The sky is falling, the sky is falling………..(Chicken Little, the main character in a children’s fable)
There are several Western versions of the Chicken Little folktale, of which the best known concerns a chick that believes the sky is falling when an acorn falls on his head. The chick decides to tell the King and on his way encounters other animals (mostly fowl) which join the chick in his quest. At this point there are many endings to the story. The moral to be drawn changes depending on the version. Where there is a happy ending, the moral is not to be a chicken but to have courage. In other versions where the birds are eaten by the fox, the fable is interpreted as a warning not to believe everything that you are told.
The National Economy
And so it appears that Chicken Little has gone to Washington and the version’s ending depends on which path the Congress takes with respect to the March 1, sequestration trigger. If you believe the tale spun by the present administration, on Friday, March 1, the fabric of our civilization begins to unwind. There will be a breakdown in public order, your food may not be safe to eat, you may have to wait longer in lines to board a plane, government workers my have furlough days, and there will be no end to the devastation! Why this will be a shock too severe for the economy to take. Our economy will tank! There seems to be no end to the fear mongering. The sky is falling……..
While the sequester is a stupid kick-the-can compromise, the debate on what to do next is just as stupid. With respect to sequestration, there are no real cuts. There only is a reduction in the automatic annual spending increase that amounts to roughly 2 cents on every federal dollar spent over the next ten years. According to the Congressional Budget Office, the federal government will only be able to cut about a little more than $40 billion in 2013. This equates at most to a 2% reduction in the federal budget. A drop in the bucket and again, not a real spending cut! Even with sequester, the federal government will still spend more in 2013 than in 2012.
Perhaps Washington should consider following the first version of the fable and garner some courage to do the right thing. If both sides of Congress and the Administration move beyond their comfort zone and find common ground on health and tax reform, those changes combined with meaningful spending cuts will be a first step towards a “real” reduction of our national debt. Hopefully, by the publication of this article, this manufactured crisis will have a happy ending, but if past performance is an indicator of future behavior, this crisis or the next crisis will be far from resolved.
As for the immediate future, I will wake up on Saturday morning (God willing), March 2, 2013 and the sun will be shining, the birds will be chirping and the sky will be blue! The only cloud on the horizon will be the huge national debt hanging over our heads and sounds of the “children” in Washington playing “kick-the-can” with our nation’s future while singing “the sky is falling….the sky is falling”!
The California Economy
The fourth quarter 2012 UCLA Anderson Forecast states that passage of Proposition 30 by California voters creates some risk and has some impact on the Forecast. On the positive side, Proposition 30 provides a way forward in funding state investment in education and provides some funding for the realignment of services. On the negative side, it does not address the many issues in the way in which we fund state government over the longer term, which could make things worse than better.
Employment is expected to grow 1.3% in 2013 and 2.4% in 2014. Unemployment is expected to fall through 2013 and will average 9.7% for the year. The 2014 unemployment rate is projected to drop to an average of 8.4%, a percent higher than the U.S. forecast. Employers in Los Angeles will generally keep pace with the national average this year adding approximately 70,000 positions, representing a 1.85% gain.
The National Apartment Market
One bright spot in our economy is that the nation’s apartment rentals are once again expected to be the best-performing commercial sector. The national apartment vacancy rate was comfortably below 6% heading into 2013. For the fourth year in a row, apartments continue to define the recovery in commercial real estate. But there are headwinds going forward and the sectors out-performance cannot persist indefinitely. In 2013, firming housing market conditions combined with the cycle’s first measurable increases in apartment supply will moderate income trending higher as well as property values.
Even with new supply coming on line, the outlook for the multi-family market still seems quite positive, as tenant demand appears likely to continue to be driven by the unbundling of households that doubled. In some cases, household preferences have changed, favoring the mobility afforded by renting over ownership. Even as new construction ramps up and product comes on line, there will still be a strong demand for apartment residences that will persists even after the nascent housing recovery takes hold.
The Los Angeles County Multi-Family Market
The apartment investment activity was very strong during the 2nd half of 2012 as sellers were motivated to close prior to year end to lock in profits ahead of rising capital gain taxes. Note the increases for the second half of 2012 in the dollar volume and number of transactions in the trend chart below.
The activity this year will cool moderately from the pace set in 2012, but sales are still anticipated to be brisk. Buyer demand continues to be very strong especially for class “A” and “B” assets in the better areas. Many of these properties are selling over list price with multiple offers. Helping to fuel the market are very attractive interest rates, which dip into the high three percent rage for agency financing.
On a less positive note, investors should be aware that our Sacramento legislature is poised to remove commercial property from Proposition 13 tax protection, which could potentially raise property taxes on those assists dramatically. This will include apartment buildings and will put downward pressure on market values, especially in rent controlled areas.
Source: CoStar, Inc
(The Copyright report contains research licensed to AOA Commercial Brokerage)
In L.A. County the construction cycle is gaining momentum this year and developers will add 5,000 units. Fortunately for many owners of existing apartments, the influx of new supply is mostly localized, thus helping healthy rents gains is supply-constrained areas. Most of the new units scheduled to come on line over the next two years are in just 25% of the county’s submarkets; Wilshire/Westlake, Downtown and Marina Del Rey/Venice/Westchester will each increase by approximately 1,000 apartments during 2013 and 2014.
Co-Owned Investments Post-Recession
Co-Owned properties include Tenant-in-Common (TIC’s) and Delaware Statutory Trusts (DST’s). While no sector of the Real Estate industry is recession proof, the Co-Owned properties (under SEC regulations) appears to have weathered the storm better than expected. This is due in part to the historically low loan to value ratio (LTV) of 50%-60%, the transparent/comprehensive due diligence performed by both Sponsors and Lenders prior to purchase, experienced professional management, and the institutional quality of the properties. However, some asset types are fairing better than others – i.e., multi-family and single tenant properties.
As mentioned previously, the multi-family sector has been far more resilient and in far better shape in terms of fundamentals than any other asset type – particularly office and retail and even industrial. The financing options are more favorable for multi-family properties than most other sectors in commercial real estate. That is because the industry is buoyed by Fannie Mae and Freddie Mac, which provide liquidity to the housing market. The apartment sector has always been viewed by lenders as having less risk than commercial retail or office properties.
While there are fewer Co-Owned offerings on market than in past years, they are perhaps more attractive with respect to their financials; higher CAP rates and cash flow (average 6.5%). Also, because of the current lending environment, the properties are scrutinized closer than in previous years and the underwriting requirements have tightened. In addition, the LTV ratios are lower than previous years at a ratio of 50%-55%.
Using the 1031 Exchange and Co-Owned Properties as a Retirement Vehicle
The good news is that while the market has turned downward, historically, the multi-family market values are still relatively high while interest rates remain at a fifty year low. And yes, there is financing available for multi-family properties. The process takes longer and the buyers must have good credit and financial strength. If you are looking towards retirement, it is still an excellent time to sell, take advantage of the 1031 Exchange into Co-Owned Investments and position yourself for the next up-leg of the real estate cycle.
While the real estate market is cyclical, we are not in lockstep nationally and market fluctuations give us opportunities in various geographical areas that are better poised for growth. Some areas that have held with respect to multi-family are Texas, the Carolinas, Colorado and the Mid-Atlantic region to name a few.
Record numbers of American families have swelled the rental ranks since the onset of the housing market collapse so that nearly 4 years after the economy’s return to expansion, apartments continue to define the recovery in commercial real estate. A significant portion of U.S. households will return to multi-family housing as renters due to stricter mortgage loan requirements and the decreasing availability of consumer mortgage financing. In addition, increasing demand for rental housing will come from the 5,000,000 “Echo Boomers” entering the largest demographic of 18-24 year-olds in the U.S. history. Even as new construction of apartment buildings ramps up, the higher demand for apartment residences still outstrips new supply. All of these factors imply that select segments of the U.S. multi-family market are poised to capitalize on surging demand combined with still constrained new product beginning to come on line, ensuring that multi-family properties will be dramatically more valuable in 2016 than 2013!
Advantages of Co-Owned Properties
- Flexible size to match your needs
- Pre-arranged financing
- No management hassles
- Potential increased after tax cash flow
- Economics of scale
- Can be identified and closed in a timely manner
- Investment can be diversified into more than one property and/or location
As a Co-Owner, one can reduce management responsibility, defer capital gains taxes, increase both cash flow and tax deductions, increase appreciation potential, have more safeguards with triple net, high-credit tenants and maintain direct ownership. The option of partial ownership gives buyers the opportunity to diversify their real estate holdings by purchasing interests in multiple properties and various geographical locations. Co-Ownership can get you more while you do less. Accordingly, this arrangement can solve several problems for owners looking to make their lives less complicated.
Anne Baber is a real estate broker with the Apartment Owners Association, Commercial Brokerage Division and has over 20 years experience in apartment house brokerage. She can be reached at (818) 235-1135 or [email protected]
Anne Baber is a real estate broker with the Apartment Owners Association, Commercial Brokerage Division and has 25+ years experience in apartment house brokerage. She can be reached at (818) 235-1135 or [email protected].