Monthly Archives: August 2013 - Page 2

Nasdaq Gets Weird; Mortgage Rates Hit New Highs; Leading Economic Indicators Edge Up

By Dees Stribling, Contributing Editor –

On Thursday Wall Street experienced its biggest technical fubar since the 2011 Flash Crash, when trading stopped stone cold on the Nasdaq for about three hours, idling trillions of dollars in investment capital. After it was over, Nasdaq issued a vague statement.

“Earlier this afternoon, NASDAQ OMX became aware that price quotes were not being disseminated by the Securities Industry Processor (SIP), which consolidates and disseminates all prices for the industry,” the company said, adding that the glitch was fixed in 30 minutes. But Nasdaq had to coordinate with the other major exchanges and regulators to get things on even keel again, which took more time.

The reason for the stoppage? Not stated, and perhaps not known. In any case, Wall Street ended up on Thursday, with the Dow Jones Industrial Average up 66.19 points, or 0.44 percent, and the S&P 500 gaining 0.86 percent. The ill-starred Naasdaq was in the black, too, by 0.99 percent.

Mortgage Rates Hit New Highs

Mortgage rates are continuing their upward creep, but the housing market still seems to soldier on in its recovery. Freddie Mac reported on Thursday that 30-year fixed mortgages averaged 4.58 percent (with 0.8 points) for the week ending Aug. 22, the highest average in about two years. During the same week last year, the average for a 30-year mortgage was 3.66 percent.

“Fixed mortgage rates continued to follow bond yields higher leading up to the August 21 release of the Federal Reserve monetary policy committee’s minutes for July,” Freddie Mac chief economist Frank Nothaft said in a statement. “Meeting participants acknowledged mortgage rate increases might restrain housing market activity, but several members expressed confidence the housing recovery would be resilient in the face of higher rates.”

So far, it has been. Separately, the Federal Home Finance Agency reported that its House Price Index for the second quarter of 2013 was up 2.1 percent from the first quarter, and up 7.2 percent compared with the second quarter in 2012. The agency’s index is based on home prices for properties whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac.

Leading Economic Indicators Edge Up 

The Conference Board reported on Thursday that its Leading Economic Index (LEI) for the U.S. increased 0.6 percent in July to 96.0, following no change in June, and a 0.3 percent increase in May. The happy year 2004 = 100, according to the organization’s reckoning.

“Following moderate growth in the last few months, the U.S. LEI picked up in July, with widespread gains among its components,” Conference Board economist Ataman Ozyildirim, said in a statement. “The pace of the LEI’s growth over the last six months has nearly doubled, pointing to a gradually strengthening expansion through the end of the year. In July, average workweek in manufacturing was the weakest component.”

According to the Conference Board, some of the other components of the index include average weekly initial claims for unemployment insurance; manufacturers’ new orders; ISM Index of New Orders; building permits; stock prices; and the interest rate spread, 10-year Treasury bonds less federal funds.

Storm Watch

By Keith Loria, Contributing Editor –

There’s a lot to deal with when managing a multifamily development but one item has moved up the rankings of importance for many in the past few years—that of preparing for a natural disaster or strong weather occurrence.

In the past two years, the Northeast was hit by major storms Irene and Sandy, the Midwest has dealt with raging wildfires and the rest of the country has had more than its share of tornados, earthquakes and major winter storms. In fact, in 2012 alone, there were 11 extreme weather events in the U.S. and each had damages exceeding $1 billion.

These storms often wreak havoc on a property and what many multifamily developments realized—and realized too late—was that there was no realistic, actionable plan in place at the property for before, during and after a storm. That is something that has changed considerably as many preparedness lessons were learned by these events.

“Any owner of a multifamily or assisted living facility should consider what the natural and man-made hazards are that expose the property,” says Chuck Miccolis, commercial lines engineer for the Institute for Business & Home Safety, which offers insights and guidance on key rebuilding issues to help apartment communities repair or rebuild so that their properties are stronger and more resilient. “Once I know that, I would like to know what are the capabilities of the emergency response teams and whether I have the personnel to meet the needs of the complex.”

Other concerns to be considered are ensuring residents know all evacuation zones, having updated maps and schematics in place and devising plans for all residents to evacuate safely. There should be a call-list to alert everyone and, of course, a way to communicate back and forth if the phone lines go down.

Then there are the individual building concerns and protecting the building’s envelope during a storm or disaster. Miccolis recommends yearly inspections of the roof and foundation and additional inspections after every major storm.

“The roof is the first line of defense against the elements so you should make sure that there are no leaks or damage before the threat of a storm,” he says. “To protect windows, you should have hurricane shutters, but make sure that is in your emergency plan. You need to have the staff and manpower to protect the building, and if you only have a small maintenance staff and a large property, the plan won’t work.”

Barbara K. Schoor serves as vice president for Community Investment Strategies Inc., a Lawrenceville, N.J.-based real estate company that manages more than 3,000 multifamily units in New Jersey. CIS was recently selected as one of 12 organizations to participate in Enterprise Community Partners’ Hurricane Sandy Recovery and Rebuilding Program, a collaborative that is developing best practices to enhance the long-term capacity of the region’s affordable housing infrastructure in the wake of Superstorm Sandy.

“One of the reasons we were interested in becoming part of this is there’s an awful lot of planning you don’t realize you need to be doing. None of the policies are that difficult and not even that innovative, but they have to be in place for things to work,” Schoor says. “We are looking at ways to assess our communities’ vulnerability in the event of future crises and find effective, maximum-impact options to repair physical damage, and identify potential financing mechanisms to implement retrofits.”

One of the most important components of creating a plan is communication with residents, vendors and all staff.

“You need to set the expectations of your residents and make sure they are prepared as well. One of the things the collaborative is looking at is the best ways to educate people so they are prepared,” Schoor says. “Another important part of the plan is the communication with various service organizations that exist in the community, so they understand about us and know what our needs might be in an emergency.”

When Superstorm Sandy hit New Jersey last year, CIS had a plan in place, but it didn’t account for the floods and major damage that was happening. Plus, its senior properties were much more vulnerable in a crisis than expected.

“We found ourselves having to become a service provider. A lot of what we were faced with—helping residents secure medication, contacting or locating family members to help people evacuate, providing flashlights and essentials—had us assume the role of a special needs housing provider when there’s not an emergency,” Schoor says. “We go beyond bricks and mortar when we plan our communities and in emergency situations, we want to go beyond as well.”

One tip from the collaborative’s early sessions is for multifamily developments to have preparedness classes on a routine basis, both for staff and residents. Other ideas are to have a checklist handy, keep a complete list of contacts for all staff and residents and know the vendors to call when items are needed.

Staying ahead of climate change

When an apartment community is developing a plan for disaster preparedness, it’s important to consider climate change and its effects into all planning. In May, the Natural Resources Defense Council (NRDC) and American Rivers released “Getting Climate Smart: A Water Preparedness Guide for State Action,” a report designed to help states develop climate preparedness plans focused on water to help keep communities resilient.

“Our guide specifically looks at climate change impact like flooding, drought, water scarcity and things of that nature and how people can develop a plan to address these impacts,” says Ben Chou, co-author of the report. “We outline a six-step process that includes educating people about climate change, setting up groups to talk about risks, strategies they can take to reduce impact, implementing a plan and updating that plan as new information comes in.”

Not anticipating what could happen is the biggest problem when disaster hits. A good strategy for multifamily, Chou says, is making sure emergency evacuation plans are in place and that the routes aren’t in vulnerable areas that could flood and be un-travelable, which could impact the ability of people to leave and also the likelihood of first responders getting to the scene.

“You should also make sure that people are aware of the evacuation plans—the elderly, those who don’t speak English well, people of low income—and make sure they understand what to do ahead of time,” Chou says. “There should also be a discussion on the critical systems-—water, sewer and communications—and these shouldn’t be in vulnerable or hazardous areas like basements that can flood.”

The weather disasters of the last several years have put many on alert to the hazards that could come and have shown them the importance of having a plan in place.

“The worst thing is being unprepared and underestimating what can happen,” Miccolis says. “No two storms are alike and even if you’ve made it unscathed through one, it doesn’t mean that you are safe for the next one.”

Cyber Liability

By Kevin D. Smith, CPCU, ARM, The Graham Company –

Among the many risks that property owners must manage is the risk of cyber liability. Years ago, privacy of residents’ personally identifiable data was confined to filing cabinets and office computers, but now this data exists electronically in the cloud, on laptops, smartphones or tablet devices often in addition to the paper files. Access points are everywhere, and the information can be easily transmitted. What’s more concerning is that cyber criminals are on the lookout for this data, and they are becoming more sophisticated every day. If that is not enough to worry about, state and federal regulations are being enacted that require a duty of care for this data, and complying can be difficult.

Cyber liability insurance is relatively new and has become the fastest growing line of coverage over the last 10 years. Few industries are immune to the risk of data breaches that can include customer, vendor or employee data. As with any risk, it is relative to the type and amount of exposure an individual company faces.

For property owners and managers, the amount of data collected on employees, residents or prospective residents can be immense, and a breach of this data would not only be embarrassing but also costly. Cyber liability insurance can provide a level of protection from this emerging risk and should be evaluated as part of any risk management program.

Cyber liability policies

Cyber liability policies are designed to cover a company for a loss or breach of personally identifiable information. Traditional insurance policies were not designed to cover these types of exposures, so any coverage you might find under your general liability, professional liability, crime or property policies or even a directors’ & officer’s liability policy written for a privately held company will either be very limited or simply accidental. Some carriers might offer you an endorsement to provide coverage for a specific component of your cyber liability exposure, but it is usually not as comprehensive as buying a separate policy.

Here are several reasons why your traditional insurance policies might not respond to a cyber liability claim:

■ General liability policies do not respond to claims for damage to intangible property (there is also typically a specific exclusion for claims arising out of electronic data)

■ General Liability policies typically exclude claims arising out of “blogs” you own or host

■ Property policies only provide loss of business income coverage if there was direct physical damage caused to your property (not caused by hackers or rogue employees who shut down your website or computer systems or the systems of a service provider you rely upon to conduct your business)

■ Crime policies do not respond to claims for damage to intangible property (there is also typically a specific exclusion for loss of confidential information)

■ Private company directors’ & officers’ liability policies typically exclude claims arising out of bodily injury (including emotional distress), property damage and specific types of personal injury

■ No traditional insurance policy currently provides coverage for the expenses associated with notifying affected individuals when their personally identifiable financial or medical information was breached while in your care, custody or control

These are just some of the hurdles to overcome in order to find coverage for cyber liability claims under a traditional insurance policy.

Evaluating costs

Costs resulting from a breach can vary greatly, and when you take into account lost revenue or reputational damage, they can be significant. The costs associated with the breach include defense and judgment costs from lawsuits as well as notification and credit-monitoring expenses. Consider just the costs of notification and credit monitoring for a multifamily property manager with 3,000 residents. The cost of notification and credit monitoring after a breach can range from $30 to $50 per person. If the data lost compromised 3,000 records, these costs alone would be over $100,000.

Policies can be structured to provide limits anywhere from $1,000,000 to $10,000,000 or more, with various deductible and coverage options to tailor the policy to fit the coverage and cost needs of the insured. Premiums will vary and will be dependent upon the amount of coverage, size of your organization, type of data collected and security measures in place. Generally, policies will start around $10,000 for $1,000,000 in limits.

Some of the exposures and costs that can be covered under a well-structured cyber liability policy include:

■ Information security and privacy liability for failure to protect personal or corporate information (like tenant Social Security numbers and credit research) held on computers systems, smartphones, laptops or paper files or entrusted to third-party vendors

■ Costs to notify affected individuals that their personal information has been breached, as required by law

■ Other costs associated with data breaches, such as public relations, investigative costs and defense costs from lawsuits

■ Loss of business income when a “hacker” prevents your customers from accessing your website or disrupts your systems

■ Loss of business income when your service provider’s systems are affected by a “hacker” (such as a cloud service provider or credit card processing company)

■ Personal injury (such as libel) that may result from the use of blogs on your website or other social media

When employees are cyber criminals

Breaches can happen in a variety of ways, and there is no shortage of news of examples of significant breaches. The FTC reports that identity theft complaints were up 32 percent in 2012, and over 12 million people have been a victim of identity theft.

While cyber criminals account for much of these instances, there is also the threat of human error of employees that causes data to be lost. For example, laptops left in cabs, smartphones lost, USB drives left in the open and stolen, or simply emailing a file with this data to the wrong address. While encryption can be a line of defense against the release of this data, many times it is not sophisticated enough, or it simply does not exist on every computer or device. In 2012, Blue Cross Blue Shield of Tennessee paid a $1.5 million settlement for penalties under the HITECH Act for a breach of over 1 million patient records after the theft of computer hard drives (with unencrypted health information).

The use of third parties, such as a rent payment portal, does not eliminate the risk. The company that selected the third party would also be involved in a lawsuit or breach since they selected and promoted the third party for resident rent payments. A lawsuit would examine what level of due diligence was done by the property manager to select the third-party rent payment portal and its security measures.

The need for prevention

Preventing breaches with security protocols is a no-brainer and often a requirement of state or federal government. Good security and prevention measures also make you a more appealing risk for cyber liability underwriters, which help keep costs down if insurance is purchased.

It begins with identifying the type of information collected and putting policies in place to protect this data. This protection can range from employment policies to control employee behavior, such as policies on downloading unauthorized software and rules related to personal device usage to technology solutions such as keeping anti-virus software up-to-date and complex password protection measures. Your IT department should regularly monitor security measures and look for signs of attempted breaches. Many companies have used an outside consultant to perform an audit of the cyber security systems in place to determine vulnerable areas.

The threat of lost data, the ensuing costs, and potential liability for property owners and managers is real and growing each year. Companies spend a lot of money and effort on keeping this data safe, but the sheer number of incidents suggests that it is only a matter of time before companies experience some sort of breach.

Kevin D. Smith CPCU, ARM, is vice president, real estate division director at The Graham Company, a property and casualty brokerage specializing in the multi-housing. 

Home Prices Rise Everywhere

By Dees Stribling, Contributing Editor –

U.S. residential prices continued their upward climb in May, according to the latest S&P/Case-Shiller Home Price Indices on Tuesday. From April to May, the 10- and 20-city composites rose 2.6 percent and 2.5 percent, respectively. Home prices gained 11.8 percent and 12.2 percent for the 10- and 20-city composites indices in the 12 months ending in May 2013.

All 20 cities showed positive monthly returns for May. Ten cities—Chicago, Denver, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Seattle and Tampa—showed acceleration, according to Case-Shiller. Chicago, for example, posted an impressive monthly gain of 3.7 percent in May. Miami and Seattle had their largest monthly gains since August 2005 and April 1990, respectively.

“Home prices continue to strengthen,” David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, noted in a press statement. “Two cities set new highs, surpassing their pre-crisis levels and five cities—Atlanta, Chicago, San Diego, San Francisco and Seattle—posted monthly gains of over 3 percent, also a first time event.”

Does it add up to a new bubble? Observers are quick to point out that certain short-term events are driving prices in many places, such as the fact that formerly distressed properties are beginning to re-sell at more “normal” prices, which adds an upward element to overall prices. Also, and maybe more immediately, the prospect of yet higher interest rates might have increased demand for houses as buyers hurry to lock in rates.

Residential vacancy rates edge down

The Census Bureau reported on Tuesday that the national vacancy rate for rental housing was 8.2 percent in the second quarter of 2013, 0.4 percentage points lower than during the same quarter a year earlier. The vacancy rate for homeowner housing, which are for-sale units that don’t happen to have any occupants, was 1.9 percent, down 0.2 percentage points for the year.

Owner-occupied housing units made up 56.2 percent of total U.S. housing units, while renter-occupied units made up 30.2 percent of the inventory in the second quarter 2013, the bureau also reported. Vacant year-round units comprised 10.3 percent of total housing units, while 3.3 percent were for seasonal use. About 2.7 percent of the total units were for rent, 1.1 percent were for sale only, and 0.9 percent were rented or sold but not yet occupied (such as student housing in the summer).

Homeownership stood at a rate of 65 percent of U.S. households in 2Q13, unchanged from the first quarter. But over the longer term, homeownership has been dropping. During the second quarter of 2012, 65.5 percent of all householders owned their dwellings.

Wall Street had a mixed day on Tuesday, but mostly it was a trip to Nowheresville, with the Dow Jones Industrial Average down 1.38 points, or a scant 0.01 percent. The S&P 500 gained 0.04 percent and the Nasdaq was up 0.48 percent.

Capital Stack

By Keat Foong, Executive Editor –

Developers seeking financing for apartment acquisitions and/or rehabs are faced with a variety of situations depending on the type of financing—senior loan, transitional financing, or gap financing—that is being sought.

Permanent financing is generally in abundant supply today, agrees Paul Daneshrad, CEO of Starpoint Properties. “Development capital and debt is much easier to acquire. It is an open market. If the project, location and economics are right, you should have no problems.”

Starpoint Properties focuses on investing in non-core, value-add, opportunities in the $20 million to $70 million range. Daneshrad is probably not alone in favoring Fannie Mae and Freddie Mac permanent financing. The GSEs, he agrees, are offering the most favorable interest rates and leverage.

By comparison, life insurance companies remain very competitive sources of permanent financing for top-quality, low-leverage, loans, but they may not provide more than 60 to 65 percent LTV. CMBS lenders may be slightly less competitive than the GSEs in the multifamily arena, and they are still restricting financing to larger loan sizes. Commercial banks are said to be not active in the permanent financing arena.

Although the general availability of permanent financing for the multifamily sector is much touted, it may still be difficult to obtain such financing in many markets. Daneshrad says, for example, that parts of Texas and Detroit, and increasingly, Washington, D.C., may be encountering more supply issues.

When it comes to shorter-term transitional, or bridge, financing for apartments, more and more financing sources continue to emerge to serve the market. “Plenty of opportunity funds and equity shops are getting more active in lending into the space,” says Larry Grantham, managing director of Karlin Real Estate.

Bridge loans are generally employed when the use of permanent financing is not yet possible, as when the apartment’s occupancy is undergoing stabilization. Or, such financing may be employed when the transaction needs to be financed, and a permanent loan cannot be obtained in the short time available.

Situations that are pertinent today for the use of bridge financing include: the purchase of non-performing notes or REO properties; property repositionings involving significant renovation capital; and discounted payoffs by the existing borrower. Ultimately, the bridge loan is refinanced with a permanent loan with better terms.

Karlin Real Estate specializes in providing bridge financing for “middle-market” transactions of $5 million to $30 million located in secondary or tertiary markets. The company provides up to 85 percent LTV for its bridge loans for terms of one to five years, with typically one-year yield maintenance. Interest rate charged could be 8 to 10 percent, with the option to accrue the interest payments, says Grantham.

In its loan decision, Karlin Real Estate emphasizes the debt basis—basis per square foot or per key—of the property in order to minimize the risks taken by the company, Grantham suggests. “Whether the loan is the right basis” is the company’s primary concern in underwriting, he says. The company is also concerned about lending to dependable, “realistic” borrowers, who do not take excessive risks.

Besides the private funds, banks are a major source of bridge financing today. Unfortunately, bank financing may not provide the desired amount of loan dollars, the maximum LTVs provided being typically only 60 to 70 percent.

Addressing a perceived market need in transitional financing, Pembrook Capital Management LLC, which focuses on what it sees as the underserved, $10 million to $50 million, middle-market, supplies the needed loan dollars to bring the transitional financing to a higher leverage.

Coming out of the recession, commercial banks were limited in their ability to finance real estate. As Patrick Martin, president of Pembrook Multifamily Capital, points out, the banks also favored bigger, more established, players, and imposed more conservative limitations on their loans.

Staking a subordinate lien position, Pembrook can finance the needed gap in the bridge financing to carry the leverage of bank financing up to 80 or as high as 85 percent. It does this by supplying a mezzanine loan or preferred equity. In cases in which bank bridge loans are not already in place, Pembrook also offers to supply a high-proceeds bridge loan execution by combining a bridge loan with a mezzanine loan or preferred equity in a single execution.

Terms for Pembrook’s gap financing are mostly two to five years, and the floating or fixed interest rates, depending on the market and the sponsor, can range from about 9 percent to 15 percent (for new construction). “Ultimately, we are not an equity provider, but a debt fund. We try not to play in the space that demands equity-like returns. We do not charge as much as equity,” adds Martin.

It may still be a challenge to obtain mezzanine debt and preferred equity for transitional projects.

Much of the need for gap financing derives from the acquisition of properties that require repositioning or refinancing or that may be overleveraged, says Martin. In some cases, the borrower is purchasing the property back from the bank. In all cases, the transitional loan is not providing leverage at a sufficient level to meet the borrower’s need.

The property’s basis is one of the top considerations for Pembrook when it evaluates applications, suggests Martin. The lender is also very focused on the quality of the sponsor, the viability of the exit and the soundness of the execution. Many of Pembrook’s transactions have been focused on New York City and Los Angeles, but they also extend to Dallas, Miami and Seattle. In following market recoveries, Pembrook also provides financing for secondary markets throughout the nation, such as Denver, Raleigh and Oklahoma City.

Whereas the position of permanent financing in the multifamily arena appears to be secure, and first-lien bridge financing is increasingly available, gap capital may still be more limited. According to Martin, there are more providers in the preferred equity and mezzanine debt sector than there used to be, but the middle market is still underserved. More than $2 billion in transactions cross its desk per year, but Pembrook approves less than 10 percent of these inquiries.

Freddie Mac Loan Facilitates Acquisition, Rehab for Starpoint

When Starpoint Properties LLC purchased the 558-unit Parkview Terrace Apartments, Redlands, Calif. in 2011 for $79 million, it announced that it had completed one of the largest transactions in the Inland Empire at the time.

The Class B property was located in a relatively healthy submarket, characterized by average annual household income of about $85,000, a 95 percent occupancy rate and no concessions. “We liked the location of the property, especially its vicinity to employers including Loma Linda [University Medical Center],” said Paul Daneshrad, CEO of Starpoint Properties. Parkview Terrace, he added, was also desirable for its amenities, unit mix and overall layout, relative to other competing apartment properties in the submarket.

Starpoint Properties’ purchase was financed with a $40 million Freddie Mac acquisition loan via Walker and Dunlop, said Daneshrad. The seven-year fixed-rate loan carried an interest rate of about 4 percent. The company opted for the Freddie Mac financing supplied through Walker & Dunlop because of the fixed-rate feature, relatively low interest rate and favorable LTV being offered, said Daneshrad. “Freddie Mac is one of the most competitive programs in the country.”

Starpoint invested about $2.5 million in equity in renovating the 32.5-acre property, said Daneshrad. Renovations were centered on the common areas, as in-unit upgrades had already been performed by the previous owner, Equity Residential. New amenities included a Vegas-style pool and fire pit; beach volleyball, basketball and tennis courts; golf driving range and putting green; and built-in barbecues and seating near the pool areas. A movie theater and business center were added to the clubhouse; the office space was reconfigured to accommodate the new uses; and the gym and all common-area bathrooms were upgraded. A fountain was also added to the center of the courtyard.

Parkview Terrace Apartments was about 94 percent occupied when it was purchased by Starpoint Properties at a cap rate of about 6 percent, Daneshrad indicated. The rents were originally about $1,200 to $1,900.

Pacific Northwest: Ahead of the Curve

By Jeffrey Steele, Contributing Editor –

The Seattle and Portland metros share a number of commonalities, and they’re not limited to cloudy and wet weather, nature-loving denizens or the ribbon of roadway locals disparagingly refer to as “The Slog.”

Within the multifamily sector, for instance, they are currently displaying an array of similar traits, from rebounding economies and excellent employment growth to enviable levels of housing absorption, exceedingly high rates of occupancy and very real opportunities to push rent growth rates higher.

“In general, this is the best performing region in the country in terms of recent revenue growth in multifamily,” says Greg Willett, vice president, research and analysis with Carrollton, Tex.-based MPF Research, a division of RealPage.

In metro Seattle, apartment occupancy levels are at 95.7 percent, up 50 basis points on an annual basis. Apartment buildings are full in every product niche and every neighborhood, with the exception of a couple areas in Tacoma. The result: Strong rent growth vis-à-vis other regions of the country, he says.

Rent growth in Seattle-Tacoma stands at 4.2 percent, as opposed to 2.6 percent nationwide. What’s more, rent growth in the metro hasn’t slowed much in recent months, as it has in some other areas of the country.

Portland occupancy is at 96.4 percent, and again, every product segment and enclave seems to be jam packed, Willett says. Annual rent growth pace in the Portland metro is just less than Seattle-Tacoma, and stands at 3.9 percent. These kinds of numbers place both the Seattle-Tacoma and Portland metros in the top 10 nationally in occupancy and rent growth.

The construction pipeline

Both Seattle and Portland are traditional barrier-to-entry markets, according to Willett. In both metros, new supply is typically constrained by cost factors and limited land availability, resulting in major new supply bursts being fairly rare.

However, considerable building is taking place right now in Seattle, Willett says.

While the near-term apartment inventory growth is not what it is in red hot markets like Texas, Washington, D.C., the Carolinas and Denver, the extent of new construction is significant given Seattle’s modest building history.

Ongoing construction is reported at 12,254 units, and it will yield a surge of 3.7 percent in inventory over the next 18 months, according to Willett.

“That’s almost double the average seen over the past couple of decades,” he adds. “About half the product under construction will be delivered in the urban core. While the building pace is fairly aggressive, MPF Research expects the metro to handle this burst of completions better than will most areas where lots of deliveries are unusual. While the metro’s performance premium relative to the U.S. as a whole probably won’t remain as big as it is now, we
do think the area will continue to post better-than-average occupancy and rent growth numbers.”

Alan Mark, founder and president of The Mark Company, views the Seattle market as one characterized by stark dichotomies regarding for-rent and for-sale inventory. “It’s just shocking in terms of low vacancies on the rental side, no inventory on the for-sale side, lots of apartments coming up in different markets [and] very little coming up on the condo side,” he observes.

In the meantime, the construction pipeline in Portland is at historic norms or even a bit under those norms. Ongoing construction comes in at only about 1,800 units, an inventory growth rate over the next 18 months of just one percent. “With that restrained pace of building, Portland is positioned to rank among the country’s best performers over the next couple of years,” Willett says.

“The question here will be how aggressively rents can be pushed, given housing affordability always is more of a challenge here than in most markets.”

Opportunities for investment

Significant opportunities for investment exist in the region. “Rents are still rising, and there’s great job growth,” Mark reports, citing Seattle’s current jobless rate of about four percent, as well as the heavy recruiting being undertaken by technology-focused employers like

He sees opportunity in Class A, B and C assets, as well as in the construction of small condominium buildings that can be built quickly with readily obtained financing. “If it’s an apartment building, the financing’s out there,” he says. “If it’s a condo building and it’s sizeable, it’s tough to get.

“I think there’s a real opportunity … it’s like the old [saying], if you’re turning around an oil tanker you have to do it a mile ahead. [It’s] the same thing with [apartments]. One doesn’t want to wait until 2015 when the market’s hot to start building. It’s really [better to] build it now to deliver it in 2015.”

For a number of reasons, investors have liked these markets for some time, Willett adds. “You have seen considerable run-up in prices, so at this point you’re coupon clipping,” he remarks. “You know your return is not huge in these markets, because you’re paying so much.”

Regional bright spots

When it comes to positive harbingers for the future, the economy and jobs continue to loom large. Seattle is outperforming earlier projections in terms of the quickness of its job market recovery from recession.

“It kicked back into high gear very quickly,” he reports, noting annual job growth in Seattle-Tacoma stands at 2.2 percent, representing 36,700 positions, according to April figures from the U.S. Bureau of Labor Statistics (BLS).

That has translated into strong demand for apartments, with annual absorption in the Seattle-Tacoma metro coming in at 7,419 units in Q1. “When looking at individual metros across the country over the last year, the only ones that absorbed more total product were Dallas and Houston,” Willett says.

In Portland, the metro’s job growth numbers stand at 1.3 percent, or 12,900 positions, according to the BLS. The pace of expansion has eased somewhat from earlier levels. In the year-ending first quarter, a modest 2,122 units were absorbed. “Product availability has played a greater role than the state of the economy in that figure,” Willett says. “With the existing stock full, what’s been absorbed has exactly matched what’s come on line.”

The strength of the Pacific Northwest job market translates to excellent incomes as well, according to Mark. Approximately 28 percent of Seattle employees make $100,000 or more per year, he reports. Even more striking is that the largest group claiming that income level is the 24- to 34-year-old demographic.

“That’s kind of a key buying group,” Mark says. “And what we’re seeing is couples there, especially in the tech field, pulling in over $200,000 per year.”

Noteworthy projects

When it comes to eagerly anticipated developments, Willett points to the projects of Vancouver, Wash.-based Holland Partners. The developer is now at work on a much-heralded high-rise called 815 Pine Street in downtown Seattle. The 40-story tower will have 386 apartments, is anticipated to achieve LEED Silver status, and will begin welcoming first residents in late 2014, he says.

Mark gives the nod to the 41-story, two-tower development called Insignia, expected to multiply the number of condos for sale in downtown Seattle by a factor of 12. Insignia is the latest project from Burnaby, B.C.-based Bosa Development Corp. “Nat Bosa has really changed the face of Vancouver, [and] now it’s on to Seattle,” Mark says. “He always delivers beautiful product, and that’s true if you see what’s in Vancouver or San Francisco. And it’s really the only thing that will be delivered. He’s always ahead of the curve.”