the
developments, and the current front runner is reportedly China Railway Construction Co., the world’s
second-largest contractor.
Investment from private Chinese firms into U.S. real estate will grow in 2013, according to Martin.”There’s a big interest in Chinese funds investing into the U.S. because of the safe harbor of U.S. real
estate,” he said. “And there are a lot of wealthy Chinese individuals who are looking to put their money
someplace.”
Middle Eastern sovereign wealth funds and India-based investors have expressed interest in a variety of
U.S. real estate products, with a focus on asset acquisitions. And Hodgson Russ LLP Partner Sujata
Yalamanchili said that many foreign firms including Canadian investors are becoming capital partners in
U.S. property joint ventures.
“People are looking for safe places to invest their capital,” said Fried Frank Harris Shriver & Jacobson LLP
Partner Jonathan Mechanic, head of the firm’s real estate practice. “There is room for different players
with different risk profiles.”
There still remain obstacles to real estate growth in 2013, including the prospect of long-term federal
tax reform and the increasing complexity of joint venture arrangements in the property market. Overall,
though, it is likely to be a banner year for the U.S. real estate and real estate finance industries.
“The demand for new debt is pretty staggering,” Huffenus said. “As long as yields stay low, CMBS is
going to be a viable product. We’re gearing up for a busy 2013 and beyond.”
–Editing by Elizabeth Bowen and Sarah Golin.
All Content © 2003-2012, Portfolio Media, Inc.

The full article can be found here:

http://www.morganlewis.com/pubs/Law360_USRealEstateMarketSetToBoomIn2013_01jan13.pdf

  
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