Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/206598
DEMAND DRIVES DEVELOPMENT The economy's continued recovery has launched a new wave of development in the multifamily market. Construction activity is ramping up across the country in markets ranging from New York to Oregon. More than 100,000 new units are expected to be completed this year, and that resurgence is just the start of a new era of building over the next few years, according to Reis. The development drought appears to be over in markets such as Las Vegas where the future is looking brighter for both apartment owners and developers. "Developers are bullish for the next several years with some 10,000 units either planned or in the pipeline," says Garry Cuff, CCIM, vice president at Colliers International in Las Vegas. The improving economy, including the addition of approximately 20,000 new jobs over the past year, has helped to fill existing apartments in the Las Vegas metro area, which spans a total inventory of about 160,000 units. Occupancies for class A properties currently stand at 94 percent, while class B and class C properties are only slightly lower at 93 percent. "Barring some unforeseen downturn in the national economy or negative geopolitical event in the world, multifamily properties should perform very well compared to the past several years and I see Las Vegas climbing out of the basement compared with other parts of the country," Cuff adds. If buyers can't fnd what they want at a price they are willing to pay in Tampa or Orlando, Fla., they are going to Jacksonville, which historically has been overlooked by investors, according to Stone. As a result, Jacksonville has claimed some of the highest per unit sale prices in the state during the past 18 months, with 26 properties sold during the frst half of the year for a total price of $446.7 million, according to RCA. Buyers are also shopping for properties that ofer more opportunities to boost net operating income. "Right now, class A assets are pretty stable, but they don't have a whole lot of upside lef," Stone says. Class B properties have more potential to improve occupancies and raise rates. In addition, class B and class C properties are likely to gain favor among investors because there is more opportunity for rent growth. "Tere are value enhancements that you can make to improve your rental structure and stabilize your occupancy," Stone says. Investment sales among class C properties are heating up in markets such as Phoenix. In 2012, Phoenix-based Gerchick Real Estate closed $45 million in multifamily sales and the frm expects to double that this year. "Tis market is incredibly active," says Linda Gerchick, CCIM, designated broker and team leader at Gerchick Real Estate in Phoenix. Some investors have been tired of waiting on the sidelines CCIM.com Although there are some concerns that the added inventory may have a negative impact on occupancies, most metros are likely to see those new units absorbed relatively quickly. Many of the properties are coming online at occupancies of 85 percent or more, indicating that demand for apartments remains strong, according to Reis. For some investors, urban redevelopment projects are presenting an opportunity to tap into growing demand from renters to move into revitalized downtown neighborhoods. In Indianapolis, for example, recent redevelopments include transforming historic Bush Stadium into the new Stadium Lofts. The first 138-unit building opened earlier this summer. Such conversions are ideally suited to the growing demand for urban living. "Our downtown market has been the strongest market by far for years," says George Tikijian III, CCIM, president of Tikijian Associates, a multihousing investment advisory firm based in Indianapolis. Currently, there are about 5,000 apartment units located in downtown Indianapolis with an estimated 2,000 new units that will be added over the next 12 months. Although that activity will likely create some oversupply in the shortterm, Tikijian expects renters to absorb those units by 2015. "All of the factors that have caused high demand for apartments over the last few years are still in place," he adds. and are ready to make a move, which is driving demand. Te desire to buy investment property with good cash fow is another attractive incentive, she adds. Phoenix is experiencing a furry of rehab and retroftting activity among older properties. Te improvements make the rents "go over the roof" and properties have been selling "like crazy," Gerchick says. Tat demand is driving prices higher. In the past year, prices for class C properties have doubled from $17,000 per door to $36,000 to $38,000 per door. Gerchick is currently negotiating with a California buyer who is interested in purchasing a 72-unit property in Phoenix that has been rehabbed and will likely sell between $38,000 and $40,000 per unit, she says. Clearly, investors still have abundant capital to place and apartments remain an attractive choice. "Activity has not trailed of. Tere is still a great deal of demand from buyers, really across all segments," says Tikijian. Tikijian sold 14 apartment properties in 2012 and expects to close on a comparable volume in 2013. "I see nothing on the horizon that will reduce the demand to invest in apartments," he says. "If interest rates continue to increase, it could have a negative impact on pricing, but it won't necessarily curb investment sales." Beth Mattson-Teig is a freelance writer based in Minneapolis. 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