Friday, August 12, 2011

Apartment Redux

I heard an interesting comment today during a meeting. The legal representative for a client works for a national law firm that specializes in land. This is land trusts, acquisitions, conversions, and operations for companies that buy, hold, and operate rental complexes. The recent collapse in land values had also reduced the value of existing apartment complexes in many regions; some were even forced into foreclosure. These investors, represented by these national firms, see a tremendous opportunity to the upside and are now buying class B and C properties, doing facelifts and rehabs, updating appliances, fixing the pools, and raising them to A- status. In many areas, very few rentals had been built during the last ten years; there is now pressure to the upside in rents. These investors see an excellent short term return and even a long term return, 3 and 4 percent is better than treasuries. Ain’t the free market great!

I haven’t done a rental complex in years, all our planning efforts since 2005 have focused on for sale, both attached and detached. I am starting two apartment complexes now. A small 130 unit complex and a five story Texas wrap (that’s where the garage is the core and the units literally wrap and hide the garage structure). We were force fed by the government for the last ten to fifteen years on the notion that home ownership was a right; the banking system was turned on its head by regulations and requirements, cheap money, and a bubble of demand. Now all those failed purchasers need a home, rentals are back.

With per unit apartment values now well north of $200,000 per unit, and in some markets above $250,000, the only direction for rents is up (in fact the The National City Tower Lofts in LA was converted to 93 apartments, they are asking $350,000 per unit, got a spare $32.7 million?).

While the building industry wants to believe that some balance between ownership and rental exists somewhere, it is seldom achieved. The vagaries of markets, employment, interest rates, and demographics all play into rent to own ratios. Again the market must be served, and as always the development industry is there to help. They plan and build, then overbuild, try and twist things with more gov’ment regulations, then the inevitable collapse. Then they start over. Ain’t it great?

Stay tuned . . . . .

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