In our last article, we stated that we thought the housing market slump would continue through year end and start to stabilize in early 2008. Unfortunately, there has not been any news that changes our belief. Some of the recent statistics indicate that we may still be too optimistic.
- The Commerce Department reported on August 16 that housing starts in July decreased 6.1% to a seasonably adjusted 1.381 million annual rate. This was the lowest rate in ten years as sales continue to slump and credit tightens.
- The Commerce Department reported on August 24 that sales of new single family homes increased 2.8% in July to a seasonably adjusted rate of 870,000. However, new home sales were 10.2% lower than July 2006 and the average price decreased to $300,800, down 3.4% from July 2006. The median price increased to $239,500 a .6% increase over July 2006. An estimated 74,000 new homes were sold in July.
- On August 27, the National Association of Realtors reported that sales of existing homes in July were down .2% to a seasonally adjusted annual rate of 5.75 million units, the lowest since November 2002. The median price was $228,900, down .6% from $230,200 in July 2006.
- The inventory of unsold existing homes as of July 31 was estimated to be 4.59 million, a 9.6 month’s supply at the current sales pace.(Source – Real Estate Journal)
- Unsold new homes on July 31 were estimated to be 533,000, a 6.5 month’s supply as compared to a 5.9 months supply at December 31, 2006. (Source – Real Estate Journal)
- Lenders continue to tighten requirements for mortgage lending and this has decreased the number of first time home buyers. The troubles in the subprime mortgage market and the rising number of foreclosures are causing lenders to tighten their lending standards.
What is a subprime mortgage? Subprime lending refers to the practice of making loans to borrowers that don’t qualify for the best market interest rates because of their credit history. Subprime mortgages are offered at higher interest rates due to the increased risk. Some of the common subprime mortgages include:
- Interest only – Only interest for a period of time
- Pick a Payment – In some cases, negative amortization occurred
- Initial fixed rate that converts to a variable rate.
The multi-family section should enjoy another good year as the number of potential residents should increase in part due to the tightening of lender’s requirements and the number of foreclosures. However, many of the potential renters returning to the rental market because of foreclosure may have bad credit and may not meet the qualification criteria to rent. Owners should be able to increase rents 3 – 5%. Developers should see land prices stabilizing, or maybe decreasing, as the demand for land from condo developers has cooled.
The multi-family market, like other sectors of real estate, has some common and unique terms that are used. We are going to discuss some of the terms found in the revenue section of the income statement, also known as the operating statement.
- Market Rent Potential – Market unit rent times the number of units.
- Gain or Loss-to-Lease – Difference between market rent and actual lease rate.
- Vacancy – Number of vacant units times market rent
- Model/Employee Apartments – Units used for models or employees times market rent.
- Concessions – There are not any standard concessions as they vary by complex. Some common concessions in the market include ½ month free or a reduction in the monthly rent for the terms of the lease. Concessions maybe offered to both new residents and current residents that are renewing their leases.
- Rental Income – Total of market rent less deductions discussed in items 2-5.
- Other Income – Some of the common items include, but are not limited to: Late Fees, NSF Fees, Month to Month Charges, Vending Income, Early Termination Fees, Laundry Income and Cleaning Fees.
- Garage/Storage Income – Applies only to complexes that have garages or storage units.
- Total Income – Total of items 6, 7 & 8. This is the only item that many owners want as this is usually the cash collected.
In the next issue, we will discuss the common expense categories.
One common question that is asked by owners is “Should I sell now or wait until I can increase rent”? There is not one answer that is appropriate for every situation. We do know that cap rates are at a historic low and I believe that cap rates will be higher a year from now. One way to analyze this question is to estimate the rent increase and determine the amount the cap rate could increase without changing the estimated market value of your property. Let’s assume the following:
|Current Operating Income:||$478,800|
|Current Cap Rate:||8%|
|Proposed Rent Increase:||3%|
|Annual Increase in Total Income:||$23,940|
|Annual Increase in Operating Income:||$14,364|
|Estimated Current Market Value:||$5,985,000|
|Projected Operating Income:
(after rent increase)
|Cap Rate @ price of $5,985,000||8.24%|
We can now make a decision on whether to sell now or wait based on our perception of the direction of cap rates. This is a very simplistic approach which does not consider other factors such as interest rates, new units being added, employment outlook, demographics, etc.
Fickling & Company’s Multi-Family Division is pleased to announce that we have recently added two new third-party managed accounts to our apartment portfolio. When stepping in to a new management role, Fickling & Co., Inc. recognizes that accomplishing our mission requires the enthusiastic commitment of our most valuable resource – our employees.
Tips for Strengthening and Energizing a New STAFF
- SELL, DON’T TELL: The most effective Managers seldom issue commands. Instead, they sell a course of action.
- ENCOURAGE YOUR STAFF TO MAKE DECISIONS: Employees need to feel they have adequate authority over their own jobs. If not, they will feel powerless and never develop decision-making skills.
- DELEGATE, DON’T DUMP: Delegating is giving something away that can develop a team member’s skills.
- SET GOALS WITH THE STAFF: Goal setting improves performance more than any other management technique.
- FOLLOW THROUGH: Your credibility will go down each time people’s expectations are not met.
- DON’T CHANGE COURSE MIDSTREAM: Employees need continuity.
- GIVE CRITICISM GRACEFULLY: Your best employee will judge you by how you treat your worst.
- HAVE A PLAN FOR THEIR FUTURE: People who can not move up, move out.
- AVOID HASTY DECISIONS ABOUT WORK STYLES: When you expect employees to work exactly as you do, you are likely to be disappointed.
- USE REWARDS AND INCENTIVES: The ratio of praise to criticism should be 4 to 1.
- ENCOURAGE COMRADERIE: People stay on their jobs in part, because they like the people they work with. Teamwork is the key to the property’s success.
Director Multi-Family Management
Macon Commercial Office
In our last article, we stated that we thought the housing market would continue to slump until mid-year and then start to stabilize. We may have been too optimistic. We now believe the housing slump will continue through year end and start to stabilize in early 2008. Some of the statistics that influenced our prediction include:
- The Commerce Department reported on May 16th that housing starts in April increased 2.5% to a seasonably adjusted 1.528 million annual rate. However, housing permits, an indicator of future starts fell, 8.9%
- The Commerce Department reported on May 24th that sales of new homes surged in April, the first increase in four months. However, the average price decreased to $299,100, down $25,600 from March 2007. The median price dropped to $229,100, down $28,500 from March 2007. An estimated 92,000 new homes were sold in April.
- On May 25th, the National Association of Realtors reported that sales of existing homes were down 2.6% to a seasonally adjusted annual rate of 5.98 million units. This is the slowest sales pace since 2004. The median price dropped to $220,900, the ninth straight decline in the median price.
- The inventory of unsold existing homes as of April 30th was estimated to be 4.2 million, an 8.4 month’s supply.(Source – Real Estate Journal)
- Unsold new homes on April 30th were estimated to be 538,000, a 6.5 month’s supply as compared to a 5.9 months supply at December 31, 2006. (Source – Real Estate Journal)
- Lenders have tightened requirements for mortgage lending and this has decreased the number of first time home buyers. The troubles in the subprime mortgage market and the rising number of foreclosures are causing lenders to tighten their lending standards.
The multi-family section should enjoy another good year as the number of potential residents should increase in part due to the tightening of lender’s requirements and the number of foreclosures. Owners should be able to increase rents 3 – 5%. Developers should see land prices stabilizing, or maybe decreasing, as the demand for land from condo developers has cooled.
Two new apartment complexes in Macon received approval from Planning and Zoning.
- On April 8th, a 240 unit complex off Zebulon Road behind Lowes was approved. The complex, consisting of three four story building with 1, 2 & 3 bedroom units, will be located on 14 acres.
- On April 23rd, a 298 unit complex on Wesleyan Drive near Bowman Road was approved. This development will be on a 12.9 acre tract and six buildings with 10 units each, 11 buildings with 20 units and nine garages with 2 units above the garages.
A new 294 unit complex is under construction off Zebulon Road just west of I-475. These units are scheduled to be completed in April 2008.
Sales in the Macon market during 2007 have been somewhat slower than last year. A 200 unit Class B property sold for $48,375/unit. Two Class C properties with a total of 159 units sold for an average of $20,632/unit.
In the last issue we discussed the classification (A, B, C, D) of apartments. Some of the other terms used in the apartment sector include:
- Efficiency(Studio): Usually small (350 to 450sf) living room and bedroom are together and includes a small kitchen, bathroom and closet
- Garden Apartment: Generally one to three floors with access to upper units by stairs.
- Mid-Rise: Four to ten floor building with elevator service
- High-Rise: Ten floors or more with elevator service
- Townhouse: Usually a two story apartment with the living room, kitchen and a half bath downstairs and the bedrooms plus full baths upstairs.
In our next issue, we will discuss some of the terms you will see on the operating (income) statement. We will also discuss some of the ways that are used to estimate the asking price of apartments.
As always, if you have any questions, please give me a call.
Much has been accomplished since our last report. Lullwater at Saluda Pointe, our luxury apartment development in Lexington, South Carolina (a suburb of Columbia), has opened and has been leasing up at a very rapid pace. We have received certificates of occupancy on approximately 50% of the units and expect to be complete by the end of summer. Lullwater at Saluda Pointe is, without question, the most attractive apartment community in the Columbia metro area and offers an amenity package that is “head and shoulders” above the market. The result has been some very impressive leasing activity (thanks to the excellent leasing and management staff) at rates above pro-forma.
Here in Macon, work continues in earnest on Marketplace at Bass, Lullwater Village and Lullwater East. Lullwater East, scheduled to be complete the latter part of summer, is progressing very well. The building will feature a very attractive upscale brick and stone façade with some very nice landscaping. Starbucks Coffee is leasing space in this center and expects to move in during August and begin serving their delicious coffee in the early fall. Hazel Dennis, Director of Retail Leasing, is working with several other interested high-end tenants on the balance of the space and we look forward to a successful lease-up of the building.
At Lullwater Village, we have contracted to sell two out-lots to newcomers to the Macon area; an upscale hotel company and a wonderful restaurant chain are each expected to close this summer and will each bring exciting new hotel and dining opportunities to Macon.
Marketplace at Bass, just to the north of Lullwater Village (in front of the Bass Pro Shops), is also moving along very well. McDonald’s, scheduled to open in August, has joined BB&T at the corner of Bass Road and Bass Pro Parkway. Additionally, we have contracted to sell two additional out-lots to two great restaurants, one of which will be new to the Macon area. The “power center” site has been cleared and we are in the process of moving hundreds of thousands of cubic yards of dirt in preparation for construction there.
We constantly continue to look for new development opportunities. In addition to the Star Towers development in Atlanta we are currently evaluating a retail development opportunity in Valdosta. We are also evaluating apartment developments here in Georgia, as well as Alabama, Florida, South Carolina and North Carolina.
VP of Development and Acquisitions
Macon Commercial Office
The first quarter of 2007 has been a busy one in the Commercial Development Department.
At Lullwater at Saluda Pointe, our apartment development in the Columbia, South Carolina suburb of Lexington, we have opened the beautiful leasing office for business and the lease up process has begun in earnest. We expect our first residents to move in the beginning of second quarter and construction on this 280 unit luxury property should be complete by the end of summer.
We are currently pursuing other apartment development opportunities in the Raleigh Durham, North Carolina area, Huntsville, Alabama, as well as Atlanta and Savannah Georgia. We feel that each of these markets represents attractive development and investment opportunities.
In Macon, we continue to work on our retail developments on Bass Road. BB & T closed on the purchase of an Outparcel in January with plans to build a new branch office on the property. We have contracts pending on other parcels and expect several other transactions to close this quarter.
We are also excited about the start of construction of Lullwater East, an 11,000 square foot shopping center located at the southeast corner of Bass Road and Starcadia Circle. This center will be anchored by a brand new Starbucks Coffee Shop, and we expect other high-end tenants to follow them there.
This quarter, we also expect to start clearing and grading for Marketplace at Bass, our “big box” retail development in front of the Bass Pro Shops on Bass Pro Parkway. We have had several well known national retailers, many of whom would be new to the Middle Georgia market, express strong interest in this development and are confident we will be able to attract them to this location.
On Arkwright Road, we are finalizing plans to begin the development of Phase II of the successful Arkwright Landing office development. The twelve lots planned for this project are expected to continue to attract upscale professionals seeking a convenient north Macon office address.
Lastly, we continue to work on the design, permitting, and pre-leasing for the Star Towers mixed-use development in suburban Atlanta. It is expected to be built in three phases, and when completed, we expect Star Towers to include Class A luxury high rise office space, exclusive retail and dining, in addition to a luxury full service hotel. This is an exciting opportunity that we believe will provide great returns to its owners.
VP of Commercial Development
Macon Commercial Office
Our Multifamily Portfolio has continued to grow and prosper in the First Quarter of 2007. Our Property Management team has been very busy creating strategic plans of action for three new apartment communities.
Our newly added properties include an A+ development in South Carolina, a 22 year-old asset in Middle Georgia, and 212 units in North Carolina. Each of these properties is unique; each has its own set of needs and challenges.
At Fickling & Company, we pride ourselves on our ability to overcome challenges and develop successful Management Plans to meet our owners’ needs and objectives.
The following elements are the key categories to be considered when taking on a new community:
In order to ensure that the property’s market rents are competitive, an in-depth market survey of the area is always required. Market rents should be analyzed per unit type. Too often, we assume that lowering prices across the board will automatically cure high vacancy loss. Instead of lowering rents, we often find that raising rents on the faster selling units creates a wider spread, and increases leasing activity in the unit styles with the greatest availability.
Fickling & Company has an outstanding Human Resources Department. As soon as all of the personnel have been interviewed and evaluated, training programs are immediately executed. It is critical that new employees have an immediate and positive impression of the Fickling organization, and the importance of their role.
A property budget and goals are set into play. Clear and measurable goals are the primary ingredient for creating a winning environment and maximizing peoples’ performance.
Good Business Practices
Fickling’s comprehensive Policies and Procedures Manual is introduced to all new properties at the time of take over. A property audit is scheduled to ensure overall compliance in Operations, Leasing, Personnel & Payroll, Safety and OSHA Standards.
On-site reports, both current and historical, are analyzed to determine a property’s “weakest link”. Expenses are also studied to ensure cost effectiveness in all phases of spending.
Inspecting What You Expect
The inspection process is another primary factor driving the success of the Fickling Management Plan and Expectations. We believe in setting very high standards. A quality curb appeal and product is necessary to maintain a strong image in the marketplace and attract a quality, paying clientele.
Marketing and Promotions
In order to create an effective Marketing Plan, we must first define who the customer is and the best resources for reaching them. Although conventional apartment publications are always a part of any marketing/advertising plan, they may not be the strongest or best traffic generators. All advertising materials must also be closely reviewed for professionalism and return on the dollar.
At the time of a new take-over, Fickling plans and hosts a variety of Resident Appreciation activities, in addition to initiating our “top tier” customer service program.
We distribute surveys to existing residents to determine their level of comfort and satisfaction. Surveys are excellent tools for improving the resident’s perspective and overall resident retention.
Fickling & Co. is aware that, now more than ever, investors must select management teams with great care. Our third-party property management team is committed to providing the management expertise, financial stability, professional excellence and integrity required in today’s competitive real estate market.
Director of Multi-Family
Macon Commercial Office
The National Multi-family Market was stronger in 2006 than it has been in the past few years. Owners were able to increase rates while decreasing the amount of concessions given to new tenants. Occupancy rates in many markets, increased as the supply of apartments were constrained due to the conversion of apartments into condominiums. Also, the increased cost of construction and the cost of land contributed to the sluggish construction of apartments.
The conditions of the housing market in 2006 had a positive impact on the multi-family market. The slowdown in the housing sector has been described as being everything from a correction to a crash.
There was a definite slowdown in the housing sector during 2006 as evidenced by the following:
- The National Association of Realtors estimated that sales of existing homes fell 8.4% to 6.48 million in 2006, the largest decline in 24 years.
- The Commerce Department reported on January 26 that sales of new homes dropped 17% to 1.06 million in 2006- the weakest sales year since 2002.
- The Commerce Department estimated that housing starts were approximately 1.8 million in 2006, down 12.9% from 2005- the biggest decline since 1991.
- On February 16, the Commerce Department reported that January 2007 housing starts were down 14.3% to a seasonally adjusted annual rate of 1.41 million.
For 2007, we believe the housing market will continue to slump until mid-year and then start to stabilize. Some of the factors that influenced our prediction include:
- The inventory of unsold existing homes as of December 31, 2006 was estimated to be 3.5 million, a 6.8 months supply. (Source: The National Association of Home Builders.)
- Unsold new homes as of December 31, 2006 were estimated to be 537,000, a 5.9 months supply. (Source: The National Association of Home Builders.)
- Lenders are tightening their requirements for mortgage lending. A recent article in the Wall Street Journal discussed the shakeout in the sub-prime mortgage industry. During the boom times, the lenders relaxed standards, allowing buyers to buy homes with little or no money down. One very interesting item in the article was that many sub-prime loans went into default very soon after the housing market cooled. An article in The Wall Street Journal on February 28 stated that Freddie Mac was tightening standards on sub-prime loans.
The multi-family market should enjoy another good year in 2007. We believe:
- Owners will be able to increase rents, albeit not as much as in 2006.
- More infill apartment communities will be developed as renters want to decrease the commuting distance to work to save on both time and the cost of commuting.
- Occupancy rates will stay relatively flat as more units come on line and some potential renters will opt to become homeowners as home prices increase only slightly and mortgage rates remain low.
- Cap rates will increase as investors go back to demanding more of their return from the operating results vs. price appreciation.
What could happen to make our predictions wrong?
- If a large number of condominium projects, both new and conversions, don’t sell and the owners put the units into the rental market.
- If the supply of units increases sharply as developers build more units in 2007 vs. 2006. A recent article in the Atlanta Business Chronicle stated that developers in the Atlanta market were planning to build 11,000 apartment units in 2007 as compared to 7,000 units in 2006.
The Middle Georgia apartment market for 2007 should mirror the national market. A new complex of approximately 300 units is planned off Zebulon Road, just west of I-475. A group of developers just announced that they are considering building an apartment complex in downtown Macon. During 2006, a 224 unit complex opened on Skipper Road and a 148 unit complex opened on Mercer University drive. Apartment sales were very active in 2006. Class B – x complexes containing xxx units were sold at an average price of $xx,xxx. Class C – x complexes containing xxx units were sold at an average price of $xx,xxx.
At Fickling & Company’s recent First Annual Middle Georgia Real Estate Market Review & Forecast Breakfast, one of the attendees asked what was a class “B” apartment. We were unable to find a formal classification for apartments but did find one that gives a good description.
Classification of Apartment Buildings
Class A – Large newer buildings in prime area with amenities such as garages, in-unit washer/dryers, pools, spas, exercise gyms, etc. Usually owned by institutions.
Class B – Buildings in good areas with many amenities, but not as nice as Class A buildings and over 10 years old.
Class C – Older buildings, well maintained, in blue collar areas, square footage in units may be smaller; have fewer amenities than Class B buildings.
Class D – Older buildings in marginal areas with higher vacancies, deferred maintenance; unit mix has more efficiency units; few, if any amenities.
Most fourplexes and smaller type properties would be at best classified as Class C or D. (Source: Joseph W. DeCarlo)
In future issues, we will discuss other terms that are specific to the multi-family industry.
Fickling & Company’s Multi-Family Division has had an extraordinary year. Our apartment portfolio has doubled in size, and revenues are up by 55% over last year’s operating results.
The Fourth Quarter has been particularly successful for the Fickling properties. We have consistently outperformed the market, with occupancies averaging 95% or greater. Market rents have also substantially increased throughout the portfolio.
In 2006, our Multi-Family Division has greatly benefited from the implementation of our new on-site accounting system, MRI. The accuracy and depth of the reports have assisted in our overall financial performance, as well as allowing us to provide a highly sophisticated report package for our owners.
Fickling & Co. is dedicated to the ongoing education and professionalism of our employees. To increase our training efforts in 2006, we joined the Grace Hill Training Program.
Our Multi-Family Division has recently completed the 2007 operating budgets. We are anticipating another great year and our goals are aggressive. We plan to expand our business and services into additional markets throughout the Southeast, as well as continuing to provide top tier service for our residents as well as our clients.
Director of Multi-Family Management
Macon Commercial Office
In this article we will discuss the National Market for 2006 and 2007. The condition of the housing sector has a direct impact on the condition of the multi-family market. As predicted, the housing sector slowed in 2006 after setting records for each year from 2000 to 2005.
The Commerce Department estimated that October’s new home sales were off 3.2% and new home sales are down 17.9% for the first ten months of 2006. Estimates for new home sales for 2006 are in the range of 1.05 to 1.06 million, compared to the April estimates of 1.17 million. We are not seeing concessions such as free vacations and new cars offered by builders to help sell new homes.
The National Association of Realtors estimated that sales of existing homes rose .5% in October, the first increase since February. Estimates for existing home sales for 2006 are in the range of 6.2 to 6.3 million as compared to the April estimate of 6.67 million.
Some of these factors that contributed to the downturn in the housing sector were the affordability of housing and the increase in mortgage ratios after 17 straight quarter-point increases in the federal funds rate. However, 15-year mortgage rates recently declined to 5.9%, the lowest level since March 2006.
The downturn in the housing sector is one of the factors that will make the 2006 apartment market the strongest it has been over the past few years. Other factors that will make the apartment market strong in 2006 include job growth and the decreasing supply of new apartments as construction costs and cost of land have contributed to the sluggish construction of apartments.
In the Bibb County market, Mill Creek Run, a 224-unit complex on Skipper Road and the 148 units at Pinewood Park on Mercer University opened in 2006. There are plans to build approximately 300 units off Zebulon Road, just west of I-475. A development group has announced they are considering building an 80 unit complex in Downtown Macon.
Sales prices for apartments continue to increase. In some cases, asking prices on smaller apartment complexes are greater than replacement costs.
For 2007, we believe the housing slowdown will continue into 2007 but should stabilize around mid-year. We believe the multi-family market will enjoy another strong year but think that cap rates will slowly increase as investors return to seek more of their return from operating income and less from the increase in the value of the property. Also, the rate of return from alternative investments should continue to increase.
If you need additional information or have questions, please feel free to call me.