Rental Housing Journal - Colorado - January 2014

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January 2014 - Vol. 6 Issue 1Rental Housing Journal Colorado

www.rentalhousingjournal.com • Professional Publishing, Inc DENVER • COLORADO SPRINGS • BOULDER

Continued on page 2

Bustling Economy Eases Concerns,Light Rail Paves the Path for Investment Activity

Favorable Strategies for Real Estate Investors in 2014

Denver employment will rise at one of the fastest paces in the nation this year, support-

ing housing demand as a wave of new inventory comes online. A high-ly educated workforce is fostering expansion in several of the metro’s high-tech industries, including ener-gy, financial services, bioscience and healthcare. In addition, the highly anticipated redevelopment of Union Station in downtown Denver will be completed midyear, creating a multi-modal transportation hub that con-nects train, light rail, bus and other transportation options in one central location. This project has been a cata-lyst for development throughout the area as nearly 4,000 apartments are under construction in the CBD and several projects have been estab-lished in the path of rail lines. Though a surplus of inventory will threaten to soften select submarkets this year, strong job growth and household

formation should mitigate upswings in vacancy.

Investment activity will remain brisk through 2014 as a bright eco-

nomic outlook and an increase in household formation instill confi-dence in investors. However, a lim-ited number of properties available

for sale could hinder transaction velocity in the coming months. Light rail expansion is guiding many investors to purchase assets along the planned routes and the area along the I-225 rail line has also been especially popular. The anticipated opening of this rail line, as well as job cultivation and development near the Fitzsimons Life Science District are spurring interest in area properties. Pre-1980s assets in need of repositioning are garnering strong investor interest and range in quali-ty, amenities and size. The recently opened West Rail Line will continue to draw significant attention as investors who have stabilized assets seek to cash out and search for addi-tional opportunities.

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Denver Up 8 Places 2014 Rank: 3 2013 Rank: 11

Ask The Expert is a Q&A with TRANSWESTERN experts and leaders. In this edition,

George Garfield, Transwestern’s West president, talks to Steven Orchard and Michelle Lee, leaders of the firm’s structured finance group in the West, about strategies for non-institutional investors in light of aggressive asset pricing, as well as current capital markets, economic and monetary conditions. 1st Quarter 2014

George Garfield:Many investors are frustrated by today’s frothy pricing of commer-cial real estate. Non-institutional

investors, in particular, are finding themselves outbid on acquisition targets. What is your advice to these investors?

Steven Orchard and Michelle Lee:Asset values are generally high rela-tive to underlying fundamentals due to the ample supply of investment capital in the soft economy, making distressed assets with attractive pric-es difficult to find. Non-institutional buyers can best compete for mid-cap, value-add investments, and are most likely to find those deals out-side of primary markets.Fortunately for non-institutional buyers, more capital is coming online

for mid-cap deals. Equity funds and lenders are increasingly willing to transact below their stated minimum deal size. Many are forming sub-ventures to pursue small and mid-cap opportunities. Some are working in secondary and tertiary markets in order to find yield. These bigger platforms, however, want to accept less risk on smaller deals. As such, those looking for capital should proactively adapt to the demands of capital sources. For example, they might need to strengthen their sponsorship profile and financial capacity by securing a co-general partner relationship. They should prepare to accept meaningful

risk to their position to reassure the institutional capital provider, via such measures as personal recourse, larger equity contributions or subor-dinating their fees and returns. Our most successful clients today adjust to these shifting dynamics and make it easy for institutional money to say “yes.”

Garfield:Where should investors look for investment opportunities in 2014?

Continued on page 4

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Rental Housing journal Colorado • January 201422

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Love This JobI’m going to bet that you proba-bly haven’t h e a r d many peo-

ple say that they love being a land-lord. If anything, you’ve heard the cons, hatred, and horrific stories of doing such. But, in a world where there is so much emphasis on nega-tivity, I’d like to bring our attention for a second to some of the positives of the property management indus-try. So, whether you’ve chosen to be a landlord as a career, or have been lucky enough to have inherited the job of managing rentals, there are many benefits that go along with being in this business.

First, and probably most obvious, being a property manager creates wealth. There is no denying that owning and managing property over the long term is a great money earner. There will always be a demand for housing. However, the earning potential will fluctuate with the state of the economy and various conditions within th4 housing mar-ket. In good credit conditions, there will be a higher rate of owner occu-pation and increasing capital values.

In more constrained times, there will be more renters with higher rents. Real estate investments are arguably the most stable and secure types of investments you can make. As prop-erty owners, you are able to use ten-ants’ money to pay your mortgage and build your equity, so that you can increase the cash flow to buy greater properties and/or create a stream of retirement income. As a property manager, you can increase rents regularly to match current market rent rates, and your manage-ment fee based on gross rents will increase simultaneously with your client’s income. It really can be a win-win situation.

Secondly, real estate is real. Managing rentals forces you to become more knowledgeable about property upkeep and home repairs. No matter how involved you may be in caring for the actual residence, you will have to understand some-thing about repairs and mainte-nance, even if you hire out the work to be done by others. So, whether you’re lining up the contractors, or putting in your own elbow grease, you’ll notice that you are more dili-gent about ensuring quality work.

BLACK TEXT VERSION

WHITE TEXT VERSION

page 22 2014 Annual Report

Sources: CoStar Group, Inc., Real Capital Analytics

* Estimate ** Forecast

Market Forecast Employment: 3.8% s Construction: 5,300 s Vacancy: 30 bps s Effective Rents: 4.5% s

Uni

ts (t

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Supply and Demand

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ate

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$67

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10 11 12 13*09

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Absolute Change Y-O-Y % ChangeEmployment Trends

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4% Denver employment will rise at one of the fastest paces in the nation this year, supporting housing demand as a wave of new inventory comes online. A highly educated workforce is fostering expansion

in several of the metro’s high-tech industries, including energy, financial services, bioscience and healthcare. In addition, the highly anticipated re-development of Union Station in downtown Denver will be completed midyear, creating a multi-modal transportation hub that connects train, light rail, bus and other transportation options in one central location. This project has been a catalyst for development throughout the area as nearly 4,000 apartments are under construction in the CBD and several projects have been established in the path of rail lines. Though a surplus of inventory will threaten to soften select submarkets this year, strong job growth and household formation should mitigate upswings in vacancy.

Investment activity will remain brisk through 2014 as a bright eco-nomic outlook and an increase in household formation instill confidence in investors. However, a limited number of properties available for sale could hinder transaction velocity in the coming months. Light rail expan-sion is guiding many investors to purchase assets along the planned routes and the area along the I-225 rail line has also been especially popular. The anticipated opening of this rail line, as well as job cultivation and devel-opment near the Fitzsimons Life Science District are spurring interest in area properties. Pre-1980s assets in need of repositioning are garnering strong investor interest and range in quality, amenities and size. The re-cently opened West Rail Line will continue to draw significant attention as investors who have stabilized assets seek to cash out and search for ad-ditional opportunities.

2014 Market Outlook

u 2014 NAI Rank: 3, Up 8 Places. The nation’s strongest rent-growth forecast propelled Denver eight spots in this year’s ranking to claim the third position.

u Employment Forecast: Denver employers will create 49,100 positions this year, expanding payrolls 3.8 percent. Employment growth was also 3.8 percent last year.

u Construction Forecast: Completions will double from last year as builders deliver 10,000 units in 2014, increasing stock 3.7 percent.

u Vacancy Forecast: Vacancy will tick up 30 basis points to 5 percent by year end, erasing the 30-basis point drop in 2013.

u Rent Forecast: Effective rents grew 6.1 percent last year and will ad-vance 4.5 percent in 2014 to $987 per month.

u Investment Forecast: Buyers seeking assets in the path of growth will also look along the East and Gold lines, or planned routes to the north.

Bustling Economy Eases Concerns, Light Rail Paves the Path for Investment Activity


BLACK TEXT VERSION

WHITE TEXT VERSION





Uni

ts (t

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s)

Completions Vacancy

Supply and Demand

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$62

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2014 Market Outlook









2014 Market Outlook• 2014 NAI Rank: 3, Up 8 Places. The nation’s strongest rent-growth fore-

cast propelled Denver eight spots in this year’s ranking to claim the third position.

• Employment Forecast: Denver employers will create 49,100 positions this year, expanding payrolls 3.8 percent. Employment growth was also 3.8 percent last year.

• Construction Forecast: Completions will double from last year as build-ers deliver 10,000 units in 2014, increasing stock 3.7 percent.

• Vacancy Forecast: Vacancy will tick up 30 basis points to 5 percent by year end, erasing the 30-basis point drop in 2013.

• Rent Forecast: Effective rents grew 6.1 percent last year and will advance 4.5 percent in 2014 to $987 per month.

• Investment Forecast: Buyers seeking assets in the path of growth will also look along the East and Gold lines, or planned routes to the north.

Orchard and Lee:We advise our clients to look at what they already own as their best invest-ment opportunity instead of over-paying for new assets. Investing capital to upgrade or reposition cur-rent assets can create value and maintains a lower comparative cost basis than developing or acquiring new assets. Investors are advised to evaluate each property in their port-folio and reposition them for a long-term hold.

An owner seeking to redevelop an older property might need to use third-party, joint venture equity in concert with a bridge loan to fund their project. For example, one of our clients owns an industrial build-ing in downtown Los Angeles that might garner $17 million if it was sold. But then the client would be hard pressed to find another suitable asset to purchase; a dilemma it has already encountered. We are formu-

lating a restructure plan in which it will contribute the building into a new joint venture; secure a bridge loan and venture equity; and rede-velop the asset into a creative office building. Our client is thereby posi-tioned to deliver an office building for less than could a competitor that had to purchase a redevelopment property, which allows it to drive leasing with competitive rents.

A less extensive reposition may be funded with equity from the prop-erty itself, using higher leverage fixed-rate term debt. If no additional capital investment is needed, the best strategy may simply be recapi-talizing the financing for a longer term hold. In any case, we encour-age clients to plan for at least a five to seven year horizon with respect to their financing.

Regardless of the strategy that is

1/8 Page4 7/8” x 3 5/8” bwOn-Site4

ON-SITE-NW SEATTLEVALLEY, METRO, ARIZONA APT. NEWSSalsbury IndustriesFeb, Apr, Jun, Aug, Oct, Dec

1010 East 62nd Street, Los Angeles, CA 90001-1598Phone: 1-800-624-5269 • Fax: 1-800-624-5299

Bustling Economy ..continued from front page

Favorable Strategies ..continued from front page

Continued on page 4

Continued on page 3

Rental Housing journal Colorado • January 2014 3


Love ..continued from page 2Bending The Cost Curve

A New Report from the Urban Land Institute and Enterprise, Explores Solutions to Expand the Supply of Affordable Rental Housing

WASHINGTON – Solutions to increase the supply of affordable rental housing are explored in a new report from the Urban Land Institute’s (ULI) Terwilliger Center for Housing and Enterprise Community Partners, Inc (Enterprise).

Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals outlines factors that impede the development of affordable rental housing – causing the supply in many markets to fall far short of the demand – and offers specific, actionable solutions to overcome the barriers.

Nationally, there were only 6.9 million rentals affordable to 11.8 million extremely low-income rent-ers in 2011, a supply gap that grew by three million renters between 2001 and 2011—and continues to grow. "In an era of growing demand and declining government financial support for affordable rental hous-ing, it is more important than ever to deliver affordable housing as effectively as possible,” the report says. “Bending the cost curve will enable developers to deliver addi-tional affordable rental homes and help jurisdictions provide more housing choices, meet the growing need for affordable rentals, and ensure that individuals and families across a range of incomes have a place to call home within the com-munity.”

The report, released in Washington, D.C. at the ULI/Carolyn and Preston Butcher Forum on Multifamily Housing, is based on a series of interviews and round-table discussions co-hosted by the Terwilliger Center and Enterprise over the past 16 months with nearly 200 developers, financiers, and poli-cy makers in ten markets – Chicago, Denver, Los Angeles, New York City, San Francisco, Boston, Houston, Minneapolis, Pittsburgh, and Seattle.

Conclusions drawn from the dis-cussions formed the basis for the research, which is intended to help fill the void of material examining how to overcome regulatory barri-ers to affordable rental develop-ment, such as land use, zoning and building code restrictions, process-ing delays, and financing obstacles. While economic conditions and demographics vary widely among different markets and play a signifi-cant role in local affordable housing development, the report identifies several over arching cost drivers, including:

• Project scale–Fixed costs such as

land, legal expenses, and fund-ing application fees, are not cor-related to the number of units and often make smaller projects less economical on a per unit basis.

• Project design and construction – Community concerns, site selection, the price of construc-tion labor, and state and local regulations affect the ability to produce high quality units at an affordable cost.

• Financing and underwriting – Because affordable rentals pro-duce a lower level of profit, developers face several financing obstacles, such as difficulty attracting investors who are strictly yield driven; complicated deals requiring multiple layers of funding; and limited or no avail-ability of financing for smaller projects and for mixed income projects.

• Complex deal structures – Project fees, timing of tax credit use, higher risk, greater due dili-gence, longer timelines, and the need to set aside capital reserves all drive up costs.“Drivers of cost come at all points

in the development process and are deeply intertwined, but the need for more affordable rentals compels us to take on the challenge of under-standing the drivers and work to mitigate them,” said Lynn Ross, executive director of the Terwilliger Center.

“Enterprise and ULI will use the joint research to spark federal, state and local conversations that lead to

policy change and financial innova-tion, ultimately stretching limited resources for affordable housing,” said Ali Solis, senior vice president of public policy and external affairs at Enterprise. “At the same time, we must maintain high quality, green standards so that affordable homes can be sustainable for the long haul. That is our challenge as an indus-try.”

To address the cost drivers, the report offers several recommenda-tions:

• Promote cost-effectiveness through consolidation, coordina-tion, and simplification. This includes consolidating monitor-ing and due diligence activities; coordinating competitive fund-ing competitions; improving codes, zoning and regulation; and streamlining HUD financ-ing.

• Remove barriers to reducing construction costs and delays. This includes implementing smart parking requirements; reviewing unit size and amenity requirements; reforming codes and other rules that make reha-bilitation difficult; finding ways to better coordinate develop-ment teams; and supporting innovative building techniques like micro-units and prefabricat-ed housing.

• Facilitate a more efficient deal assembly and development timeline. This includes eliminat-ing zoning barriers to by-right housing development; creating

Fixing up an older property, or turn-ing over a rental that had been trashed or damaged by past tenants, can instill a true sense of accomplish-ment.

The third reason why I love what I do is the people. I like my tenants. I would be lying if I said that I’ve liked every resident I’ve ever rented to, but if you can hit it off initially, working with them during their tenancy can be quite a pleasure. Some of my ten-ants have even become friends as well as business acquaintances. Providing nice, well-kept homes at affordable rates is powerful. I’ve had the pleasure of supplying homes to some who otherwise wouldn’t be able to rent anywhere else based on their circumstances. Experiencing their joy of having a place to call home fueled my passion and pur-pose of being a landlord. I have been able to enjoy watching many families grow together through marriage, children and other life accomplish-ments. And let’s not forget the hun-dreds of encounters with some very interesting people who have either inquired about a property, or the many contractors that I employed to perform maintenance duties -- many of whom I would have never met if I were not a property manager.

These are only a few reasons why I love being a landlord. I encourage you all to take the time to step back from the weight of the job, and ask yourself, “Why am I in rental hous-ing?” We all know that being a land-lord is complex, but I believe that if you’re able to outline the positives of the industry for yourself, then when the unavoidable negatives arise you will be able to make decisions based on love and not hate.

Katie Poole – Hussa is a Licensed Property Manager, Continuing

Education Provider and Principal at Smart Property Management in

Portland, OR. She can be reached with questions or comments at Katie@

SmartPM.coContinued on page 3

Rental Housing journal Colorado • January 20144


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clarity and structure in the public engagement process; adopting state and local policies to stream-line local development; promot-ing consistency in state Qualified Allocation Plans (QAPs); and adopting efficient deadlines for deal assembly and project devel-opment.

• Improve and align incentives. This includes evaluating life-cycle cost considerations in the underwriting process; creating incentives for green building and energy-efficient design; incorpo-rating cost considerations in the QAP process; assessing the time frame in which costs are evaluat-ed for the purpose of underwrit-ing; providing local incentives for affordable housing development (such as land acquisition subsi-dies, property tax abatements, fee waivers and expedited per-mitting); and removing perverse incentives that can increase costs (potentially by adopting alternate compensation models or flexible tax credit allocations).

• •Improve the flexibility of exist-ing sources of financing and cre-ate new financial products to bet-ter meet needs. This includes exploring entity-level financial products; facilitating the acquisi-tion of existing multifamily prop-erties through direct subsidies, public-private partnerships or

regulatory flexibility; facilitating more efficient use of project reserves; and providing greater flexibility in 4-percent Low-Income Housing Tax Credit allo-cations (such as alternate sources of debt financing, private place-ment of bonds or direct bond purchases).

• Support the development and dissemination of information and best practices. This includes cre-ating a cost competition to sup-port innovative practice; deter-mining appropriate units of mea-surement and comparison to guide decision making (such as costs-per-unit or costs-per-per-son); building a community of practice; and creating a forum for sharing data and best practices.In addition to the recommenda-

tions, the report identifies three les-sons drawn from the research – 1) Cost drivers come at all points in the development process and are deeply intertwined; 2) Mitigating the cost drivers requires collaboration efforts involving multiple stakeholders from the private and public sector; and 3) Leadership is essential to implement the recommendations.

About the Urban Land InstituteThe Urban Land Institute www.

uli.org is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of

land and in creating and sustaining thriving communities worldwide. Established in 1936, the institute has more than 30,000 members world-wide representing all aspects of land use and development disciplines.

About the ULI Terwilliger Center

for HousingThe ULI Terwilliger Center for

Housing engages in a multifaceted program of work that furthers the development of mixed-income, mixed-use communities with a full spectrum of housing affordability. The center was established in 2007 by J. Ronald Terwilliger, former ULI chairman and chairman emeritus of Trammell Crow Residential.

About Enterprise Community

PartnersEnterprise Community Partners

works with partners nationwide to build opportunity. Enterprise creates and advocates for affordable homes in thriving communities linked to jobs,

good schools, health care services, and transportation. Enterprise lends funds, finance development, and manage and build affordable housing while shaping

new strategies, solutions, and policy. Over more than 30 years, Enterprise has created 300,000 homes, invested

nearly $14 billion, and touched millions of lives. Join us at www.

EnterpriseCommunity.com or www.EnterpriseCommunity.org.

ultimately selected, investors should evaluate individual assets and their portfolios as a whole to unlock capi-tal, value and potential profit in 2014.

Garfield:Should owners consider refinanc-ing assets in light of today’s capital markets?

Orchard and Lee:Investors should be thinking about debt as an asset in 2014. One has to use leverage advisedly, obviously. But with debt this cheap and strong inflationary pressure looming in the long term, procuring long-term fixed-rate debt is a smart investing strategy. We helped a number of cli-ents implement this in 2013 while rates rose approximately 100 basis points. Rates are fairly stable again today, but in light of the Fed’s taper-ing and economic growth, many experts agree rates will increase fur-ther in 2014. It’s also important to consider the relationship between net operating income and interest rates at the time of refinancing. If rates rise and NOI doesn’t, then loan proceeds are reduced. Does the owner expect interest rates to rise next year? Will the NOI on the prop-erty increase commensurately? How will this dynamic affect their ability to refinance when the existing loan comes due? Refinancing early may be a good choice, both from an eco-nomic and risk management stand-point.

Bending ..continued from page 3Strategies ..continued from page 2

Rental Housing Journal - Colorado - January 2014

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Transcript of Rental Housing Journal - Colorado - January 2014