The Northwest APARTMENT INVESTOR newsletter

Transcription

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HFO INVESTMENT REAL ESTATE: “ALL APARTMENTS. ALL THE TIME!”
The Northwest
APARTMENT INVESTOR
newsletter
Sponsored in part by:
FALL 2014
Keep Calm and Party On!
Highlights of this Edition
By Greg Frick, HFO Investment Real Estate
•
Portland metro’s vacancy rate remains low, and effective
rent increases are forecast to remain among the nation’s
highest.
•
Portland now has the west coast’s fastest job growth —
9th fastest among the top 50 US metros.
•
Apartment construction, near 6,000 units for 2014, will
we fall short of what Metro says will be needed to house
1 million more residents by 2035?
•
Legislators have passed important tax changes you
should know about — read on for all this and more.
Table of Contents
Keep Calm & Party On! HFO’s Apartment Report............ 1
The party is still going strong but the wee hours of the
night are approaching, and it’s anyone’s guess when the
lights will come on.
Multifamily investors looking for a foothold in one of the
nation’s strongest apartment markets have continued to
inject capital into Portland in 2014.
It’s no surprise that investment dollars are looking here
for a place to call home. A perfect storm of in-migration,
changing demographic preferences, and the recessionary
slowdown in apartment construction has resulted in a
supply of rental housing considerably smaller than demand.
As Multifamily NW’s fall apartment report states, the
market’s overall vacancy rate is still under 4% while rental
rates continue to climb.
HFO Expands Brokers, Staff.......................................... 4
New IRS Tangible Property Regulations......................... 7
Market Trends Affecting Lender Motivations................... 8
Higher Rates, Lower Returns, Coming Soon? ................ 10
Metro’s Rental Housing Demand Forecast...................... 12
Increasing Apartment Property Values Through NOI...... 13
How You Can Help Emergency Responders’ Firefighting... 14
Business Tax Changes and Your Choice of Entity ........... 15
(Continued on page 3)
FORECAST
PERMITS
INTEREST RATES
or
RENTS
VACANCIES
EMPLOYMENT
NO. OF TRANSACTIONS
TRANSACTION VOLUME
H F O I N V E S T M E N T R E A L E S T A T E • 1 0 2 8 S E W AT E R A V E . S U I T E 2 7 0 P O R T L A N D , O R 9 7 2 1 4 • p h 5 0 3 . 2 4 1 . 5 5 4 1 • H F O R E . C O M
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INTERVEST
IS ACTIVELY
LENDING!
Give Mark a call today
Apartment Financing 5 units and up.
HFO Current Listing — Colonial Gardens Apartments —
72 Units in NE Portland, Oregon
RSVP: Mark Paskill
Vice President
Intervest
503-214-5082 or e-mail
mark.paskill@intervestmortgage.com
HFO 2014 Listing — Desertbrook — 110 Units in Kennewick, Washington
PAGE 3
(Continued from page 1)
Transaction Volumes
While the number of overall transactions is trending down
for 2014, we are currently well on the way to surpassing
last year’s dollar volume. Through mid-October of 2014,
there have been 115 apartment transactions involving 10 or
more units in the Portland metro area. These transactions
have accounted for more
than $997 million in
transaction volume. This
compares to a total of
nearly $1.01 billion and
a total of 149 apartment
transactions for all of 2013.
Institutional
Transactions of ($10
Million and Up)
The catalyst for the huge
increase in transaction
volume is the large number
of institutional transactions
involving properties valued
at more than $10 million.
Through mid-October 2014, there were 21 apartment
transactions over $10 million, compared to 20 for all of
last year. In terms of dollar volume, these 21 transactions
account for more than $784 million in sales. This is nearly
$73 million more than last year’s total, and $246 million
more than 2012. These impressive sales do not take into
account a number of large properties currently under
contract and set to close in the 4th quarter of 2014.
Examples of some institutional transactions this year include:
• The Asa Flats + Lofts, 231 units in the Pearl District sold
for $105.5 million; $456,710 per unit — a record high
price per unit. This sale included retail square footage.
• Reflections at Summer Creek, 351 units in Beaverton,
sold for $53 million; $150,997 per unit.
• Monterey Springs, 390 units in Happy Valley, sold for
$51.25 million; $131,410 per unit.
• Seneca Village, 264 units in Hillsboro, sold for $51
million; $193,182 per unit.
• Westview Heights, 198 units in Portland, sold for $44.8
• Kempton Downs Apartments, 278 units in Gresham, sold
for $27 million; $97,122 per unit.
• The Addy, 105 units in Northwest Portland, sold for
$26.65 million; $253,810 per unit.
• Lewis Ridge, 112 units in Vancouver, sold for $15.79
The increase in institutional sales can be attributed
to the investment capital market aggressively seeking
opportunities to achieve secured returns. This capital
is finding security in hard assets, located in markets
with strong fundamentals. Portland fits the description
of a market with strong fundamentals: in-migration,
employment growth,
barriers of entry and
West Coast location.
Capitalization (CAP) rates
continue to be at the
lowest levels we have ever
seen. Assets in the core are
trading at CAP rates from
4.00% to 4.50%, while
suburban properties have
CAP rates which are 50 to
100 basis points higher.
Buyers’ willingness to pay
these historically low CAP
rates is allowing owners
who are yield-driven to
capture long-term performance targets in shorter hold
periods — resulting in more apartments going to market.
We are also seeing this same effect with new construction.
A number of new developments are being put on the
market as soon as they are completed — sometimes even
before completion. Developers are taking advantage of the
spread between their costs and the aggressive pricing they
are able to achieve by selling in this environment.
In terms of price-per-unit and price-per-square-foot there
is a wide variety due to age, location, condition and the
ability to put new debt on the property at the time of
purchase.
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HFO Continues Expansion, Adding Managing Director, Brokers & Staff
Already the largest apartment-only commercial real estate brokerage in Oregon and SW Washington, the
expansion is in line with the company’s goal to improve the HFO experience and is a reflection of the growth in
apartment development.
HFO is proud to introduce new brokers Trevor T. Calton, MBA, senior broker and Jack Stephens, who was
promoted to broker from researcher. The promotion of Jack Stephens brings the number of licensed brokers
in the office to nine, a new high water mark. Spencer Marona, HFO’s new managing director, and Lee
Fehrenbacher, analyst, were also recently added to the team.
Spencer Marona, Managing Director, joins HFO in a newly-created position. Spencer
has spent his career working for titans of commercial real estate and commerce in the
Pacific Northwest. He is a driven organizational leader with a successful track record of
helping teams implement their strategic vision. He will manage the firm’s goal of continually
improving HFO’s process for client satisfaction. Spencer has worked with winning teams
since college, where he spent years as a player and assistant coach for the University of
Washington Huskies football team. He played in the 2001 Rose Bowl and in four NCAA Bowl
Games. Spencer holds a degree in Humanities from the University of Washington.
Trevor T. Calton, MBA, Senior Broker, has worked in commercial real estate &
mortgage banking since 1997, and is regarded as one of Portland’s top commercial real
estate investment advisors. In addition to his brokerage and lending experience, Trevor also
oversaw the management of over 6,000 affordable housing units as the Assistant Director
of Asset Management for the Housing Authority of Portland. Today, in addition to being part
of the HFO team, he is a professor of real estate finance at Portland State University.
Jack Stephens, Broker, was recruited by HFO from a national commercial real estate
firm in 2013. Jack uses his life-long knowledge of the Portland metro area to educate
clients on the nuances of the regional market and sub-markets. His thirst for knowledge
and attention to detail make him highly valuable in analyzing the ever-changing landscape
for apartment investors. Jack earned his Bachelor of Science in Economics from the
University of Oregon.
Lee Fehrenbacher, Analyst, is new to the brokerage side of real estate, but not the
industry. Prior to joining HFO, he was a reporter for the Daily Journal of Commerce,
where he wrote hundreds of articles on Portland’s real estate market. After nearly three
years of full-time research, Lee has a virtually encyclopedic knowledge of the apartment
development pipeline, and an intuitive understanding of the economic drivers behind
each project. A native of Portland, he grew up in Sacramento and earned a B.A. in
English at Western Washington University in Bellingham.
Your HFO Broker Team
Cody
Greg
Rob
Tyler
Trevor
Jack
H F O I N VHagerman
E S T M E N T R E A L E S Frick
T A T E • 1 0 2 8 S E WMarton
AT E R A V E . S U I T E 2Johnson
7 0 P O R T L A N D , O R 9Calton
7 2 1 4 • p h 5 0 3 . 2 4 1Stephens
.5541 • HFORE.COM
PAGE 5
Institutional investors’ underwriting standards have
remained relatively consistent, with the exception of rent
growth. Future rent growth predictions have been dialed
back to account for the increase in new product hitting
the market. To offset this underwriting adjustment, buyers
are getting more aggressive with their capital structure
to achieve their yield goals. Similar to 2006, we are once
again seeing interest-only commitments, and higher levels
of leverage on first and second loans.
Non-Institutional Transactions (Under $10 Million)
Ninety-one transactions below $10 million accounting for
$206 million in dollar volume have been reported for the
first three quarters of 2014. This is trending slightly below
2013 levels.
The downward trend in sales is likely due to: (1) The lack
of suitable 1031 Exchange options for current owners;
(2) Current owners’ taking advantage of historically
low interest rates and refinancing. As a result, many
are reinvesting that capital into their existing assets for
physical upgrades. At the current pace, the number of noninstitutional transactions will not reach the levels seen last
year.
Even with the reduction of the number of transactions,
non-institutional CAP rates are in the low 6% to 6.75%
range, and well-maintained properties in the urban core
are pushing rates down even further. When investors find
a suitable apartment property to purchase, many are also
able to achieve attractive terms to finance the asset with
the current state of the debt market. Long-term rates are
still in the 4.5% range or better depending on the loan-tovalue ratio, property condition and borrowers’ strength.
As we have forecast for the last 3 years, the fundamentals
of the Portland apartment market remain very strong.
Factors That Could Temper The Market in 2015
Rising rents and Wage growth
Rents in the Portland market have been on a roll. According
to Multifamily NW’s most recent report, the average
rent per square foot was up more than 10 percent this
fall over the previous year at $1.21. It’s important to
consideration the large number of new construction units
included in the survey, but the trend is unmistakable. The
market saw similar increases in 2011, 2012 and 2013, and
today numerous properties — whether tiny apartments
in Southeast Portland or luxury flats in the Pearl — are
pushing rents.
For investors, that’s created great opportunities. But
as rents continue to increase, so too are concerns over
renters’ ability to pay them.
Despite news in August that Oregon’s labor force is growing
— a positive sign that previously disenfranchised workers
are once again feeling optimistic about their employment
prospects — wage growth across the state has so far barely
kept pace with inflation. While Oregon wages have been
growing approximately 2 to 3 percent per year, inflation has
been close behind at 1 to 2 percent — effectively keeping
incomes stagnant.
Josh Lehner, an economist with the Oregon Office of
Economic Analysis, has been tracking the trend and its
impact on housing closely. Lehner said the average renter
in Portland is now spending roughly 25 percent of his or
her income on rent — a high point for the market.
“Is there a breaking point there where rents just get so
high that they force people to move away or to some other
building?” Lehner queried. “Or are rents going to come
down? One of these trends is not sustainable for a long
period of time.”
But while the state’s personal income hasn’t improved
much since the recession — it only reached pre-recession
levels at the end of September — there has been some
positive news, particularly in Portland. According to a
recent report by Christian Kaylor, an economist for the
Oregon Employment Department, while incomes idled or
declined in Washington, Clackamas and Clark counties
between 2010 and 2013, Portland’s average income grew
more than 8 percent to $49,616.
Portland also benefits from in-migration. Between 2008
and 2013, Portland’s population grew by 50,940 people
— nearly double the growth seen in Washington County,
according to research by Kaylor. And while many of those
people are finding work in Washington County’s Silicon
Forest, most aren’t moving to Portland to live in the
suburbs. Rather, they’re coming for its foodie, walkable and
bike-friendly core, whether they have a job or not.
“One of the issues we fight with is, because we are
attractive to the young creative class — the Millenials —
people come here without the jobs and they find the jobs,”
said Jerry Johnson, the managing principal at Johnson
Economics, a consultancy specializing in real estate
PAGE 6
development and land use economics. “So we always have
a lot of labor force available, which makes it hard to get the
price pressure (in wages).”
Fortunately, Portland’s migrants tend to be scrappy — 91
percent of new residents are between the ages of 18 and
64, and 73 percent are college educated. Portland also has
a higher-than-average share of entrepreneurs. That bodes
well for landlords’ abilities to attract tenants who are willing
(and able) to pay competitive rents.
“The other thing that drives price is demand,” Kaylor said.
“The reason the property developers are getting $1,750 per
month for a 650-square-foot studio in North Portland, or
inner east Portland, or Irvington, or Hollywood, is because
people are willing to pay that.”
A Wave of New Construction
Predictions for 2015:
• Investor demand for institutional apartments will
continue to be strong. The number of transactions
over $10 million will be at or above levels seen in
2014 as owners and developers look to make a
profit in this low CAP Rate environment and sell new
projects.
• The number of non-institutional transactions will
continue to increase slightly as some owners decide
to exit the market due to the recovery of values.
• Values and CAP Rates: CAP Rates will stay at their
historical low levels. The rise in values will be
attributed to the increase in Net Operating Income,
not the compression of CAP Rates.
The Threat of Rising Interest Rates
All of these predictions are predicated on interest
rates staying at their historically low levels. Should
rates begin to rise — as many expect them to over the
next couple years — it will have a dramatic impact on
apartment values as described on page 10.
Party On!
Of course, rents can’t climb forever and they certainly
won’t given the amount of new apartment construction on
the horizon.
HFO is tracking approximately 26,148 new apartment units
that are either proposed, planned or under construction
in the Portland metropolitan area. More than half —
approximately 15,000 units — are slated for the urban core.
If the current pace holds steady, 2014 will be the most active
year for new apartment construction in Multnomah County
since 1990. That’s about 4,000 units more than the market
can absorb in a typical year, but apartment construction
between 2009 and 2012 was also far below historical levels.
The Portland market is still doing a bit of catch-up.
As we have said for the last 3 years, the good feelings
are still flowing in the Portland apartment market for
both the operations side and investment side. Winston
Churchill once said, “One does not leave a convivial
party before closing time.” The Portland apartment
market is still going strong and no one is headed for the
door just yet.
Greg Frick is a partner at HFO Investment Real Estate, now
celebrating its 15th year in business. HFO’s partners have
brokered transactions of more than 15,000 units valued at
$1.86 billion throughout Oregon and Washington. Greg works
with both private market and institutional clients and can be
reached directly by phone at 503-241-5541 or e-mail
greg@hfore.com.
PAGE 7
New IRS Tangible Property
Regulations Change the Cost of Doing
Business for Apartment Owners
By Thomas B. Eriksen, Shareholder with Jordan Ramis PC
brad.eriksen@jordanramis.com
Effective January 1, 2014, new IRS
regulations regarding the expensing and
depreciation of tangible property for
commercial property owners may change the
cost of doing business for apartment owners.
The new regulations are long overdue, as
the first set of proposed rules was issued in 2006, only to be
withdrawn and replaced with another set of proposed rules
issued in 2008. The 2008 rules never took effect. In 2011,
the IRS issued temporary regulations in order to clarify the
proposed 2008 rules. In 2013, effective January 1, 2014, final
regulations were issued.
Regulations Tilt Toward Capitalization, Not Expensing
Costs incurred in repairing and maintaining residential rental
property must either be capitalized or expensed. Expensing
is preferred, as it provides for an immediate deduction
against income; whereas capitalized items must be
depreciated over the useful life of the item — up to 39 years.
as repainting, re-carpeting, etc., can typically be expected to
occur more than once every 10 years and are immediately
deductible for residential rental property.
Small Taxpayer Safe Harbor
Taxpayers with less than $10 million of gross receipts
are eligible to elect not to apply the capitalization of
the new regulations. If annual repair, maintenance, and
improvement costs preformed on an eligible building do not
exceed the lesser of $10,000 or 2% of the cost basis of the
building, these costs can be expensed each year. An eligible
building is a building “unit of property” with a cost basis of
$1,000,000 or less. The seemingly low ceiling of $10,000 of
annual costs and $1,000,000 of cost basis would appear to
limit the usefulness of this safe harbor rule. However, the
regulations treat separate building systems as individual
units of property. Accordingly, electrical, plumbing,
mechanical, elevators, pools, etc. can be considered
separately for purposes of qualifying for the Small Taxpayer
Safe Harbor. For taxpayers acquiring new residential
rental property, this highlights the need for a detailed and
accurate allocation of the purchase price among the various
building systems and components.
De Minimis Safe Harbor
The Internal Revenue Code provides that costs incurred
For taxpayers with applicable financial statements, written
to acquire, produce, or improve property must be
accounting procedures for expensing amounts under the
capitalized. Costs not required to be capitalized may be
specified dollar limits, and who consistently treat such
expensed each year, resulting in
amounts as expenses on applicable
obvious tax benefits to the property
The new regulations tend to
financial statements, a de minimis
owner. The new regulations tend
favor capitalization of costs
safe harbor may be available. This
to favor capitalization of costs
rather than expensing. In
safe harbor is available for amounts
rather than expensing. In general
general, “improvements” must
paid for tangible personal property at
“improvements” must be capitalized,
be capitalized, while “repairs”
or below $5,000 per invoice, or per
while “repairs” may be expensed.
may be expensed.
item substantiated on the invoice.
Properly structured, replacement
To make the distinction between
of refrigerators, ranges, and other appliances may be
repairs and improvements easier to determine, the new
expensed, rather than capitalized.
regulations enacted several safe harbors. These safe harbor
provisions may provide opportunities for apartment owners to
As you can see from the above discussion, each of the safe
expense a greater amount of repair and maintenance costs.
harbors is highly technical and takes careful planning and
implementation to assure compliance with the regulations.
Routine Maintenance Expense Safe Harbor
Consulting with your tax professional in advance of
The routine maintenance expense safe harbor provides that
incurring any repair, maintenance, or replacement costs is
recurring activities for the purpose of using the property and
strongly recommended.
assuring it is in operating condition may be expensed and
immediately deducted. Routine maintenance for commercial
This article is intended to inform the reader of general legal
buildings is defined as activities the owner reasonably expects principles applicable to the subject area. It is not intended to
to perform more than once every 10 years. Since apartment
provide legal advice regarding specific problems or circumstances.
units experience a higher rate of turnover and wear and tear
Readers should consult with competent counsel with regard to
than other commercial properties, maintenance activities that
specific situations.
might be performed less often on commercial properties, such
PAGE 8
Market Trends Affecting Lender
Motivation
sheet health. The following is a quick summary of what to
expect from each lender segment:
By Mark Paskill, VP, Intervest Bank
Banks get their capital from depositors and Fed borrowings,
and earn income from the interest margin between their
capital costs and loan interest rates. Banks receive
favorable reserve requirements from regulators on
multifamily loans, which motivates many banks to focus
on multifamily lending. Banks generally favor shorterterm fixed rates — and flexible prepayment penalties — to
match their borrowing capital. Some of the larger banks
have recently been offering attractive 10-year fixed rates
to grow their balance sheets, which have recovered from
the recession. With deposit rates at historic lows and
the ability to borrow from the Fed at effectively 0%,
banks currently have the ability to offer increasingly
competitive terms.
The commercial loan market is a
diverse and ever-changing landscape.
Customers in the market today looking
for a commercial mortgage are faced
with a diverse range of loan terms and
rates. Customers are often surprised how
much loan structures vary between lenders and often
ask why, for example, their local bank cannot offer what
other lenders are offering, or why commercial mortgagebacked securities (CMBS) lenders, absent from the market
three years ago are now offering aggressive interest only
periods. As each lender is different, thus understanding
how each lender segment functions as well as the
current market condition in that segment can speed
up the process of finding the best loan structure
that fits the customer financing goals.
Lenders can be categorized into distinct segments including
banks, life insurance companies, CMBS and agencies
such as Fannie and Freddie. Each segment is individually
motivated based on whether they retain or sell their loans,
their source and cost of capital, risk tolerance and balance
Life insurance lenders get their capital from insurance
policy premiums and their return on investments from
stocks, bonds and commercial mortgages. Unlike banks, life
lenders do not borrower the funds they lend and are long
term portfolio lenders. For life lenders, the drive of capital
preservation outweighs rate yields, thus they are generally
not max LTV lenders. Life lenders are motivated today
H F O Current
I N V E S TListing
MENT—
R EAspen
A L E SVillage
T A T E •—1 0162
2 8 SUnits
E W ATin
E RSpokane
A V E . S U I Valley,
T E 2 7 0 Washington
PORTLAND, OR
HFO
97214 • ph 503.241.5541 • HFORE.COM
PAGE 9
Market Trends Affecting Lender
Motivation
to make commercial mortgages, as they offer a higheryielding alternative to bond investments. With bond
yields at an all-time low, life lenders have a strong
appetite for long term commercial mortgages and
continue to offer very aggressive rates on lower LTV
transactions.
Agency lenders — such as Fannie and Freddie — originate
loans to be sold on the secondary market. These agencies
have been the primary 10-year fixed rate non-recourse
lender for many years. The originating DUS lender
underwrites to government standards and is required to put
a small slice of their capital at risk. Agency underwriting
has tightened somewhat over the past year, limiting
loan proceeds in some cases. Fannie recently
responded to the issue by introducing a 12- year
fixed rate loan product, which in some cases
provides slightly higher loan proceeds than the
traditional 10-year fixed-rate loan. The big question
for agencies is how their loan offering will be affected when
the US Treasury ends their conservatorship over them.
Finally, a major capital trend has been the steady return of
the CMBS market. Similar to Agency debt, CMBS lenders
originate loans to be sold to the secondary market for bond
securitization. The originators primary motivation is profit
on the resale of the loan, but unlike Agency loans, they
have no capital at risk once the loan is sold. The return of
the CMBS market from the 2007-2010 recession has been
driven by strong bond investor demand and improving
commercial property performance. CMBS lenders are
currently offering competitive terms including
higher leverage (higher than Fannie and banks in
many cases) along with interest-only, and high loanto-cost loans for newly constructed projects. Most
loans are highly structured but many are coming with 3+
years of interest-only as a standard feature.
Mark Paskill has more than 13 years of experience in commercial
real estate lending. He has focused on sourcing, negotiating and
closing commercial loans with a wide range of portfolio funding
sources, including commercial banks, life insurance companies,
commercial mortgage-backed securities lenders and credit unions.
He can be reached at 503-214-5082 or by e-mail at
mark.paskill@intervestcref.com.
HFO Sold Listing — Monterey — 390 Units in Portland, Oregon
PAGE 10
Six Signs the Multifamily Investment Market is Peaking
Higher Rates
Lower Returns
Coming Soon?
By Trevor T. Calton, MBA
As printed in Units Magazine
Investors frequently ask how they can tell when the market
has reached its peak. As we know, such assessments are
more accurately made in retrospect or, as the saying goes,
“Hindsight is 20/20.” But absent any crystal ball, certain
market conditions may act as indicators of things to come.
Below are six signs that the apartment market is entering
the apex of the current investment cycle.
1. Lack of Inventory.
With continued year-over-year double-digit rent increases,
many apartment communities are performing better than
ever. Consequently, many investors have been unwilling to
sell, citing both record returns and a dearth of properties in
which to reinvest through a 1031 exchange. A side effect of
this lack of supply is increased competition among buyers,
many of whom are willing to pay a premium to secure
a property, thereby compressing cap rates. Once more
inventory hits the market, buyers will have more options
and these premiums will likely disappear.
2. Higher Interest Rates Coming Soon.
The financial markets widely speculate that the Federal
Reserve is nearing the end of its five-year run of near-zero
interest rates. The Federal Funds Target Rate has hovered
between 0.00% and 0.25% since the beginning of 2009,
following the collapse of financial markets and the advent
of the Great Recession. But with the economy in full-
swing again — at least for the time being — the Fed has
reduced its bond purchase rate from its peak of $85 million
per month to $55 million per month (as of June). More
reductions are on the way. The next step in tempering
growth in the economy is to gradually raise interest rates,
which most expect them to do in 2015.
3. New Construction Permits at Record Highs.
The favorable market conditions previously noted have
spurred new construction permit applications to record
levels. With the virtual disappearance of new construction
during the recession, developers have been scrambling to
meet the pent-up market demand. But as with every real
estate cycle, the lag-time between concept and occupancy
creates latecomers to the market, and eventual oversupply.
Although the demographics in the United States favor
apartment owners, demand for apartments is still finite,
and as soon as supply catches up to demand, vacancies
will increase. The result of this will be an increase
in competition for residents, more concessions, and
consequently, reduced growth in net income.
Net Operating Income $
Cap Rate %
Property Value $
Equity Investment @ 25%
Loan Amount @ 75%
$300,000
6.0%
$5,000,000
$1,250,000
$3,750,000
$
300,000
6.0%
$ 5,000,000
$ 1,250,000
$ 3,750,000
Interest Rate %
Annual Debt Service $
Net Cash Flow $
Cash on Cash Return %
3.5%
($202,070)
$97,930
7.8%
5.5%
($255,505)
$44,495
3.6%
H
F O Current
I N V E S TListing
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R EVillage
A L E S Fair
TATE
1 0 2 8Units
S E Win
ATBremerton,
E R A V E . S U I TWashington
E 270 PORTLAND, OR 97214 • ph 503.241.5541 • H F O R E . C O M
HFO
—•120
PAGE 11
Higher Rates, Lower Returns,
Coming Soon?
4. Rents Leveling Out. Multifamily real estate has
outperformed all other real estate sectors for almost a
decade, primarily because of increased rents and a growing
number of owners passing utility expenses on to residents.
However, rent levels have outpaced residents’ income
growth at a rate that is unsustainable, and the ceiling is
finally within sight. In many top markets, double-digit rent
increases of the past have given way to predictions of a
more sustainable 3% through 2018. Additionally, recent
surveys of owners and property managers reveal that many
communities have fully realized the rent increases the
market will bear and, for the first time in years, owners are
scaling back their projections and offering concessions to
attract renters.
6. Buy Low, Sell High. Once investors begin to see that
their investments are performing at peak levels, many
will choose to sell and realize their equity gains. As this
happens, the momentum in the market will begin to shift.
With increased supply, buyers will have more options and
the “sellers’ market” that owners currently enjoy will begin
to rebalance in favor of those buyers.
Savvy owners and asset managers will take time in the
second half of 2014 to analyze their portfolios and identify
opportunities to sell certain assets at the top of the market,
capitalizing on favorable market conditions and realizing
extraordinary returns. Although some of the indicators
mentioned previously may be slower to materialize than
others, one thing is certain: This gravy-train will not
continue forever. For many assets, now may be the perfect
time to sell.
Trevor T. Calton is a Senior Broker at HFO Investment Real
5. Higher Rates Mean Lower Returns. As the table
below shows, a property producing $300,000 in net
operating income will sell for $5 million at a 6% cap rate.
If a buyer is able to secure 75% financing at today’s 3.5%
interest rates, annual debt-service would be about $202,000
and net cash flow after debt service $98,000 — providing
a cash-on-cash return of 7.8%. When market rates for the
same loan increase to 5.5%, for example, annual debt
service on that same loan would be $255,505 — yielding a
net cash flow of $44,495 and a cash-on-cash return of just
3.6%. As happens with every real estate cycle, investors
will likely be unwilling to settle for such low returns,
consequently driving cap rates up and prices down.
Estate and a Professor of Real Estate Finance at Portland State
University.
SAVE THE DATE!
Thursday, January 8 - 2015
HFO’S BIGGEST EVENT OF THE YEAR!
HFO Marketing Director Joins
Board of Big Brothers/Big Sisters
Portland, OR – HFO Investment
Real Estate is delighted to announce
that marketing director Aaron
Kirk Douglas has joined the board
of the nonprofit Big Brothers/
Big Sisters Columbia Northwest. Douglas has
been a volunteer mentor since 2006 and chairs the
organization’s 25-member ambassador board. He is
a prior nominee for national Big Brother of the Year,
and recipient of the 2011 Multnomah County Hilltop
Award for making a positive difference in the lives of
low-income individuals and families. HFO appreciates
Aaron representing the company commitment to
community.
Featured speakers:
John W. Mitchell – Economist
Victor Calanog, Reis, Inc.
VP of Apartment Research & Economics – New York
Space is limited to 300 apartment investors.
Reservations are required. E-mail aaron@hfore.com
or call (971) 717-6337 with reservation requests
~ New Location ~ More Parking!
PAGE 12
Metro Forecasts Portland Area Needs 7,000 New Apartments
Annually 2010-2035 To Meet Demand
When considering the number of apartments under construction in the Portland metro area, a quick look at housing need
forecasts by Metro are informative.
In 2012, Metro forecast that housing in the seven county PMSA would need to increase by 175,316 multifamily units
between 2010 and 2035 (7,012 units/year) to keep up with population growth. The total number of multifamily units
forecast to be needed within the urban growth boundary is 147,879, or 5,915 per year. The City of Portland will require
an average of 3,966 units per year to meet expected demand. Various estimates put the number of apartments slated for
delivery 2015-2016 squarely in that range, with more than half being added to the urban core.
Boundary Area
2010 Multifamily
Households
2035 Multifamily HH
Estimate
Total Increase Annual Avg.
Increase
Portland
104,897
204,050
99,153
3,966
Hillsboro
14,251
23,211
8,960
358
Beaverton
21,953
30,479
8,526
341
Gresham
18,243
25,656
7,413
296
Inside Urban Growth Boundary
236,346
384,225
147,879
5,915
Outside Urban Growth Boundary
47,872
64,185
20,713
828
Four-County Total (Clackamas,
Multnomah, Washington & Clark)
284,218
459,534
175,316
7,012
395,348
154,602
6,184
Tri-County Total (Oregon)
240,746
Source: Oregonmetro.gov http://www.oregonmetro.gov
Retrieved: 09/02/14
What’s New On HFO-TV:
The latest videos from HFO’s latest investor events
are online now! Click the link at www.hfore.com.
• Local, State, and National Demographic
Trends
Presented by: Christopher Zahas of Leland
Consulting Group
Monroe Apartments - Market Rate Multifamily Moreland Crossing - Market Rate Multifamily
• Trends in Portland’s Population, Economy,
and Employment
Christian Kaylor of the Oregon Employment
Department
• Current Apartment Financing Trends
Trevor T. Calton, HFO Investment Real Estate
• East Metro Trends in Gang Activity
Portland & Fairview Police Officers
• State of Oregon Tax Credits
Maureen Bock, Energy Incentives Program
Manager
• Vancouver Area Sales & Rent Trends
Greg Frick, HFO Investment Real Estate
BUILDING YOUR VISION
©2014 Pavilion Construction NW, LLC
6720 SW Macadam Avenue, Suite 310
Portland, OR 97219
503-290-5005
pavilionconstruction.com
PAGE 13
Increasing Apartment Property
Values Through NOI
By Lee Fehrenbacher, HFO Research Analyst
It’s a great time to be a seller in the Portland/Vancouver area.
With vacancy rates as low as 3%, and rents pushing $1.16
per square foot, demand for apartments is high — from
tenants and investors alike. But with a lack of available
product on the market, opportunities to get a financial foot
in the door are scarce, and that could spell opportunity for
Portland/Vancouver area building owners.
true for washers and dryers. Some managers are also
looking at including Wi-Fi services in base rents.
• Pet rent — More and more renters in Portland have
dogs these days, and as a result many apartments are
charging a monthly pet rent.
• Appliance rentals — Some apartment managers
are beginning to rent out appliances like vacuums and
carpet cleaners — things renters need occasionally but
not enough to buy themselves. “How great would it
be for your residents to pay you to help clean up your
property?” Calton said.
HFO’s Greg Frick and Trevor Calton described those market
dynamics to a room of private investors at the Heathman
Lodge in Vancouver. They explained that a scarcity of
• Reduce utility expenses — Common sense upgrades
available multifamily investment properties has helped
to low-flow toilets and shower heads, sink aerators, and
compress cap rates in Vancouver into the low 6% range —
LED light bulbs are easy changes that can go a long
which, with interest rates expected to rise in the not-tooways toward cutting expenses. “Combine that with native
distant future, is as low as they’re
landscaping and many owners are
likely to go.
Consider that in a 6.6% cap
able to reduce water usage to as
market, for every additional
As such, there probably won’t be
much as half,” Calton said. “I don’t
$50 a unit generates per
a better time for owners to sell in
know how many times I’ve seen this:
month, the value of that unit
the current real estate cycle. But
it’s nighttime, it’s been raining all
increases by roughly $9,000.
first, Calton urged landlords to take
day, and the sprinklers are on. That’s
another look at their properties’
money you’re throwing away.”
income streams. Consider that in a 6.6% cap market, for
every additional $50 a unit generates per month, the value
• Vending machines — All over the country, managers
of that unit increases by roughly $9,000.
are adding vending machines that can sell everything from
deodorants to cleaning products. Calton said he’s seen
“So when you go to sell, getting that extra income can go a
some machines bring in as much as $2,500 per week.
long way toward putting extra income in your pocket,” said
Calton.
• Take nicer pictures — When marketing apartments for
He offered a number of strategies for increasing a
rent, it pays to have quality photos. “Even though you’re
property’s Net Operating Income:
not supposed to judge a book by its cover, residents do,”
Calton said.
• The trap of over occupancy — If a property is
consistently 100% occupied, there’s a very good chance
Other income-producing improvements include:
that rental rates are too low. Having a small percentage
• Instituting a RUBS program
of vacant units allows landlords to assess the market’s
• Leasing rooftop space to cell tower owners
appetite to pay more. Calton suggested placing an
• Increasing the cost of a load of laundry.
advertisement touting higher rents as soon as a tenant
gives their notice to vacate. If a unit traditionally garners
But before making any of those decisions, Calton urged
$1,000 per month, try listing it for $1,050 or $1,100 and
investors to really get to know their market. Baby boomers,
see who bites.
for instance, searching for luxury apartments won’t be
looking for the same things as 20-somethings straight out
• Add amenities — Amenities are becoming increasingly
of college. A successful building will respond to the specific
important for tenants, who are expecting more for their
needs of its targeted demographic.
dollar as rents rise. Of all amenities, Calton said units
without dishwashers are probably the biggest deal
killers. Many residents are willing to pay as much as
$100 more a month to have one, he said. The same is
For more ideas on positioning your property for maximum
return, contact the HFO team at 503-241-5541.
PAGE 14
What You Can do to Help Emergency
Responders’ Firefighting
October is national fire safety month; the perfect time
to consider what you can do to improve emergency
responders’ firefighting at your properties.
Did you ever think it would be the case that firefighters
would arrive at your apartment building or condominium
and not be able to reach the fire. It happens.
Pumper trucks may be too wide for access lanes, or hoses
could be too short to reach hot spots. The fire department
has ways to resolve these problems, but valuable time is
lost as they make adjustments. There are things landlords
and property managers can do to ensure maximum access
for emergency response vehicles and to reduce the spread
of fire while problems are solved. Your actions might
not only save your property, they could save the lives of
residents and emergency personnel.
Though standards governing buildings and fire protection
systems are incorporated into building design, permitted
flexibility in actual construction and architecture may
create difficulties in certain circumstances with certain fire
response vehicles and equipment. For example, the local
fire code may require a fire department connection for a
sprinkler system or an annunciator for a fire alarm system,
but the location, position, marking of the device and other
features may not be specified in detail. Delays caused by
unclear or obstructed connection or communication devices
can interfere with time-sensitive response success.
Simplifying firefighters’ job, even in small ways, will help
increase their chances of success when responding to an
emergency at your building. And that doesn’t only include
fire; it can include terrorist events, building collapse and
natural catastrophes. Here are a few examples from the
Occupation Safety and Health Administration.
Pumper trucks and the famous “hook and ladder” trucks
need aerial access. Do you have trees or signage that may
obstruct their reach, arrangement or turning radius? How
about frontage access? A building that has been designed
properly initially can become subject to changes over
the years, such as landscaping, parking and tree growth
that hinder access to formerly clear areas. What about
dumpsters and other items that get placed in fire lanes
with the intent for removal? They could prevent emergency
vehicle movement or turnaround.
Think about your gates as well. Have you had any installed
since the building was originally designed? If they are
electronic, keep in mind their operation could be curtailed
in a disaster event. Getting those open may be another
Committed to Excellence
in Each Service We Provide
USI helps companies and individuals
with employee benefits solutions,
commercial insurance, risk strategies,
retirement plan services, executive
benefits and private client services.
Contact us for a consultation, at:
503.224.8390 or usi.biz
to see how we can help.
© 2014 USI. All rights reserved.
unforeseen delay. Additionally, if you have security gates,
make sure the fire department has gate access keys
or cards so they don’t have to hunt someone down for
entrance to secure areas.
There are many other issues inside a building that may
need to be considered regarding emergency responder
access, communications and identification of units and
shutoff valves. OSHA has prepared a manual to assist
owners of multi-unit residential properties in designing
emergency-responder-friendly interiors and exteriors.
Find it here: www.osha.gov/Publications/3256-07N-2006English.html
Small, inexpensive actions can be taken immediately to help
ensure improved fire and disaster response. Take the time
to look through the OSHA manual for areas you may be able
to enhance or fix. You never know what minute of what day
a disaster will strike, but you can do many things to help
reduce lost time and confusion in an emergency today.
Reprinted with permission from www.multiunitliving.
com, a partner of USI Northwest. USI Northwest offers
fire and other insurance for apartment owners. For a
free consultation or quote contact Heidi McCauley (Heidi.
mccauley@usi.biz) or Ted Stark (ted.stark@usi.biz) by
phone at 503-727-6180 or online at www.usinw.usi.biz.
PAGE 15
Business Tax Changes May Merit a
Review of Your Choice of Entity
By Krista Evans, Attorney with Jordan Ramis PC
krista.evans@jordanramis.com
During the October 2013 special legislative
session, Governor Kitzhaber signed House
Bill 3601, which, among other things,
reduced tax rates for qualifying business
income. House Bill 3601, codified in Oregon
Revised Statutes Sec. 316.043, only benefits
business owners with certain types of entities and the right
type of income. Under current law, all income over $5,000
is taxed at 9% and above. The new rates, which will go into
effect for tax years beginning January 1, 2015, are as follows:
Amount of Taxable Income
Applicable Rate
Up to $250,000
7%
$250,001 - $500,000
7.2%
$500,001 - $1,000,000
7.6%
$1,000,001 - $2,500,000
8%
$2,500,001 - $5,000,000
9%
Over $5,000,000
9.9%
The new rates are only available to entities with passthrough tax structures, such as S corporations and other
entities taxed as partnerships. This includes limited liability
companies with more than one member that have not
elected to be taxed as a corporation. Business owners that
will not get to enjoy the new rates are (1) C corporations,
which are subject to two levels of tax–one at the corporate
level and one at the shareholder level; (2) sole proprietors,
who have no separate entity for legal or tax purposes; and
(3) single member limited liability companies. Unless the
member of a single member limited liability company elects
to be taxed as a corporation, the entity is treated as a
disregarded entity and it is taxed like a sole proprietorship.
As stated above, the income must be the right kind — it
must be non-passive income, which does not include
interest, dividends, capital gains, or wages. The Internal
Revenue Code Sec. 469 defines “passive” activity as activity in
which the taxpayer does not materially participate. Most rental
activity is passive, except for real estate professionals.
In addition to having the right type of entity and the right
type of income, the business and taxpayer must meet the
following requirements to take advantage of the reduced
rates:
1.The taxpayer must materially participate in the day-today activities of the business;
2.The entity must employ at least one non-owner
employee; and
3.A minimum of 1,200 aggregate hours of work in Oregon
must be performed by non-owner employees.
Income tax rates are just one of many reasons it may be
time to evaluate if your choice of entity is the best for your
business. Forming an entity limits the personal liability of the
business owners. Whether a business has employees, and if
so, how many, may also have an impact on choice of entity
from a tax perspective. Limited liability companies offer
pass-through taxation, flexible management, and limitation
of liability for its members. S corporations offer pass-through
taxation and limitation of liability for its shareholders, but
eligibility is limited. For example, an S corporation can only
have a limited number of shareholders, while a limited
liability company is not subject to any limitation on the
number of members it can have. S corporations can only
issue a single class of stock. Limited liability companies
offer full flexibility in capitalization structure. Additionally, S
corporations must comply with the formalities of the Oregon
Business Corporation Act, which is less flexible than the Act
governing limited liability companies. Now is a good time to
speak to your legal and tax professionals to determine if a
change should be made to your business before the new tax
rates go into effect.
This article is intended to inform the reader of general legal
principles applicable to the subject area. It is not intended to
provide legal advice regarding specific problems or circumstances.
Readers should consult with competent counsel with regard to
specific situations.
HFO Current Listing — The Corso — 46 Units in Portland, Oregon — Urban Core, New Construction
PAGE 16
HFO Current Listing — Ridgestone Apartments — 103 Units in Spokane Valley, Washington
A Sampling of Recent HFO Transactions HFO’s Current Listings —
LOCATION
# UNITS
Latest Updates at www.hfore.com
Clackamas, OR
390
LOCATION
Portland, OR
198
Beaverton, OR
243
Independence, OR
196
Spokane Portfolio, WA
162
Vancouver, WA
112
Spokane Valley, WA
162
Vancouver, WA
104
Bremerton, WA
120
Astoria, OR
100
Kennewick, WA
110
Salem, OR
86
Spokane Valley, WA
103
Happy Valley, OR
72
NE Portland, OR
72
E Portland, OR
49
Spokane Valley, WA
72
Vancouver, WA
47
N Portland. OR
46
Lincoln City, OR
44
SE Portland, OR
44
N Portland, OR
30
Eugene, OR
41
SE Portland, OR
27
Eugene, OR
34
Hillsboro, OR
20
Gresham, OR
12
# UNITS
H
F O Sold
I N V EListing
STMEN
R ENew
A L EUnits
S T A Tin
E Hillsboro,
• 1 0 2 8 S E Oregon
W AT E R A V E . S U I T E 2 7 0 P O R T L A N D , O R 9 7 2 1 4 • p h 5 0 3 . 2 4 1 . 5 5 4 1 • H F O R E . C O M
HFO
—T20

The Northwest APARTMENT INVESTOR newsletter

Transcription

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