Midwest Real Estate News July-August 09 : Page 1

midwest WWW.REJOURNALS.COM by Dan Rafter, Editor Construction of retail buildings and office buildings has nearly ground to a halt in today’s struggling econ- omy. The industrial construction market is down, too. Even healthcare construction, which some have called recession-proof, is showing signs ofweakness as hospi- tals putmajor expansion and building projects on hold. But there’s one sector of the commercial construc- tion market that, while not exactly booming, is at least holding its own: the multi-family market. Today, it’s the one commercial constructionmarket that can realistically be called steady. And while rent in- creases are non-existent and vacancies have increased slightly, industry analysts still viewmulti-family construc- tion as one of the few, if any, bright spots in today’s troubled commercial construction marketplace. “Multi-family is doingmuch better than are the other commercial sectors,” said Jim Sotos, associate direc- tor in the Chicago office of Marcus & Millichap Capital Corporation. “Retail, office and industrial have certainly been the most affected by the economy. Multi-family is still holding up fairly well.” Chris Perry, vice president of theMinneapolis office ofGrandbridge Real Estate Capital, said that in the Twin Cities the vacancy rate formulti-family stands at a reason- able 5.5 percent. That is up fromamulti-family vacancy rate in the high-3-percent range one year earlier, Perry said. Such a small vacancy increase is relatively unusual for such a strong recession, he said. “It’s nice as an apartment owner when a major downturn in themarket only takes you froma 3-percent to a 5-percent vacancy,” Perry said. “You can still oper- ate your property very effectively and generate decent returns at a 5-percent vacancy rate.” Perry points to the large number of renters return- ing to the multi-family market now because of housing foreclosures. At the same time, apartment rents remain affordable. Renters also don’t have tomake a long-term commitment when moving into a multi-family building. With the economy still struggling, these factors make renting particularly attractive. Many people who would have bought a home in a better economy are now choosing to wait, Perry said. And while they wait, they’re renting apartments. “An apartment product is amore flexible product in times such as we are going through now,” Perry said. “Retail centers or office buildings are not quite as flex- ible. If the owners of multi-family products see their oc- cupancies dropping, they can react quickly. They can consider making some concessions to new potential renters. They can take a small hit on their concessions and then bring their property up to normal occupancy.” Cleveland Working through a down economy Page 21 R E A L E S T A T E N E W S® THE DAKOTAS | ILLINOIS | INDIANA | IOWA | KANSAS | KENTUCKY | MICHIGAN | MINNESOTA | MISSOURI | NEBRASKA | OHIO | TENNESSEE | WISCONSIN JULY/AUGUST 2009 VOLUME 25, ISSUE 5 Multi-family holding its own in theMidwest Whilemulti-family remains strong in the entireMid- west, it is doing particularly well inMinneapolis-St. Paul, Perry said. That’s because the Twin Cities did not over- build multi-family product in the last 20 years. This means that building owners don’t have an overabundance of inventory to fill. As Perry looks for- ward 12 to 18 months, when the economy will hope- fully continue to strengthen and the Twin Cities will see some significant job growth, he sees a time whenmulti- family demand outpaces its inventory. “Thatwill be a real benefit to the apartmentmarket,” Perry said. ScottPollock, senior vice presidentwithMinneapolis- based NorthMarq Investment Sales, agrees that the multi-familymarket, especially in the Twin Cities region, is holding strong despite the continued economic slump. NorthMarq’s numbers show an increase in multi- family vacancy rates from 3.9 percent last year to 4.9 percent now. Rent growth, too, is non-existent, Pollock said. At the same time, more landlords are offering enticing concessions to get renters in the door. Still, this all qualifiesmulti-family as a “healthy”mar- ket in today’s dismal commercial construction market. Continued on page 32

Multi-Family Market Holds Steady

Dan Rafter

Construction of retail buildings and office buildings has nearly ground to a halt in today’s struggling economy. The industrial construction market is down, too. Even healthcare construction, which some have called recession-proof, is showing signs of weakness as hospitals put major expansion and building projects on hold. But there’s one sector of the commercial construction market that, while not exactly booming, is at least holding its own: the multi-family market. Today, it’s the one commercial construction market that can realistically be called steady. And while rent increases are non-existent and vacancies have increased slightly, industry analysts still viewmulti-family construction as one of the few, if any, bright spots in today’s troubled commercial construction marketplace. “Multi-family is doingmuch better than are the other commercial sectors,” said Jim Sotos, associate director in the Chicago office of Marcus & Millichap Capital Corporation. “Retail, office and industrial have certainly been the most affected by the economy. Multi-family is still holding up fairly well.” Chris Perry, vice president of the Minneapolis office of Grandbridge Real Estate Capital, said that in the Twin Cities the vacancy rate formulti-family stands at a reasonable 5. 5 percent. That is up from a multi-family vacancy rate in the high-3-percent range one year earlier, Perry said. Such a small vacancy increase is relatively unusual for such a strong recession, he said. “It’s nice as an apartment owner when a major downturn in the market only takes you from a 3-percent to a 5-percent vacancy,” Perry said. “You can still operate your property very effectively and generate decent returns at a 5-percent vacancy rate.” Perry points to the large number of renters returning to the multi-family market now because of housing foreclosures. At the same time, apartment rents remain affordable. Renters also don’t have to make a long-term commitment when moving into a multi-family building. With the economy still struggling, these factors make renting particularly attractive. Many people who would have bought a home in a better economy are now choosing to wait, Perry said. And while they wait, they’re renting apartments. “An apartment product is a more flexible product in times such as we are going through now,” Perry said. “Retail centers or office buildings are not quite as flexible. If the owners of multi-family products see their occupancies dropping, they can react quickly. They can consider making some concessions to new potential renters. They can take a small hit on their concessions and then bring their property up to normal occupancy.” While multi-family remains strong in the entire Midwest, it is doing particularly well in Minneapolis-St. Paul, Perry said. That’s because the Twin Cities did not overbuild multi-family product in the last 20 years. This means that building owners don’t have an overabundance of inventory to fill. As Perry looks forward 12 to 18 months, when the economy will hopefully continue to strengthen and the Twin Cities will see some significant job growth, he sees a time when multifamily demand outpaces its inventory. “That will be a real benefit to the apartmentmarket,” Perry said. Scott Pollock, senior vice president withMinneapolisbased NorthMarq Investment Sales, agrees that the multi-family market, especially in the Twin Cities region, is holding strong despite the continued economic slump. NorthMarq’s numbers show an increase in multifamily vacancy rates from 3.9 percent last year to 4.9 percent now. Rent growth, too, is non-existent, Pollock said. At the same time, more landlords are offering enticing concessions to get renters in the door. Still, this all qualifiesmulti-family as a “healthy”market in today’s dismal commercial construction market. “We’ve always had a limit on the amount of new construction that hits the Twin Cities market,” Pollock said. “It’s a difficult market in which to acquire sites and get building approvals. When you look at the costs of construction and the level of rents in this market, it sometimes makes it difficult to pencil out new construction. The lack of new construction in multi-family, then, has certainly helped our existing multi-family properties remain strong. All in all, we are relatively healthy.” During the residential housing boom, which came to a halt in the middle of 2006, the homeownership rate soared to record levels. This came at a cost, though. A number of homeowners took out risky loans with artificially low initial interest rates. When these rates adjusted, a growing number of homeowners could no longer afford to make their monthly mortgage payments. That led to the record number of foreclosures across the country. Pollock says that maybe we’ve learned our lesson; maybe it’s now clear that not everyone should be a homeowner. For many people, renting makes more financial sense. “Over time, we’ve had a relatively high homeownership rate in the Twin Cities,” Pollock said. “When homeownership is very attractive like it was in the days leading up to 2008, we had a lot of renters leaving our market. Some of them are coming back now. That will create additional demand for multi-family housing.” Some markets stronger than others Not all markets, though, are equally strong, even when it comes to the relatively steady world of multi-family construction. Sue Blumberg, senior vice president and managing director in NorthMarq Capital’s Chicago office, said much of the Midwest’s multi-family markets are stable. She pointed to Indiana, Illinois and Minnesota as particularly stable markets. However, the multi-family market in Michigan is struggling, with vacancies rising and rents stagnant. Blumberg doesn’t see much of a recovery for Michigan’s multi-family market in the near future. “The market can be sporadic. It depends on where you are,” Blumberg said. “Some markets saw overbuilding. But in the Midwest we are, on the whole, pretty darn stable.” The fear some potential buyers have regarding the housing market is encouraging some potential buyers to remain renters, helping the multi-family market, Blumberg said. Renters also look at the uncertain jobs market — with national unemployment nearing 10 percent — and often decide it’s better to keep renting instead of taking on the huge financial burden of a monthly mortgage payment. “It’s expensive to move, and people are worried about bills today,” Blumberg said. “If they can stay where they are, many people are choosing to renew their apartment leases. They still don’t know if home values are going to decline further. People are still nervous.” Multi-family has proven its resilience during this recession, Blumberg said. The multi-family market has been stable even as the economy has tumbled. “This really has been a single-familyhome debacle, not a multi-family one,” she said. Much of the slowdown in commercial construction stems from the fact that developers are struggling to get financing for their projects. It’s easier, though, for developers to get this financing when they are working on multi-family construction jobs. “The local banks are actively seeking multi-family properties right now,” Sotos, from Marcus & Millichap, said. “This is the safest type of construction right now.” Sotos says that he doesn’t see this changing anytime soon. “Multi-family is going to remain the strongest sector of them all during the next few years,” he said. “You will see a lot of people who couldn’t get financing to buy a house. They are obviously going to look for some housing. They will seek out the multi-family rental market.”

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