Alan’s Blog

April 29, 2009

I participated last week on a conference call related to the state of the multi family market across the nation.  It is interesting to hear what is happening across the nation and compare it to what I see happening in Las Cruces.   Some interesting points that came from that call is that the average vacancy rate nationally is 7.2% and is expected to rise to an average of 8.75%.   This is attributed to job losses that are expected to continue through the rest of 2009.   Another factor will be homes and condos that are entering into the competition for renters.   Typically the home/condo rental is 30% of the available rental property, however, that is seen rising to 50% due to the current economic conditions.    Rents are forecasted to remain stagnant and or decline in the near future due to the increased competition from home/condo rentals, fewer qualified renters and concessions that will be given to maintain occupancy. 

 

Apartment values are decreasing in primary, secondary and tertiary markets as cap rates are rising.   We are in a current state where sellers are not accepting the increase in cap rates which reduces value.  Buyers are looking for higher cap rates but frankly there is a gap between what sellers are looking for and buyers want.   The cap rates sellers want are not achievable and cap rates that buyers want, deals are not getting done at those rates.  While that may be the perception of buyers that cap rates should be substantially higher, there is not data showing that deals are getting done at the levels buyers would like to see.  There is a balance somewhere in the middle where deals can be done, but at this time, unless a seller is overly motivated, it appears most sellers are prepared to wait this period out.  Financing continues to be a significant hurdle to getting deals done as lenders are underwriting deals at much tighter guidelines.

 

In Las Cruces, and specifically Pinnacle Management Group, we currently manage just under 700 multi family units and our vacancy rate is 4.1%.   This is better than the national average and we see rents maintaining.  I am not forecasting substantial rent increases going forward but believe large concessions will not be necessary.  I feel that we should be able to get nominal rent increases going forward which hopefully will keep pace with the current inflation levels.   We have seen our traffic levels steady, although renters are being a little more selective.  In this time of more competition I believe it will be important for property owners to maintain an advantage over competitive properties through a higher attention to detail.  Specifically to upgrades that an owner may have been putting off such as updating carpeting, paint, flooring and appearance of the property. 

 

Las Cruces has experienced a downturn in the residential market as housing prices have fallen and the market has slowed considerably.  My best estimate is that housing prices has fallen about 15%, which in today’s world is actually not that bad considering some markets have fallen by greater percentages.  Our economy seems to remain stable with our unemployment rate hovering around 5% which again is less than the national average.  We have seen construction slow down and jobs related to construction disappear.  We are also seeing some effects on retailers as they are feeling the effects of the economy. 

 

We will be entering our slower time of the year related to rentals as NMSU wraps up its school year on May 8^th.   I anticipate the summer will be a little slower than normal, however, I anticipate that as school returns in August we could see a pickup over last year.   NMSU recently approved a 5% increase in tuition, housing, etc which is to take effect in the fall of 2009, which could make certain apartments very attractive over campus housing.

 

 

Current Investment Opportunities

Medical/Retail Center              $7,100,000            (35,200 sq. ft.  4 year old center)

Free Standing Office               $450,000

 

Retail Space for Lease

1,700 – 3,000 sq. ft.  $15 psf  NNN    (Mountain Vista Plaza)                 

 

Office Space for Lease

3,300 sq. ft.              $13 psf     available 1/1/2010            (Hadley Center, across from new Las Cruces Center)

2,984 sq. ft.            $3,000/mo            (Historical building, downtown area)

 

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This year we have seen vacancy levels rise slightly on multifamily here in Las Cruces. A couple of things seem to be creating that. With the economy in a slower mode, we have seen people doubling up on apartments, meaning 4 people living in a 2 bedroom rather than 2 people living in the apartment. Additionally our student traffic was down a little this year. I can’t really put a finger on this, because the University enrollment for Freshman was about 8% higher than normal. The University is working hard to get incoming freshman to live on campus and has built new dorms overs the past 2 years. We may be seeing parents feeling that having their student on campus is cheaper than living off campus.
There has also been in increase in what is called shadow rentals which are homes that are being rented out. They can be second homes, investment homes, primary homes where people have been transferred and can’t sell the home so they need to rent it out until the market changes. These shadow rentals have put a lot of pressure on the market for other homes. The competition at this point is very stiff.
Overall, at Pinnacle we have been able to maintain a pretty stable occupancy for our owners. We have seen our properties perform at the same or greater levels than 2008, so this is a good thing.
Nationally, in 42 of 79 markets tracked by REIS, vacancy rates rose, while effective rents dropped or held flat in 44 of those markets. In the 3rd quarter teh vacancy rate rose 10 basis points to a national average of 7.8%. This is 1.6 percentage points higher than a year ago and the highest levels since 1986. Additionally we are seeing concessions needing to be made and in some cases rents being reduced to compete for the limited number of renters, Nationally.
In Las Cruces, I beleive we are beating the national trends, however, it is a very competitive market. With uniemployment nationallly at 9.8%, I believe we will be in this competitive mode for well into 2010.

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