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Ancillary Income in the Year 2019: Prepare Now for the Generation of ‘Cord Nevers’

By Jason Scutt, Worth Telecom Advisors –

It’s easy to look back at the 1980s as the far distant past with its big hair, curious clothing choices and antiquated technologies. After all, think how far we’ve come from rotary phones, VCRs, camcorders and the Sony Walkman. Yet when you look at the past, some things really haven’t changed at all—particularly when you look at these now defunct and/or dying technologies and study their original appeal such as mobility, control of when content is consumed, and the creation of personalized content. In effect, these root features make up the core functionality that created the rise of the internet itself and the now ubiquitous smart phones which are enabled by it.

A similar common thread between the past and present exists with the providers of TV and phone services which have adjusted their business models from single service businesses (Bell providing phone and Comcast providing TV) to internet and mobility centric organizations.

Property owners across the US have been unwitting, yet active, participants in this technology evolution as they have been granting providers access to their private properties in order to secure services to their tenants. In some ways, this symbiotic relationship is as important to the owners as it is to the providers since tenants require these services similar to utilities. Over the years the relationship has changed somewhat as the wiring requirements improve, FCC regulation changes, and more competitive providers enter previously single provider markets. Fundamentally, though, the relationship is mostly unchanged: the provider seeks access and marketing rights at a property, the owner grants access in exchange for some financial or in-kind consideration and residents consume the provider’s services. In fact, telecommunication based ancillary income is one of the largest sources of revenues for owners and managers.

What has changed—and what will fundamentally alter the relationship between owner and provider—is the apartment resident whose paradigm has changed completely. In a recent survey 49% of respondents stated “cellular coverage is extremely important” in the selection of a community. In another, residents rated internet as the most important amenity at a property. Landline subscriptions per home are down from 90% to less than 20% while mobile phone rates are up to 90%. Residents demand cellular coverage, quality internet access and providers of their choice. The technology demanded by residents enables a resident to completely bypass the property owner and provider’s infrastructure altogether. So called, “cord-cutters” can use a wireless hotspot as their source for internet access, connect a WiFi enabled TV to the hotspot and, of course, use their cell phone for communications. In fact, residents under 30 years old may become the first generation of “cord-nevers” as they’ve never had a wired connection.

Although their average monthly spend remains at around $200 per month, this group is typically budget conscience and very tech savvy. This group’s first device was a mobile phone which they used for communication and entertainment all while mobile. As they move into their first apartment homes, they see no reason to be tethered. While this trend is less than 2% of the market it’s not unreasonable to assume the trend may increase to 5% of all users. With more and more wireless capability and free content options, the signs point to a “tipping point.”

To an owner or manager of a community (and the providers) this trend can impact occupancy and thus their core source of income. As residents require ubiquitous internet and cellular coverage, they will make their buying selections accordingly. Properties without ubiquitous wireless coverage and provider choice will on a tangible level be less successful than similar properties with coverage and choice. This dilemma is further compounded as the “cord cutting” trend continues. If the trend continues at up to 5% of renters per year, in five years 25% of this critical source of ancillary revenue will disappear! For certain demographics it’s not unreasonable to forecast up to 10% may make the switch and thus 50% of revenues are gone.

To optimize occupancy and maximize ancillary income, many owners are beginning to take a more proactive role in shaping the future of their participation in the technology at their properties. Highlights include:

Cell coverage solutions – To address cellular coverage issues experienced by residents, the most effective solution is a distributed antenna system, which is in effect a cell tower spread across a property. While effective, the solution can also be expensive, ranging from $250,000 to $500,000 or more. Lower cost alternatives exist, at a fraction of the cost. One such solution is a WiFi based cell boost technology which amplifies existing cellular signals and retransmits the signal across the property. A critical potential issue with this solution is a common provision written into traditional telecommunication access and marketing agreements (i.e. TV, internet and phone) whereby the owner is precluded from offering competitive “bulked” services to residents which the WiFi solution can be considered.

Cell towers and antennas – As residents migrate to cellular services as the backbone of their telecommunication services, it is important for owners to participate in the revenue potential available from the placement of cellular towers and antennas at their properties. In recent years, the country has witnessed an explosion in the number of cellular towers with 30,000 or less in 2000 to more than 300,000 in 2013. Cell towers have the ability to dwarf the traditional income seem by any other ancillary income program with revenues ranging from $1,500 to $3,000 per carrier per property per month). While the roof rights of tall buildings, land beside highways, and the high ground remain valuable, so too are properties in dense urban markets, properties adjacent to power transmission lines and train tracks and certain rural locations. An important consideration for owners is to be aware that cellular antennas are becoming smaller and more discrete

Traditional cable TV and internet access and marketing agreements – As described previously, many of the common carriers at each property have a wireless strategy and are seeking to expand their offerings. As the income from revenue share programs are in decline, the need for subscription based vs marketing rights only compensation programs becomes more critical than ever. Historically, providers would pay the owner for exclusive access to a property. As the FCC has struck these type of arrangements, the providers would pay for access, use of wire and marketing rights. These agreements often underperform as the owner and provider would disengage as soon as the agreement was signed, with the owners receiving seemingly arbitrary payments and the providers receiving little to no marketing support. As owners are the ultimate gatekeepers in terms of knowing when the resident is moving in and out—and they maintain regular contact—an opportunity exists for the owner to more actively participate in supporting providers by incorporating their services into their operating processes (i.e. work orders, HOA coupons, etc). Providers are also taking the initiative to offer enhanced services such as portals, concierge, security, and home controls which can dovetail with the owner’s current platforms. New providers are entering the market such as Google Fiber, which offers futurist speeds and a seamless platform between mobile and fixed devices.

The big picture

Providers such as AT&T and Verizon have corporate structures whereby the residential services groups report to the mobility unit. Further, the circuit required to power an cellular antenna is often times the same circuit that can be used to power residential services. For these providers capturing cellular services and residential services is a very efficient and effective business proposition that can be leveraged by an owner. With greater revenue opportunities providers can consider properties and business terms they might not typically consider. Further, for providers, working with a single owner or manager of multiple properties is much more efficient than finding and negotiating with individual owners. As described, cellular solutions such as the WiFi cell boost service are directly affected by the underlying traditional cable TV, internet and phone agreements. And, while adding new providers to a property can help owners create an initial marketing boost, it may also effectively cannibalize existing revenue share programs and be in conflict with existing agreements. It therefore critical to look at the entire telecommunication picture—cellular, TV, internet, phone and WiFi—in order to create a comprehensive strategy to optimize leverage, operational capabilities, resident satisfaction, ancillary income potential and occupancy overall while also ensuring the agreements dovetail together without conflict.

While it’s impossible to fully imagine what technology trends will be dominant five, 10 and 20 years from now, it is possible to identify the obvious trends and position yourself to minimize potentially negative results and realize the most benefit possible. In the case of telecommunications, your residents—and most likely your personal habits—have already identified this trend. By identifying all of the providers and options within the ecosystem described herein, and striking out on your own with a logical game plan or utilizing a professional services group with the experience and expertise to efficiently guide you, the time to start protecting your occupancy and maximizing ancillary income is now.

Jason Scutt is president of Worth Telecom Advisors


Tech-Savvy Communities

Thanks to Kingsley Associates for sharing their Tenant feedback 

Are your apartment communities tech-savvy? Many residents expect their apartments to meet their various technology requirements, whether it be communication with management through social media, being able to choose their cable provider online, or having Wi-Fi access in common areas. This month, MHN teamed up with research and consulting services firm Kingsley Associates to ask residents about the technology in their apartment communities—and what they think is lacking.

❝    New tenants should be advised that depending on the location of their unit they may not be able to get the cable provider of their choice. ❞
—Birmingham, Ala.

❝    Look into an online management system for the washer
and dryers so that people can be notified when their laundry is done. ❞
—Charlotte, N.C.

❝    I especially like the front office’s use of Facebook and email to keep residents updated on what’s going on in the community (for example, power outages).❞
—Middletown, Conn.

❝    Setting up cable and Internet service prior to moving in would be helpful. I had to wait over two weeks to get set up. ❞
 —Pasadena, Calif.

❝    Community WiFi access would be a really
nice feature. ❞

❝    I’m very upset about my phone and Internet connection. It was never communicated to me that this complex has no reception, and now I have to incur huge expenses because of it. ❞
—Melrose, Mass.

❝    The resident portal could be more efficient if it allowed for payments on the rental units to be paid partially, rather than all or nothing. This would drastically help those that have roommates and travel a lot, allowing for an easier transaction between the tenants. ❞
—Charlotte, N.C.

❝    I don’t care about social networking sites—it’s the community’s website that matters to me. ❞
—Washington, D.C.

❝    My apartment has horrible cell phone reception. In the day and age where folks are using their cell phones more, this is a huge problem for me. I have to stand in one or two spots of my apartment just to send a text or receive a phone call. ❞
—Alexendria, Va.

❝    The business center Internet and printer seems to be out of service a large percentage of the time. ❞
—Jersey City, N.J.

❝    The ability to pay rent online would be fantastic! ❞

❝    I’m disappointed in the limited availability of technology due to the building’s contractual obligations. It’s difficult to leverage a connected lifestyle. ❞

❝    When I’ve communicated with the management team over Facebook, if it’s something complimentary they were very happy. But if had a concern, then the apartment manager would immediately ask me to stop using Facebook saying that Facebook is only for publicity. ❞
—Woburn, Mass.

❝    The Internet does not meet my expectations and makes it incredibly difficult to work from home or have video chats with family in other states. ❞
—S. Orange, N.J.

❝    I do not like having limited options for cable and Internet service. ❞
 —Jacksonville, Fla.

❝    If they could get the cable hooked up in the gym that would be great. ❞
—San Mateo, Calif.

❝    Can we get a Facebook page set up for the community? A previous community I lived at had a Facebook page and it was really useful for the residents to learn about community news and get to know each other. ❞

❝    I do wish management could provide wireless Internet throughout the building. I would be glad to pay $10-20 more per month for this service.❞

Resident feedback from Kingsley Associates

2014 Top Mortgage Banking Firms

Cautious Optimism

By Mike Ratliff and Jack Kern –

Mortgage bankers continue to see good things coming for 2014. This optimism is bolstered in part by increased certainty in the lending environment. More than 60 percent of the firms that responded to the 2014 MHN-CPE Top Mortgage Banking Firms survey anticipate an increase in business for the new calendar year, while nearly a quarter expect to see a significant increase in business—somewhere in the 21 to 41 percent range.

While this year’s business is heavily weighted toward multifamily, we anticipate that lending will continue to diversify throughout 2014. We believe that the industrial and retail sectors will both see a marked increase in activity when we re-examine these firms next year.


Transaction levels are expected to rise in 2014, though refinancing volume should remain in the “trough” until 2016 and 2017, when CMBS loan maturities realize a sharp uptick. That said, properties across all sectors are seeing fundamentals improve, with higher rents and lower occupancies, putting owners—both old and new—in a better position to refinance. In addition, December brought a bipartisan budget deal that signals Washington might be ready to play nice and avoid the hiccups that periodically downshifted the ongoing economic recovery. However, uncertainty over the future of the GSEs and concerns over a tapering of QE3 will keep the optimism for 2014 in check.


This year’s group of participating companies provided a view of their transaction volumes and a breakout of what loans were processed, including healthcare, multifamily, office, retail, hotel, industrial, mixed-use and other types. Our rankings consider a combination of greatest coverage, transaction volume commitment across sectors, loan positioning, total intermediary lending volume and direct lending activity.

Marcus & Millichap 2014 Outlook: Refinance Now, Look to Value-Add

By Mike Ratliff, Senior Associate Editor –

Long term fundamentals for the apartment industry are looking strong according to Marcus & Millichap’s 2014 Apartment Market Outlook. Continued job growth and already record-high occupancies should keep the multifamily sector strong for several years. The presentation did, however, warm of the possibility for softness in certain core urban markets due to overbuilding.

Overall macro economic trends paint a positive picture for apartments. Retail sales are 15 percent above where they were in the depths of the recession. We have regained 7.4 million out of the 8.7 million jobs lost during the downturn. This job growth is broad based, with meaningful hiring occurring in all the critical sectors. Another positive indicator is coming from a strengthening single-family market, says Hessam Nadji, senior vice president, managing director and chief sustainability officer at Marcus & Millichap.

“The strength we are now seeing in single-family does concern some apartment investors,” Nadji says.  “And that is for good reason. We have lost renters to home buying — we continue to lose some renters to home buying — but that trend is pretty stable. Roughly 30 percent of home sales are going to first time home buyers. But the bigger message of the single-family recovery is again, very positive for the multifamily side for two reasons. First off, a 10 percent price gain on a year-over-year basis in the single-family market bodes well for the economy. Some of those construction jobs are a result of residential construction on the for-sale side coming back.”

Nadji’s second point was that increasing interest rates and prices in single-family have made it harder for would-be homeowners to make a down payment and get approved for a loan. This bodes well for multifamily as well.

One particular concern (in addition to overbuilding) is how long the trend of rent growth can continue. Rents have grown faster than rental household income. This should cause a slowdown in rent growths, but primarily for the Class A sector. Class B and C assets are still showing strong rent growth, which is typical as their fundamentals typically lag those of the higher end product.

On the finance side of the industry, we can expect to see an increase in originations from life insurance companies, banks, pension funds and agency lenders throughout 2014. One of the drivers for this phenomena is the continued improvement of property fundamentals for multifamily (as well as all asset classes), says William Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp.

“Historically low cost of debt and its improving availability have become major positive factors in facilitating more business,” Hughes says.  “In essence, this allows investors to take advantage of some great opportunities. Today we are seeing a wide variety of competitive financing sources along all property sectors in most markets, with credit discipline adjusting to become slightly less restrictive, particularly with multifamily, in order to accommodate in the increase in active capital sources.”

Looking ahead, Hughes is excited for the prospects for 2014. While the fed will reduce its acquisition of bonds and MBS, Hughes believes that the central banking system will remain accommodative until the economy demonstrates significant jobs growth that results in substantial employment gains. Now that the federal budget has been approved and inflation is in check, we should see both improving employment and GDP growth. All these factors make now a great time to finance.

“We recommend that investors take a fresh look at their financing needs, both in terms of refinancing and pursuing new investment opportunities,” Hughes adds. “We continue to believe that at some point in the not too distant future, we will look back on this period and realize how unique it was.”

Investors looking for opportunities in 2014 might be served by examining deals in older properties or in secondary/tertiary urban core markets.

“Class A properties in preferred markets saw cap rates drop substantially in 2010, 2011 and 2012 as institutional investors poured funds into premiere assets,” says John Sebree, senior vice president, director of Marcus & Millichap’s National Multi Housing Group. “Class B and C product likely provides some of the best opportunity in the coming year.”

Value-add plays to drive rent growth are also becoming an increasingly popular strategy. According to Sebree, investors are targeting 1980s construction due to the ability to go in and update in order to compete a bit more with the Class A stock. Investing in next generation or hip urban markets is another possibility.

“The other value-add that is taking place is that we have had a resurgence in the urban core,” Sebree says. “Most metros have had new construction come into the urban cores at a higher rate over the past couple of years compared to what we have seen in the past. This trend is growing the urban cores and is expanding out into neighborhoods that are close to downtown areas. Areas that maybe a few years ago people would not have considered buying. Now I am seeing people say ‘I am going to buy this property — it is a little bit rough right now — but I can see the growth coming my way and I am going to get out in front of it.’”

New Year Demands New Investment Strategies

By John S. Sebree - vice president/national director, National Multi Housing Group, Marcus & Millichap – contributor

With most opportunities exhausted in major metros, apartment investors in 2014 will be left to pursue alternate markets or hold periods for higher yields.

Amid pitched competition that has driven down cap rates, identifying assets that will provide targeted returns will increasingly force multifamily investors to adopt new investment strategies during 2014.

Purchasing properties with below-market rents, subsequently strengthening occupancy and raising rents, and then selling the property for a handsome profit was a winning strategy coming out of the recession, but no more. Most of this type of opportunity in major metros has been exhausted, leaving investors to determine where to turn next. Some are making a transition to a “buy-and-hold” approach to investing, acquiring targets that will provide stable income streams for the next five to seven years and serve as a hedge against the potential onset of inflation.

Some Seek Riskier, Higher-Yield Properties
Meanwhile, other investors are broadening their search for properties that have higher risk profiles and greater potential for significant value appreciation. Many secondary and tertiary submarkets of major metros hold properties that fit this profile, and an increasingly large share of deal volume in most markets will occur in these areas. In addition, secondary and tertiary metros continue to gain favor with investors in their search for properties with higher yields than their counterparts in the nation’s most prominent urban centers. The smaller metros in the Midwest, in addition to thriving areas such as Austin, Texas, will see significant inflows of equity capital during 2014, and debt providers are sure to follow closely behind.

Austin, in particular, stands out as the type of market that out-of-area investors will gravitate to in greater numbers in the year ahead. Unlike secondary metros that lack a diverse set of economic drivers to generate rental housing demand, Austin can boast government employment, a major university, and a booming tech sector as key economic engines. Austin’s economy will strengthen further over the next year, with local gross domestic product forecast to surpass $100 billion for the first time in history. Meanwhile, vacancy may rise to a more normal level next year as the metro records another surge in completions, making asset and submarket selection an imperative consideration for investors.

In Florida, capital will continue to migrate north from the three-county South Florida region to the center of the state and Jacksonville in the northeast corner. Deal volume in Jacksonville has been notable recently for the increased presence of large investors and institutions seeking core holdings that provide higher returns. As a wide-ranging metro area with several hubs of economic activity, Jacksonville will continue to attract large investors in the years ahead. Expanded access to debt, meanwhile, will also enable smaller investors to complete more transactions.

Good Returns, Strengthening Economies Encourage Investors
The strength of the investment markets in all metros rests heavily on investors enjoying continued access to the capital markets. From an equity capital standpoint, new capital continues to emerge in the multifamily segment, spurred by the lack of adequate returns available in other asset classes. Debt capital is also expanding, and, in many metros, lenders are competing keenly to provide acquisition funding. Higher interest rates appear certain at some point in the near term and will most likely affect pricing on low-margin properties, meaning primarily Class A assets. Properties on the lower rungs of the quality scale, however, will not see any price adjustments in the near term.

Strengthening metro economies will also boost apartment operations and encourage investors. Through October 2013, more than 80 percent of the jobs lost nationwide during the recession had been replaced, and many metros have already added more jobs than were lost during the downturn. The surprisingly robust number of workers hired nationwide in October despite the federal government shutdown that month erased many doubts about whether the economic recovery is sustainable. Economic growth and job creation will gain momentum in 2014 as demand for goods and services rises.

Finally, the recovery in the single-family home market may potentially raise vacancy and lower rent growth in several metros in 2014, but several offsetting factors are also in force that will prevent a broad-based flight to homeownership. The rise in 30-year mortgage rates during 2013 has likely relegated many marginally qualified prospective home buyers to the rental segment. Also, a lack of new homes being built at affordable “entry points” will thwart home buying aspirations.

Why 2014 Will Be a Holder’s Market

By Les Shaver -

Just because it seems like cap rates can’t go down any farther, and many formerly favorable markets will be flooded with supply, that doesn’t mean everyone wants to sell.

There are many good reasons to buy and hold too. And, they are many of the same reasons the apartment sector has been a favorite of investors over the past few years.

Pent-up demand from Echo Boomers (with 21.8 million individuals ages 18 to 34 living at home in 2012, according to the Census), and the promise of economic growth in 2014 and 2015 mean the apartment market hasn’t hit its ceiling.

“Although the rate of acceleration is slowing and pricing is a concern, apartment fundamentals are still generally healthy,” says Lili Dunn, chief investment officer for Greensboro, N.C.–based Bell Partners. “Rental housing benefits from strong demand driven by robust rental household formation, which is fueled by demographic trends and, to a lesser extent, job growth.”

Economists believe the apartment market still has a lot of upside over the next four or five years, at least, pointing to about 2.2 million new jobs created in 2013.

“That is a recovery,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group. “It’s a lethargic recovery. But it’s still a recovery that’s gaining speed. This year, depending on whom you talk to, we’re anticipating 2.7 million to 3 million new jobs. These new jobs will continue to increase the formation of new households.”

And, Dunn doesn’t think there will be an oversupply of apartments to sap the demographic-driven demand. She points out that the supply in the pipeline is expected to decline after hitting 300,000 units in 2014, and thinks supply concerns are overblown. “New supply is also still within reasonable levels of long-term averages,” she says.

While many well-heeled investors are starting to dispose of their apartment holdings and chase yield in other asset classes, some economists think weaknesses in those other sectors—such as office and retail—will help apartment investments maintain their value.

“Some people are still risk adverse about other property types and are taking a long-term hold approach to this,” says Ryan Severino, senior economist and associate director of research at New York–based Reis.

With these economic tailwinds, Severino doesn’t expect to see a market implosion like the one that occurred in the late 2000s, where condo converters, not buying on a cap-rate basis, pushed prices to unsustainable levels.

“Even in the markets where cap rates are rising, it isn’t like 2008 and 2009, where we had a massive expansion in cap rates that clobbered the market,” Severino says. “I don’t think you’ll see that performance from the underlying economy or see demand erode like that [again].”

Brokers and market researchers are concerned about where pricing is heading, but aren’t exactly planning for an Armageddon-like scenario.

“Unless something blows up, I don’t see a hard crash,” says Dan Fasulo, managing director at New York–based Real Capital Analytics (RCA). “But I guess, who does see a hard crash? By just looking at line graphs we [have] leveled off. Cap rates aren’t moving lower. The rate of increase in pricing is slowing. You can expect more of that over the next couple of years.”

Why 2014 Will Be a Seller’s Market

By Les Shaver -

Jared Kushner hadn’t been running New York–based Kushner Cos. long when he noticed something problematic in early 2007: He could no longer justify buying apartments.

“I remember sitting with my dad and saying we couldn’t make sense of the buys in the markets—buying at 4 caps and financing at 6 percent,” Kushner says. “The dynamics really didn’t seem to make sense for multifamily.”

So, the Kushners made a decision. “We basically said, if we’re not buyers, we’re sellers,” Jared says. “We were able to market the portfolio and get an extraordinary price.”

The timing was impeccable. Kushner sold 17,000 units in 86 complexes to AIG and Morgan Properties in June 2007 for $1.9 billion. In 2008, the economy fell into recession. By 2010, acquisition pricing looked a lot better to Kushner (as it did to other opportunistic buyers around the country). So, over the past four years, the company has scooped up $3.5 billion worth of assets as the younger Kushner expanded the firm’s footprint beyond the Garden State to his new home in New York City, plus seven markets around the country.

Early on, Kushner found a number of buying opportunities. “The last couple of years have been a phenomenal time because [interest] rates have been low, cap rates have been high, and the spread seemed to make sense for us to be very aggressive buyers,” Kushner says.

But that dynamic is changing as more investors chase yield off the beaten path. “We haven’t been able to find the opportunities in the seven national markets that we’re in,” he says. “Gardens have been trading at prices beyond where we are comfortable. So, we’re super focused on New York City, which is a market that seems to have no end in sight for how it will continue to perform.”

Kushner certainly isn’t alone. As single-property transactions and cap rates head to near-record levels, interest rates perk up, and inflation fears hover, some industry analysts (and even a few executives) have started to ask themselves the same question the Kushners pondered in 2007—Is now the time to think about selling?

As it seems with every question in real estate, there’s no easy answer.

Disposition Decision
Some indicators say it’s 2007 again. As of the third quarter of 2013, cap rates came in at 6.2 percent nationally. “That’s every bit as low as 2007,” says Dan Fasulo, managing director at New York–based Real Capital Analytics (RCA).

With $22 billion of sales volume in the third quarter of 2013 and $30 billion in the fourth quarter of 2012, the apartment market was reaching the lofty volume it hit during the last boom. In fact, single-property deals are at an all-time high.

Part of that might be from a lack of supply on the market. That situation could actually make dispositions appealing for opportunistic sellers in 2014, especially for those that made value-add acquisitions (and have now stabilized those properties) during the recession.

“Now is a very good time to sell because of the number of buyers in the marketplace,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group.

You can put Lili Dunn, chief investment officer for Greensboro, N.C.–based Bell Partners, in the opportunistic category. Bell, which completes about $1 billion in transactions a year, seizes good opportunities to buy and sell. But, in the near term, the company expects to be a net seller.

“Pricing is back to peak levels,” Dunn says. “There seems to be a dislocation between cap rates and projected growth rates in some areas. It is a great time to take advantage of markets that have peaked and/or assets that have maximized operating performance.”

While some companies, like Bell, can be opportunistic sellers to prune their portfolios, there is an argument to be made that this may be a better sales environment than owners may see in the next few years. So, if large institutional investors want to sell, now is the time. Already, some are leaving the market. Bloomberg reports that Washington, D.C.–based Carlyle Group “is reducing holdings of multifamily housing as rent growth slows from a post-recession surge.”

Many of these investors may be looking to park their money in other classes, such as office and retail. In fact, Fasulo sees more upside in office and retail, where rents are still 20 percent to 30 percent lower than peak.

“I think the market will be hard-pressed to continue its momentum,” Fasulo says. “As far as double-digit gains in pricing, I think that game is pretty much over. Your serious players in the market are expecting debt costs to be higher going forward, with little room to raise rents higher.”

Though there’s not a lot of evidence of it so far, rising interest rates could eventually pull cap rates up. Ten-year Treasuries jumped from 1.6 percent in May 2013 to 2.6 percent at press time. If cap rates eventually follow, buyers might have to make a decision.

“Sellers have expectations of where prices should be,” Kushner says. “The question is, do cap rates widen out and do people keep hitting those prices and settling for less return on investment relative to risk?”

If buyers eventually balk at those decreasing returns, sellers might have to make price adjustments. Overdevelopment could eventually add more supply to the market, also forcing sellers to adjust.

With supply ramping up, you might face more competition from other sellers over the next few years than you might in the near term,” says Ryan Severino, senior economist and associate director of research at New York–based Reis. “If you’re in a position to harvest those gains (from a value-add situation) and redeploy that capital into something else that might present better return options going forward, now is not a bad time to do it.”

Top 10 Rent Growth Markets of 2014

By Lindsay Machak -

Industry experts project that some of the largest metro areas will see some of the largest rent growth next year. Yet some hot secondary metros, such as Denver and Nashville, are also among the top markets for 2014.

Seattle will continue to grow in 2014 and is expected to see the biggest percent change in rents, according to New York-based Reis.

San Francisco will push rents by about 4.7 percent next year, according to the MPF. The Bay Area’s job growth market continues to improve, as the unemployment rate dropped from 6.9 percent in July to 6.1 percent in September, according to the Bureau of Labor Statistics.

Meanwhile Texas markets Austin, Dallas and Houston are each showing strong fundamentals heading into the new year. Job growth in all three markets will give the boost they need to push rents by about 3.9 percent next year. While some people may fear Austin is seeing too much development, most mangers aren’t worried about it. As far as Dallas and Houston, both markets are seeing rapid development, and are among the hottest secondary markets in the nation.

The Top 10 Rent Growth Markets for 2014:

1. Seattle: 5.8
2. San Francisco: 4.7
3. Denver: 4.6
4. San Jose: 4.5
5. Nashville: 4
6. San Diego: 4
7. Austin: 3.9
8. Dallas: 3.9
9. Houston: 3.9
10. New York City: 3.8

Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.

8 Threats to Apartment Owners in 2014

By Les Shaver -

As the rest of the economy has foundered, apartment owners have surged coming out of the recession. But the good times might not last forever. Here are eight things that could wreck their joyride.
1. Fannie Mae and Freddie Mac
It’s been more than five years since the speculation about Fannie Mae and Freddie Mac started, yet they remain a vital source of liquidity in the sector, especially in secondary and tertiary markets (where other lenders are less likely to go). “Fannie and Freddie are the most dominant lending sources in our industry,” says John Sebree, director of Calabasas, Calif.–based Marcus & Millichap’s National Multi-Housing Group. “If that is changed, it will have an effect on our values and our ability to finance properties.”
2. Unemployment
The apartment sector has seen great rent growth over the past few years without its customers enjoying real income growth. If the sector wants to continue to grow, employment, and wages, must increase. And, if things regress, the industry will suffer. “You put unemployment and the economy in the macro bucket,” says Dan Fasulo, managing director at New York–based Real Capital Analytics. “They’ll be hovering above everything we do and directly impacting values.”
3. Rising Interest Rates
When interest rates rise, they reduce investor-levered returns, which obviously hinders valuations. “The interest-rate market, and how much interest rates increase and over what period of time, will have a huge effect on value,” Sebree says. “If Treasuries jump 100 or 120 basis points, that will have an effect on cap rates.”
4. Overdevelopment
Simple supply and demand dictates that when more apartments show up in your neighborhood, it generally decreases the value of those properties that were there already. “Supply is an issue at the submarket and neighborhood levels,” says Ryan Severino, senior economist and associate director of research at New York–based Reis. “It’s not a uniform thing.” But in markets with oversupply, valuations will take a hit.
5. An Exodus of Capital
Already, some players, like Washington, D.C.–based Carlyle Group, are trimming their apartment holdings. If the movement gets bigger, it could hurt values. “Capital is moving out,” Fasulo says. “Your smart money players, chasing yield compression in the market, are already playing in the other sectors where there is a bigger spread.”
6. Inflation
Inflation will hit apartment owners, but, ultimately, the sector is in a good position to handle higher prices. “If we look at what inflation will do, it will increase rents, but it will increase expenses and interest rates [too],” Sebree says. “It will probably increase values, as well. If inflation happens at a higher rate than what many are predicting, the investors that have locked in long-term debt will be in better shape than others.”
7. Political Threats 
When Bill de Blasio was elected the next mayor of New York City last month, apartment owners in the city, including Fasulo (who owns units in Brooklyn) took note. “The mayor of New York has a lot of power to impact change very quickly,” Fasulo says. “Understanding the positions of the new mayor-elect, I’m not sure I’d make a bet that operating expenses for New York City apartment owners would be going down.”
8. Geopolitical Issues
Apartment industry executives, like everyone else, are susceptible to what happens in the outside world. If gridlock in Washington or recessions in other countries plunge the U.S. into recession, multifamily owners suffer. “One of my greatest concerns that I believe will impact apartment values and fundamentals is uncertainty about global economics and our government policy,” says Lili Dunn, chief investment officer forGreensboro, N.C.–based Bell Partners (though she remains hopeful the economy will remain along its path of moderate growth).

U.S. Housing Price Rise Slows; Consumer, Investor Confidence Down

By Dees Stribling, Contributing Editor –

S&P Dow Jones Indices reported the latest S&P/Case-Shiller Home Price Indices on Tuesday, which cover the three months ending in September. According to the company, the National Home Price Index was 3.2 percent in the third quarter of 2013 and 11.2 percent over the last four quarters.

In September 2013, both the 10- and 20-city composite indexes gained 0.7 percent month over month and 13.3 percent since the same time last year. While 13 of 20 cities posted higher year-over-year growth rates, 19 cities had lower monthly growth in September than August. Prices are still rising, in other words, just not as rapidly as they had been, a trend that might mean that the current run up isn’t a much of a bubble.

“The second and third quarters of 2013 were very good for home prices,” David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, said in a statement. “Housing continues to emerge from the financial crisis: the proportion of homes in foreclosure is declining and consumers’ balance sheets are strengthening. The longer-run question is whether household formation continues to recover and if home ownership will return to peak levels since in 2004.”

Consumer Confidence Drops

Consumers were feeling a little more uncertain this month, according to the Conference Board, which said on Tuesday that its Consumer Confidence Index dropped from 72.4 in October to 70.4 in November. The Present Situation Index edged down to 72.0 from 72.6, and the Expectations Index declined to 69.3 from 72.2 last month.

Consumers’ assessment of overall current conditions decreased slightly. Those claiming business conditions are “good” edged up to 19.9 percent from 19.5 percent, while those claiming business conditions are “bad” increased to 25.2 percent from 23 percent. Consumers’ appraisal of the job market didn’t change much, with those saying jobs are “plentiful” ticking up to 11.8 percent from 11.6 percent, while those saying jobs are “hard to get” decreasing to 34 percent from 34.9 percent.

Conference Broad chief economist Lynn Franco noted in a statement that “Sentiment regarding current conditions was mixed, with consumers saying the job market had strengthened, while economic conditions had slowed. When looking ahead six months, consumers expressed greater concern about future job and earning prospects, but remain neutral about economic conditions. All in all, with such uncertainty prevailing, this could be a challenging holiday season for retailers.”

Investor Confidence Down Too

The State Street Investor Confidence Index was released on Tuesday as well, and it came in at 91.3 in November, down 4.2 points from October’s reading. The decline was because a relatively steep drop in European investor confidence, down from 111.3 last month to 101.5 in November. Investor confidence in North America and Asia improved slightly.

Wall Street had a lackluster day on Tuesday, with the Dow Jones Industrial Average gaining a hard-to-see 0.26 points, or less than 0.01 percent. The S&P 500 managed to gain 0.01 percent, while the Nasdaq was up considerably more, 0.58 percent.