Orange County Multifamily Outlook: 2010
If you are a member of the Apartment Association of Orange County, you can find this article inside of the January 2010 issue of the Apartment News Magazine, starting on page 38. If not, please enjoy the copied text below.
Orange County Multifamily Outlook: 2010
By: Nicholas A. Dunlap, CPM
2009 was a roller coaster ride for apartment owners. It saw us rushing to comply with federal mandates, struggling with vacancies, adjusting rents and yes, even evaluating properties for acquisition. Going forward, we are certainly anxious to put this turbulent time behind us. The industry as a whole experienced a shift that saw inexperienced owners, operators and brokers decide that maybe multifamily housing wasn’t for them after all. Expectations are minimal as we look forward to a 2010 that we are hoping is simply better than 2009. With that, several key factors weigh on the minds of property owners and managers. Staying in tune with the numbers and data can help you beat the statistics instead of becoming one.
The Unemployment Rate
Simply put, less jobs equals higher vacancy rates. We have experienced this over the past year as Orange County’s unemployment rate climbed to 9.8% and the vacancy rate increased to 7.8%. Owners were forced to introduce concessions and adjust rents to meet the market or sit with vacancies. The ability to recognize trends and make changes in a quick and efficient manner can prove the difference between 3% and 8% vacancy. When residents come into the leasing office and give notice, an effective resident manager should launch into an onslaught of questions that can definitively answer the who, what, where, when and most importantly: why a resident is leaving. If it is due to a job loss or decrease in hours, consider having a program established that allows you to work with the residents. These programs can be great for public relations and more importantly, establishing a program ahead of time allows you to put more thought into the methods with which you protect your bottom line. Remember, what you do for one resident you must do for all, so be sure to require formal documentation from residents who are being considered for rent reductions/adjustments.
Sales Prices, Interest Rates and Capitalization Rates
Selling low means buying low and for many longtime owners, this market could be the perfect time to do just that. Having owned a smaller property such as a 2 to 10 unit complex for a number of years, many owners can sell now and conduct a 1031 Exchange into a larger property where they can earn a greater cash flow, increased tax shelter and eliminate themselves of day-to-day management headaches by retaining professional management or even participating in a group investment with built-in management. As Capitalization Rates have increased and Interest Rates have decreased, positive leverage is now achieved more regularly than before. The Cap Rate is a ratio between the Net Operating Income and the Market Value of a property that yields in percentage form the annual return rate. Positive leverage occurs when the percentage rate of return on borrowed money is higher than the interest rate on borrowed money. Essentially, you are borrowing money at a lower rate than the return you can receive on it. A 7.8% Cap Rate and 6% Interest Rate equals positive leverage. As Cap Rates increase, sales prices decrease. In recent years, we routinely saw cap rates in the 4%’s and 5%’s. Now, we are seeing cap rates in the 6%’s and 7%’s. This is a sign that the market is coming back around to buyers.
Dollars In and Dollars Out
With turnover expenses escalating along with higher vacancy rates and advertising expenses increasing to maximize the exposure of vacant apartment homes, it is important to offset some of these costs through the creation of ancillary income sources at your properties. Opportunities are available through a number of sources, including: Cable television providers, Laundry Companies, Renter’s Insurance carriers and even recycling companies. These companies will actually pay you for a right to access and exclusively advertise to your tenants. Explore the marketplace in your area and you will be surprised by the additional income sources available to you as a landlord. In a year when rental increases are not anticipated, additional income streams to your property enable you to offset some of the increasing operational expenses.
Recognizing these numbers and trends both within your portfolio and within the marketplace directly affects your ability to thrive and succeed in 2010. There is an old adage in business that “time kills deals” and this can be fitly applied to the state of the current real estate market. While there has not been a rash of foreclosures in the Orange County multifamily sector, the real estate market in general is down. As with any down market, there are opportunities primed for the astute investor. Acting quickly and confidently is of the utmost importance. Align yourself with experts to help navigate your ship through stormy water and on to success. Stay informed and active with the AAOC to ensure you are informed of the most current issues affecting our rights as the owners and operators of Orange County multifamily housing.
Please note, Employment Statistics from State of California, Employment Development Department Report published October 16th, 2009. Vacancy rate information from REIS Commercial Real Estate data published November 2nd, 2009.