Hi,
Spring is coming and the residential market is also sensing rejuvenation. This is a seasonal update about our own activities and general trends.
Investment Update: In February we signed through ERLI Holdings to purchase a 64 unit multi-family property in Athens GA. You may scroll down to view the property.
Athens is a vibrant university town with high occupancy rates. The plan is to rehab, upgrade and sell it in 3 years.
Recent Activity: In recent winter months we've focused on rehab and development of existing GREI properties. We've completed foundation and structural work on one of the Atlanta complexes, which will allow us to add 12 more apartments in 3 months.
We've finished design and submitted permits for 6 new units in another complex. We've rehabbed 4 empty units in a third complex and next month we'll begin work on 5 more units there. By the end of the process we will have added a total of 27 units in a period of 6 months. That's an additional income generated at a fraction of the market value of those new apartments. That's a great example of value-added real estate management!
The US Market: The economy is warming up. Unemployment is low and inflation is around the corner, which sets stage for the Fed to raise interest rates. Some argue that the data is misleading and present "alternative facts" claiming that the unemployment index measures the percentage of unemployed out of those who were actively seeking employment.
That latter group has shrunk in recent years due to various reasons. Also, the Labor Force Participation Rate doesn't measure income or work stability. For example, the data doesn't indicate part-time and minimum wage jobs which allow less than basic standard of living.
Therefore it may be too early to toast with champagne glasses. Nevertheless, even pessimists would agree that although the data isn't what the newspapers would have you believe, it's still far better than previous years.
The real estate market is obviously directly affected by the economy and here you may notice two contradicting phenomena:
1. Ultra luxury properties in large urban cities have lost their charm and price cuts are spreading. New York and Miami are good examples. High end properties in these cities were hit for 2 main reasons: the demand for such properties was fueled by wealthy international individuals who were looking for a safe haven to park their money. This was an artificial demand that didn't originate by demand for dwellings but rather by financial considerations and the need to secure the money through relatively safer instruments. Many of those properties were purchased through shell companies that allowed buyers to remain anonymous. This indicated that the purchase was made by those looking for places to hide their fortunes and skirt tax laws. As a consequence, the de Blasio administration has imposed disclosure requirements which made those properties less attractive for these purposes. The other reason is that demand usually triggers supply. The real estate cycle is a bit long and luxury properties that were designed in 2013-2014 are now coming to market. This oversupply will generate aggressive promotions which will lead to price cuts and this already trickles down to less expensive properties. Another reason may be that some of those wealthy individuals are less liquid and movement of capital is more regulated. This isn't good news for those who were counting on the previous price trend. The expected increase of interest rates will also have a negative effect on the finance of those properties, many of which relied on adjustable rates.
2. Multi-family properties in most markets continue to increase in value due to high demand for rent. If you've read my previous newsletter you may recall the graph that displayed the strong downward trend in US homeownership. This trend was unrelated to the subprime crisis and it meant that Americans rent more and own less. Evidently the occupancy rates in multifamily properties are at record numbers and as a result they've become more expensive.
Another fact one should consider is Housing Completions and here the crisis played a major role. This graph shows Housing Completions (not to be confused with Housing Starts which is a popular indicator). It's evident that the crisis has crippled the construction industry for a long period. Projects were abandoned, banks were reluctant to free funds, consumer tastes have changed and the construction industry came to a screeching halt.
However the US population continued to grow at almost exactly the same rate, whether due to birth rate or immigration. As one can see in this graph the demand for housing remained steady. And so existing rental properties and especially multi-family properties have benefitted from an increased demand. Some of the investors who entered this market in 2012-2013 have already seen 100% return on their investment.
Conclusion: Many experts believe that the inflationary pressures that I've mentioned in the beginning of this article and the evident shortage in rental properties will support the upward trend in multi-family property prices of certain types and in certain markets. However the forecast rise in interest rates should add a stream of cold water and moderate the trend.
Questions or remarks are always welcome.
Happy Purim!
64-unit garden style apartment complex. The complex is conveniently located to the north side of Downtown Athens, GA. There are a total 160 bedrooms comprised of 32 x 2-Bed/2-Bath units and 32 x 3-Bed/2-Bath units. Year built: 1996. Major rehab in 2015.
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