(Bloomberg) U.S. commercial real estate yields are near the highest level relative to Treasury bonds on record, a signal to some investors it’s time to buy property.

Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, based on an index calculated by the National Council of Real Estate Investment Fiduciaries. That was 429 basis points, or 4.29 percentage points, higher than the yield on 10-year government bonds as of June 30, according to data compiled by Bloomberg. It’s about 475 basis points higher than Treasury yields as of yesterday.

That spread is near the record 539 basis points in the first quarter of 2009, when the U.S. was mired in the worst of the financial crisis and property prices sank. Risk-averse investors are seeking the highest-quality office towers, hotels and apartments as the gap widens, according to Nori Gerardo Lietz, partner and chief strategist for private real estate at Partners Group AG in San Francisco.

“The data indicate that real estate is poised for a rebound,” said Gerardo Lietz, who advises pension funds on property investments.

View Full Article at Bloomberg.com


By Christopher Hosford

Student housing has come a long way from the bleak dorms of bygone days, or the meager off-campus options that were little better. Today, in many cases, student housing rivals market-rate spa communities in their array of amenities and cutting-edge style. Further, they enjoy generally strong overall occupancy and the prospect of growing rental rates, as college enrollment continues to increase.

But student housing does have a dark side…

[BLOGGER COMMENT: At the Apartment Finance Today conference that I attended a couple of weeks ago there was a lot of buzz about student housing. In 2009 we arranged a $15.325 million construction loan for a student housing property in Tampa.  The process of placing this loan taught me that this is an industry niche that is often misunderstood by investors and lenders. It is best to proceed with caution and work with best in breed developers and managers of purpose-built student housing that know the opportunities and pitfalls in this dynamic market.]

Read article in MHNOnline

By Hal Reinauer

The lending world has turned a more watchful eye to property condition and begun to take notice of reduced capital improvement programs. This attention has made it more difficult for those properties with some issues to find a reasonable lending solution, even with stable cash flows supporting the loan request. Appraisers and Engineers, like banks and lenders, have also felt the pressure and they have reacted with greater scrutiny and increased attention to the ongoing maintenance schedule and immediate repairs. To prevent this from affecting your refinance there are a few critical steps you can take to ensure your property receives the credit it is due.

  1. Housekeeping. First, ensure that the grounds of the property are clean and free of any refuse, graffiti and tenant property that have overflowed into the common areas. The property inspector will be adversely impacted by the minor details that are his first impression of the property exterior and grounds so make sure that any obvious exterior damage, paint peeling, torn screens, broken windows, misaligned or missing gutters, broken parking lights and any other repair item that can be taken care of at minimal cost is addressed promptly and prior to the site inspection. The cleanliness of the property is extremely important in how your property will be viewed by the engineer and the lender. Have the maintenance staff pay special attention to these needs and the long term benefit will pay off with increased occupancy and greater financing potential. The site inspection will concentrate on housekeeping, site issues, parking areas, building exteriors, roof, foundations, HVAC, plumbing, electrical, fire and life safety, dwelling units and common areas, so you as the owner/operator should as well.
  1. Anticipate. Second, identify your major capital needs before the engineer does. Engineers are looking for the building systems that need replacement now and throughout the loan term so identifying those yourself and having your own schedule prepared with cost assumptions will save you in the long run. A good replacement schedule is a detailed one; make sure you cover as many building systems as you can and make reasonable assumptions as to their useful life, replacement cost and quantity. Having the information on the age and type of the building systems is also very important; windows, roofs, HVAC systems, water heaters, kitchen appliances, counters, cabinets, vanities and flooring are typical line items included in the schedule. Also try and take an assessment of your annual plumbing and electrical expenses as these assumptions will assist your lender in differentiating between one time capital expenses and actual ongoing needs.

It’s also a good idea to acquire actual bids for projects you wish to complete in the near future as there can be a wide range of prices associated with even the most basic of repairs. Having a good bid in hand will prevent any discrepancy with what you believe a project to cost and the engineer has estimated.

  1. Awareness. Third, be aware of the big issues. Pay particular attention to any issue that could cause water infiltration, mold, electrical issues (low amperage, aluminum wiring, etc), plumbing systems (polybutylene piping, galvanized piping, etc) and any life safety issue (fire systems, hand rails, deck structures, tripping hazards etc). Being aware of the major issues at your property and having a preventative maintenance plan or explanation of corrective measures already taken will assist the lender in mitigating the risk and speed the process along.

Finally, understanding your replacement reserve schedule and escrow is essential. Once the engineer and lender have completed their site inspection they will prepare a list of immediate needs and ongoing replacement reserves. This is where the owner prepared budget and bids will play a great role in balancing the interests of all parties. The Fannie Mae guide, as well as the other GSE’s and lending institutions, includes certain parameters for the collection of ongoing replacement reserves based on a scale of the property’s condition.

  • Limited Reserves – The Property has been exceptionally well maintained such that a minimal reserve estimate is adequate to cover emergency repair issues if they arise during the Mortgage Loan term.
  • Moderate Reserves – The Property is in adequate condition for its age and construction type and will require only typical repairs/replacements during the Mortgage Loan term
  • Substantive Reserves – The Property exhibits characteristics or construction quality that make more substantial replacement reserves necessary in order to mitigate certain risks inherent in the physical asset.

Replacement reserves are an operating cost, so remember that these funds are yours to spend and utilize for the ongoing maintenance of the property. The lender holds these funds to protect their investment in the property only, and will take into consideration the effect on cash flow when sizing your facility. If your previous reserve escrow was $0 and now it’s $200/per unit per annum that does not mean your total operating costs have risen by $200 per unit, but that the allocation of funds previously included in line items such as repairs and maintenance, supplies, and contractors will now be captured in a lender established reserve and reduced from the proforma projections. The net effect on ongoing cash flow for properties that have been well maintained should be negligible if you work with your lender to ensure the accuracy of your operating statements and maintenance budget.

Finally, remember that the lender and your interests are the same; we both want to see the asset be a long term viable investment.

The Apartment Finance Today conference was a great opportunity to share ideas with the best and brightest in the multi-family investment, development and finance industry. The final session of the conference was a panel with three economists focused on answering the key question on everyone’s mind:

  • What are the best & worst nationwide markets for apartment investment?

If you would like to view these PowerPoint presentations they are available from the box.net widget on the right hand side of this blog or follow this link to the folder: http://www.box.net/shared/zmttpnc3hh

NOTE: These are not my work product, they were prepared by:

  • Sam Chandan, Global Chief Economist and Executive Vice President, Real Capital Analytics
  • Ryan Severino, Economist, REIS
  • Greg Willett, Vice President, Research & Analysis, MPF Research

I am back from moderating an all-star panel discussion at the Apartment Finance Today Conference in Fort Lauderdale, FL.

Our topic: “Small but Mighty: Finding the Best Small-Balance Apartment Loan” was well received by a full house of real estate investors and developers.  As sources of capital are becoming harder to find our panel of industry veterans provided input and guidance on why this is the greatest opportunity to acquire multi-family properties in a generation. Our panel focused on discussing the financing options for real estate investors that need up to $5 million to buy, build or renovate rental apartment properties.

We tackled the problems facing the industry head-on and shared ideas on how investors can find the best small loans at the most generous rates and terms. Underwriting criteria for portfolio lenders such as banks, insurance companies and private lenders was contrasted with Agency lenders such as Fannie, Freddie and FHA. Contrary to the myths perpetuated by the mass media there is still abundant capital available to owners, developers and investors focused on multi-family housing. This session hammered home the fact that long term, fixed rate loans with interest rates starting in the 4-5% range can still be achieved.

Panel included:

Jerry Anderson
Senior Vice President, Alliant Capital

Rick Wolf
Senior Managing Director, Greystone Servicing Corp

Charles Ostroff
Chief Underwriter, Arbor Commercial Mortgage

Michael McCleary
Associate Director, Marcus & Millichap Capital Corporation

Our presentation notes can be downloaded from the box.net widget on the right hand side of this screen or will be automatically e-mailed to you by sending a note to SmallButMighty5mm@gmail.com