Dramatic OC Rent Cuts Make for Profitable Investment

Early this week, rent comps in Orange County showed that Lake Forest had a huge decrease in the rental price of apartment of 11.4% as displayed by realfacts.com. Affecting this reduction, surrounding cities such as Brea, Aliso Viejo, Orange, Placentia and Fullerton, also had decreases in their rental prices. Realfacts.com compared these cuts nationwide and found that apartment rentals, on average are down by $105. What does this mean for today’s investor?

Investment opportunities are currently unlimited due to the economic downturn. Even with the dramatic decrease in rent costs, apartments are still being occupied to their full capacity. These rent cuts are only enticing more to the rental market. With the loss of jobs being so prevalent especially in Orange County and the surrounding areas, renting has reached an all time high. Investors alike can take full advantage of this. Not only is investing in one of these apartment properties wise; it would be foolish not to.

Written by: Brittany Duhs

California’s Population Increases

Sacramento just released the population statistic for California and the rate of increase was less than one percent, the lowest rate recorded in history. According to the Department of Finance, California increased its population by 353,000 from July 2008 to July 2009 bringing the total population to 38.5 million.

Keep in mind that California also has approximately 1.8 – 2 million illegal immigrants as well, which would bring the total closer to 40 million.

The only time the state has seen a slower growth rate was in the years from 1994 to 1996. However, note, California is still where most people are moving. According to a UHaul study, of the 50 top locations in the U.S. where people move 10 of them are in California – representing 20% of all moves.

Slow growth impacts property owners and those renting apartments, shopping centers and office buildings. Experts are anticipating slow growth leading to moderate growth for California for the coming few years.

Still, Los Angeles remains the top place for inbound moves, although 3^rd in the nation, whereas San Diego is 11^th, Sacramento is 15^th and San Francisco is 19^th. Result:  Apartments for sale and rent in Los Angeles, San Diego, Sacramento, and San Francisco will be where the demand will be. Although, some residents will take the more inexpensive route and find apartments for sale and rent in suburbs and outlying areas such as the Inland Empire (Riverside and San Bernardino), Orange County, Long Beach and areas such as Oakland or Contra Costa.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing for sale in California:  counties of Los Angeles, Orange County, San Diego, Riverside, San Bernardino and San Francisco. East West Commercial is seeing its Commercial REO and Apartment REO business increase throughout California. Contact Apartment Broker Michael Duhs at http://www.EastWestCommercial.com for investing in commercial properties for sale or coming to market.

California Landlords are Cutting Apartment Rents to Fill Vacancies. The Real Cure: Growth in Employment

With vacancies running above 10.6% nationally according to the U.S. Census Bureau Second Quarter 2009 data, landlords are doing what it takes to fill rental space in the nation’s apartment stock. In parts of southern California, namely the Inland Empire and Los Angeles, reports are indicating higher vacancy than the national average. Unemployment has reached a 25 year high and expected to near 11% by the second quarter. It could get more challenging over the next 9 months before it gets better.

What are the main causes for the vacancies? Some would say poor management. But, when it’s hitting a majority of the apartment owners, then one must look at the conditions of the market, not merely poor management. Supply and demand — this is the case here.

Rent.com recently found in a survey that 70% of the nation’s apartment stock is being impacted and the renters are indicating a very common message. In its survey of 987,450 units across the nation, 90% attributed their situation to job losses, while 51% said they were trying to save money or could no longer afford rent at all. Other responses include: 43% saying they were “doubling up” or moving in with others in order to save money, 35% were looking for a better deal, 37% were impacted by increase credit declines, 31% were relocating, and 22% were buying a home.

All but one of the responses (buying a home) are attributed to job losses and an unstable economy. In other words, demand for apartments is found wanting when people are losing their jobs or can’t find work. It’s encouraging that we only loss 85,000 jobs in December 2009 when we’ve had so much job loss over the past 2 years. But, this loss is disappointing especially after November 2009 had a slight gain in jobs of 4,000. December’s fall was higher than expected. Experts thought the loss was going to mount to 10,000 job losses, not 85,000. So, my question, “Why does the stock market continue its march upward?”

What are apartment landlord’s doing in order to keep their buildings full? Creativity is king. First, they lowering rents, then they are offering free rent. Included in the incentives are free storage or more parking, lower deposits, or relaxed pet policies. Times are changing. The landlord is not in the driver seat. Now the tenant is calling the shots.

For investors – it’s a time to buy. Apartments for sale in Los Angeles and San Diego are plentiful, while forecasters are beginning to see some apartment units for sale in the Inland Empire (Riverside and San Bernardino) ahead of the competition of the long anticipated commercial loan defaults coming. This will in turn create more supply and put upward pressure on cap rates, thus driving down values. However, many investors are surprised at the slow deal flow. The difference in the bid / ask of apartments for sale in southern California still exists. Apartments in San Diego are still strong, whereas apartments in Riverside and San Bernardino counties are still having a difficult time, because of vacancy. Vacancies are still high and will remain high until the employment picture improves.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing for sale in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact Apartment Broker Michael Duhs at http://www.EastWestCommercial.com for investing in commercial properties for sale or coming to market.

Jobs in California will Drive Apartment Demand

Orange County Faring Better than Neighbors

Orange County is faring better than its neighboring counties with respect to joblessness dropping from 9.8% in August to 9.4% in September according to recent reporting by the California Employment Development Department. Orange County is the only southern California county in the single digit category, while statewide the unemployment rate dipped from 12.3% in August to 12.2% in September. There is little good news, but this is a step in the right direction. Neighboring counties posted the following: San Diego 10.2%; Ventura, 11%; Los Angeles, 12.7%; San Bernardino, 13.6%; and Riverside, 14.7%. How do these numbers compare nationally? The nation as a whole had a down tick in the unemployment rate to 9.7%.

 

Positive Job Growth in Next 2 Years will Help Apartments

Cal State Fullerton’s Anil Puri, dean of Business and Economics, just released projections for 2010 and 2011 indicating positive job growth for southern California counties, a reversal from 2009. This will bode well for apartments and occupancy levels across the southland. Anil Puri is projecting employment growth as follows for the next two years:

County	2009	2010	2011
Orange County	-3.9%	.6%	1.7%
Los Angeles	-3.6%	.4%	1.3%
Riverside/San Bernardino	-4.9%	.9%	2.9%

 

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing for sale in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv (Commercial REO’s), or http://www.REOapartments.tv (REO Apartments) for investing in commercial properties for sale or coming to market.

California is Where People Want to Live – Good News for Apartments and Retail

Where would you like to live and work? Survey says…

The Golden State of California

California Ranks as the #1 Place to Live

Outsiders still consider California the place to live. This is good news for the outlook of the California economy – no less for apartment owners and retail establishments. California is still considered the Golden State according to a new Harris Poll recently conducted. California ranked #1 for the sixth year in row, while Florida and Hawaii ranked #2 and #3, respectively.

Echo Boomers – The Prime Renter Category Favors California

For apartment owners and investors the poll revealed an interesting statistic.The favored status was most prevalent among the echo boomers (ages 18-32),which is the group that rents more than any other group. Baby Boomers (ages46-63) was the next highest group to favor California. Weather is cited as the numberone reason for the attraction. These groups tend to live more active lifestylesand this played a significant role in their decision making.

Sun Belt States is Where People Want to Live and Work

Sun Belt States

Of the cities and states listed high on the list, the top four statesmentioned are all in the Sun Belt. The top city, interestingly not a warmweather Sun Belt area, was New York City, followedby Denver. San Francisco ranked 3^rd , while San Diego was 4^th and Seattle 5^th . Los Angeles was 15^th of the citythat most people either wanted to work or live.

Contact me if you  would like to invest in apartments or retail investment properties in the southern California counties of San Diego, Los Angeles, Inland Empire (Riverside and San Bernardino) and Orange County.

By Michael Duhs, Managing Broker of East West Commercial at (949)939-8352, specializes in apartments and senior housing for sale, in the counties of Los Angeles, OrangeCounty, San Diego,Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv (Commercial REO’s), or http://www.REOapartments.tv (REO Apartments) for your source for commercial properties for sale or coming to market.

Foreclosure and REO Season Has Re-Opened Here in California: Los Angeles, San Diego, Orange County, San Bernardino, Riverside

The California Foreclosure Prevention Act, which established a 90-day moratorium on foreclosure that went into effect June 15, ends today. What does this mean for property values and the coming sales activity? Will there be a flood of new properties that come to market? What have lenders learned?

Opinions vary. But, those on the ground are expressing some concern, especially because properties need to be marked to the market. Some glimmer of hope exists — RealtyTrac’s report for August shows foreclosure activity is down from the same time last year—9% from a year ago and 15% from the previous month. However, what people are questioning is whether there will be a flood on new properties in the months of September, October and November. That’s what happened earlier this year after the federal government’s moratorium on foreclosures came to an end.

Lenders are being much more prudent than in years past. They’re first line of attack is do workouts with borrowers. Secondly, they plan to bring properties to market in a trickle. But the problem with the later scenario is that they can not hold on to REO properties too long or else the regulators will start breathing down their necks to boast their reserves. If too many REO’s begin to flood their portfolios then they’ll have to flood the market with REO properties. So, if the economy behaves and works in their favor, then it could prove to be a trickle of new supply, which will send a number of REO’s into the rushing river. If the economy worsens then it could be a tsunami scenario with devastating consequences.

The commercial REO market and the corresponding lenders are gearing up for a minimum of a rushing river scenario, but I don’t think they are staffed for a tsunami scenario. If this is the scenario then will be problematic. The areas destined for difficulty are Los Angeles, north Orange County, San Bernardino, and Riverside Counties. San Diego is experiencing some fallout now, but is less likely to be hit hard.

The REO asset sectors that are predicted to come online first are retail and offices, with apartments and industrial close behind. Unless consumers start spending then REO retail will come online like a locomotive after the Christmas selling season ends. Depending on how many single family homes are released to the market by lenders is really the test of how apartments will fare. If a flood of single family home reach the market, then people will have the choice between living in a home with multiple family members and friends or venturing out to an apartment. Apartment REO’s in San Bernardino, Riverside, San Diego and Los Angeles will become prevalent if a flood of single family homes come to the market. This scenario will swoop up the demand for renters. Apartment brokers are concerned about this scenario, but remain optimistic that the lack of new construction will help over the next year or two.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale, retail, and senior housing in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv (Commercial REO’s), or http://www.REOapartments.tv (REO Apartments) for your source for commercial properties for sale or coming to market. For Michael Duhs’ blog, go to http://michaelduhs.wordpress.com, http://activerain.com/blogs/michaelduhs, http://www.blog.EastWestCommercial.com

Commercial Loan Delinquency Rate Continues to Climb and Southern California Retail, Apartments, and Offices Owners and Lenders are Feeling It

For some historical perspective, at the end of 2007 the CMBS Delinquency Rate stood between 35-50 basis points, whereas by the end of 2008 it increased to over 2%. JP Morgan’s recent August 11, 2009 study claims loans that are with special servicers are now at 6% of all loans, a 200% increase. Experts believe this rate is destined to get worse, believing the rate will climb to 8% by 2009-2010 and between 10-12% by 2011.

Special servicers now are holding $41b in commercial loans with multi-family, retail, and office comprising 80% of the defaults. Where are the majority of the defaults? Southern California (Los Angeles, Riverside, San Bernardino, Orange County, and San Diego), Texas, Florida, Michigan, Arizona, and Nevada. Most lenders are not expecting these escalating rates to peak until late 2010 through 2011.

Banks are in trouble. We continue to hear the bad news each Friday. By the end of 2008 the FDIC had taken back 80 banks and by the end of 2009 the number is expected to come in at 150. Economists and investment bankers are now calling for upwards of 1,000 bank failures by the time the commercial loan fallout finishes – somewhere between 2010-2012. Does this sound like the S&L crisis days all over again?

The crisis will not bottom until banks mark to the market their loan portfolios and these properties come to market at realistic prices. For now, it’s status quo – “extend and pretend.” In other words, banks are not facing reality, so they keep extending their loans, defaults keep mounting, and they are pretending that commercial values are stabilizing. Far from the case and it’s getting worse.

The extend and pretend phenomena is clearly seen by what’s on the market. Not much!  In a brief survey of the apartment buildings on the market only four apartment buildings are clearly marketed as either a short sale or REO in Riverside, in San Bernardino there are four properties, in Los Angeles twenty-one multi-family investment properties are listed this way, Orange County there are none, and San Diego there are three. This suggests that there are approximately 32 troubled apartment / multi-family properties in this five county region. This is so far from reality, because the number is truly in the hundreds, meaning lenders and special servicers are waiting to release properties.

With so many loans in special servicing the flood gates will have to begin to open and we will soon see a flood of multi-family, retail and office properties on the market. Many are saying this will begin to happen in the next six months. Prudent investors are preparing themselves and positioning their assets for this buying opportunity. We’ll see some of the best opportunities in Los Angeles, Orange County and San Diego Counties. San Bernardino and Riverside Counties will continue to experience a devaluing, but these two counties have are already been hit over the head.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing in the counties of Los Angeles, Orange County, San Diego, Riverside and Sa.n Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv, or http://www.REOapartments.tv for your source for properties available or coming to market. For Michael Duhs’ blog, go to http://michaelduhs.wordpress.com, http://activerain.com/blogs/michaelduhs, http://www.blog.EastWestCommercial.com

Commercial REO’s and Apartment REO’s are Around the Corner: Los Angeles, Orange County, San Diego, Riverside and San Bernardino Markets are Targets

The latest quarterly report from Capmark signal a “red flag” in the commercial loan market. Capmark’s announcement of its $1.6 billion quarterly loss is the tip of the iceberg to what’s coming. Capmark is one of the largest commercial lenders in the US with $11.1 billion in assets and approximately 97% of its portfolio in commercial loans, according to Moody’s.

Nationwide, the multi-family sector will see a lot of defaults. In a recent report by CHPC, it’s estimated that 2,200 multi-family loans will fail across the county. What’s the definition of failure? Not being able to re-finance under current lending underwriting guidelines of 70% LTV and 1.3 DCR. Approximately 8,800 multi-family loans nationwide are expected to come due through 2012 and loan losses could total $90 billion for the apartment sector. For the whole commercial sector economists are prediction losses totaling $500 million.

Locally in southern California there are 924 properties that are in the pre-foreclosure stage, with many of them headed for the REO department of banks across the United States. Los Angeles is way ahead of the pack with 737 bad apartment loans, with Orange County (28), Riverside (43) and San Bernardino (31) with comparable bad loans. San Diego County has 85 properties that are heading in the wrong direction.

Apartments in Southern California that are in Pre-Foreclosure Status

County	Properties in Pre-Foreclosure
Los Angeles County	737
Orange County	28
Riverside County	43
San Bernardino County	31
San Diego County	85
Total	924

If national trends are indicative of local results then southern California is destined for bigger problems ahead. Nationally the commercial default rate increased from 2.25% to 2.88%, a 13% increase from the first quarter of 2009 to the second quarter. Experts are predicting the default rate will increase from current levels to 4.1 by the end of this year to 5.2% next year, an annual projected increase of 27%.

The trend to watch when assessing the apartment default rate is the unemployment rate in the areas of Riverside, San Bernardino, San Diego, Orange County and Los Angeles. When folks lose their jobs they can’t pay their rent, which will cause apartment owners to default on their loans. The silver lining is another trend that is forming – the supply side of the equation which will be written about in a coming blog.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv, or http://www.REOapartments.tv for your source for properties available or coming to market. East West Commercial

Increase in Water Costs are Causing Apartment Investors in Southern California to Be Water Wise

Over the last few months apartment owners and home owners are seeing dramatic increase in their water bills. Water districts have sent out forewarnings, but reality is never good for the bottom line. From San Diego to Orange County and on to Los Angeles, and even east to the Inland Empire (Riverside and San Bernardino) property owners are being advised to conserve.

Most commercial property owners are required to water their landscaping during off-peak hours and days, so water usage doesn’t spike during any one day. The heat is on, as least these last few weeks. What does this mean? More water usage, more showers, and more watering. This is not a good trend for the bottom line for apartment investing.

What can property owners do? Check the water efficiency of irrigation systems and washing machines, teach water conservation to tenants, separate meters for each unit, and plant drought tolerant plants to name a few suggestions.

Water is an important commodity for apartment owners to pay attention to. In San Diego and parts of Orange County water rates have increase as much as 20-25%. This increase needs to be considered when looking at apartments for sale in the counties of southern California:  Los Angeles, Orange County, San Diego, and the Inland Empire.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv, or http://www.REOapartments.tv for your source for properties available or coming to market. East West Commercial

Longer Escrows are the New Norm for Apartment Transactions

Want to close your next apartment transaction in 30 days? It’s not going to happen.

Sellers and seller’s brokers are realizing that the time frame for closing apartment transactions is taking much longer. In the last two years I have seen a constant stream of delays by lenders, which have resulted in escrow extensions or canceled contracts.

What used to take 45 days to close a commercial transaction is now taking 60-90 days. Most Fannie and Freddie lenders will tell you upfront, expect 90 days. Commercial lenders are saying 60 days.

In harder hit apartment markets such as Inland Empire (Riverside and San Bernardino) expect the appraisal to take longer and underwriting to take an additional 10 days. Because the sales velocity is down it’s also harder for the appraisers to find and compile “like-kind” comparables to give lenders the comfort level they need. My advice: do not let any money go hard until your loan is out of lender underwriting. Even after these approvals I have seen a few deals go sideways because the lender changed lending direction as the market changed.

San Diego, Orange County and Los Angeles are active apartment markets, yet slower than 2008. Astute brokers and apartment investors are being much more careful to allow enough time for longer escrows. It provides much less stress and a smoother transaction.

By Michael Duhs, Managing Broker of East West Commercial at (949) 939-8352, specializes in apartments for sale and senior housing in the counties of Los Angeles, Orange County, San Diego, Riverside and San Bernardino. East West Commercial is seeing its Commercial REO and Apartment REO business increase in southern California. Contact http://www.EastWestCommercial.com, http://www.CommercialREOs.tv, or http://www.REOapartments.tv for your source for properties available or coming to market. East West Commercial