Apartments, Capital And Performance
As reported here in The Source roughly a year ago, in 2012 the multifamily sector did just about exactly what Dr. Mike Eppli of NAIOP predicted it would: lead the charge into recovery. Rising rents and lowering vacancy rates, Eppli said, were in the cards, driven by the fallout from the housing crisis. Eppli saw a national demographic that broke with its traditional history and headed not into home ownership, but rental.
The result in the national apartment sector is clear: 4% vacancy rates — a landlord’s market — and rising rents are moving to meet the needs of hundreds of thousands of would-be homebuyers displaced by the downturn. And the trend isn’t over, as NAR Chief Economist Lawrence Yun in the most recent Commercial Real Estate Outlook wrote
Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.1 percent; and Minneapolis and Syracuse, N.Y., each at 2.5 percent.
Average apartment rents are expected to increase 4.6 percent this year and 4.7 percent in 2014, after rising 4.1 percent in 2012. Multifamily net absorption is projected at 270,600 units in 2013 and 253,200 next year.
Capital Challenges Persist
Independent of the sunny apartment market numbers are the persistent constrictions on capital to make deals happen. The recovery has been uneven, and our experts in capital allocation in the banking sector seem to have only two settings on their risk tolerance control panels: too much (2007) and not enough (today).
We’ve written about a variety of approaches to take to find elusive capital sources. Credit unions, tax deferments such as 1031 exchanges. 1031 isn’t the only governmental help for finding capital in the apartment sector. Private placement of investment funds went through a game-changing transformation last year.
Rule 506 Changes
November’s Source post on SEC’s changes to Rule 506 in conjunction with the JOBS (Jumpstart Our Business Startups) Act generated plenty of discussion. For the first time in 80 years, the federal regulations defining what kinds of investor can be categorized as “sophisticated” thereby allowing deal principals in certain circumstances to skip the preparation and delivery of disclosure documents. These simplifications and streamlining of the process brings more capital to the table for apartment building deals because it allows the small investor a chance at the cap rates and cash flows apartments offer.
Of course, nothing has been simplified to the point that good counsel is not needed: small investors can fit nicely in your private placement just as easily as they can present serious problems. Always consult qualified counsel in any private placement.
But be aware that the small investor has been set up as a change agent and a new source of badly needed capital in the apartment market. There’s work to do — as always — but the additional options can fuel the apartment recovery trend even farther in 2013.