As we move into the new year, pay close attention to interest rates and housing prices in the residential real estate market.
High-interest rates and expensive housing prices for single-family homes will likely continue to boost the multifamily market throughout 2023.
When the residential market factors begin to normalize, it could signify that the multifamily market will also rebalance — which could look like a drop in performance. However, it may be that the market is stabilizing after significantly strong activity for the past few years.
#2. Creative Reuse and Renovation Address Affordability Crisis
The nationwide supply of affordable housing is expected to remain low throughout 2023. The need for affordable housing opportunities impacts multifamily, and one of the most popular solutions will be creative reuse projects and modernizing renovations.
Turning other commercial real estate asset classes into multifamily buildings is expected to become commonplace in the 2023 market as more investors and developers respond to the need for more housing at affordable rates.
Renovating existing multifamily buildings to become affordable housing options will also be a way for property owners to pivot to increase the performance of their multifamily assets. Since the demand for affordable multifamily units is characteristically high, this will be an attractive investment decision for the market.
#3. The Workforce Turns to Multifamily
As more workforce members finally return to the office, the demand for metropolitan apartments will likely remain high. According to Victor Calanog, Head of CRE Economics at Moody’s Analytics, the combined factors of the national housing shortage and high single-family home prices position workforce housing as a promising investment for multifamily investors.
Targeting urban environments and nearby professional market hubs could strengthen the performance of multifamily buildings looking to appeal to tenants in the workforce. To help position multifamily assets as attractive options, renovating and modernizing the building could be helpful — particularly if the building is older.
Another key consideration for positioning a multifamily building to target the workforce is the need for a strong internet connection. Your building should have great connectivity for both cellular and WiFi needs.
Many tenants will work from home, either a few days a week for their hybrid positions or full-time remote jobs. Ensuring that your building has a stable connectivity infrastructure is essential for creating a viable work environment for these tenants.
Some buildings offer WiFi plans to attract and retain tenants. At the very least, the building needs to support cell and WiFi — not be a connectivity dead zone.
#4. The Flight to Quality Persists
Across every commercial real estate asset, quality is considered critical as more tenants consider the experience that a building or space creates.
From the office to retail and multifamily, tenants are on the flight to quality. This was sparked as new concerns emerged from the pandemic when everyone re-entered the built environment after a long pause.
When looking for a place to call home, multifamily tenants will weigh all their options. Multifamily tenants likely have many requirements on their wishlists. They will research to see which local building best meets their needs, wants, and non-negotiables.
To help multifamily assets perform, it’s important to maintain the building and modernize the common areas. Here are a few ideas that can help get a multifamily building prepared to attract tenants in the 2023 market:
Source: 4 Multifamily Trends We’re Watching into 2023
https://www.creconsult.net/market-trends/4-multifamily-trends-were-watching-into-2023/
The commercial real estate debt market crumpled last year, weighed down by historically aggressive interest rate hikes, but one little-watched corner of the sector has stepped in to fill the void partially.
Regional and community banks have grabbed a larger market share of commercial real estate loans as banking giants like JPMorgan Chase, Bank of America and Wells Fargo have retreated from the market.
“The local and community banks have really stepped into that space that the debt funds were in before,” said JLL Executive Managing Director Gerard Sansosti, who co-leads the firm's national debt practice. "I don’t think they’re under the same scrutiny that the money center banks are."
Small and regional banks are picking up the slack left by major banks as they pull back on CRE lending.
But regional banks, with assets between $10B and $100B, and even smaller community banks can only fill so much of the vacuum, and if the Federal Reserve continues to raise rates, they will start to pull back themselves before too long, experts told Bisnow.
“Unless there is more clarity to the market and the capacity loosens up a little bit, I believe [smaller banks] will get selective,” Sansosti said.
Banks overall have taken a larger market share in CRE as other lenders, such as debt funds, CMBS, and insurance companies all saw activity plummet. Banks made up 46.4% of all nonagency commercial and multifamily lending in the U.S., up from 23.1% in the same period of 2021 and 30% in the second quarter, according to CBRE. Banks made up more than 30% of lending in the second quarter, according to a CBRE report.
Michael Riccio, CBRE senior managing director and author of the report, told Bisnow that community and regional banks were the main players during this period.
He said the volatile interest rate environment “essentially shut down” lending activity from major money centers. Overall loan closings dropped by 11% from the second quarter of 2022 and 4.7% year-over-year.
Truist Financial Corp., one of the country’s ten largest banks with nearly $550B in assets, pulled back on commercial lending as its underwriting raised projected interest rates from 5.5% in the middle of 2022 to between 7% and 7.25% today, said Mark Hancock, senior vice president of Truist’s commercial real estate lending division.
“We’re taking care of our existing clients,” Hancock said. "We’re trying to get creative where we can without breaking our guidelines."
As a result, Tony Marquez, the president of commercial banking at Bethesda, Maryland-based EagleBank, said he’d seen more traffic through his door among developers and real estate investors.
“There is a clear indication from my vantage point that we’re getting more looks at different deals because some of the larger banks have not been as active in the past year,” Marquez said, adding that loan growth for the regional bank was 2.2% in the third quarter compared to just 1% in Q2.
Smaller banks are able to fill this void given they receive less scrutiny from banking regulators compared to money center institutions, Sansosti told Bisnow. Money centers are subject to annual federal stress tests and limits on how much commercial real estate lending they’re able to add to their balance sheets.
Michael Barr, the Federal Reserve’s vice chairman of supervision, warned last month that the central bank could tighten stress test requirements further, even though 33 of the largest banks passed those stress tests last summer, indicating they could weather a severe recession and continue to lend, Banking Dive reported.
Smaller banks see the vacuum left by money centers as a way to grab more market share, Commercial Real Estate Finance Council Executive Director Lisa Pendergast said.
“If you’re one of the few games in town, then you have more opportunity to ensure your loan is as creditworthy as it can possibly be,” Pendergast said.
However, there are limits to the size of loans these banks can make. Most regional banks don't lend more than $40M to $60M on any deal, Riccio said, which means investors and developers have to go to multiple banks to cobble together enough debt for bigger projects.
"They’re not going to do a $200M loan," Sansosti said. "They’re filling a need, but it’s more in that small to medium-sized loan."
For now, Sansosti said the smaller banks have the upper hand, pushing potential clients to open accounts and make deposits in exchange for loans while tightening their underwriting standards.
But unless the Fed ceases its interest rate hikes or reverses course in the event of a severe recession, smaller banks may soon have to pull back themselves, Sansosti said.
Some regional banks have slowed down already. Bridge Logistics Properties, industrial development and investment arm of Bridge Investment Group, has historically relied upon regional banks and debt funds for its projects, Eastern Region Managing Director Greg Boler said.
Boler said Bridge is getting construction loan quotes for a future project, but with higher interest rates pushing up borrowing costs, the quotes so far are “all pretty expensive.” It’s forcing Bridge this year to pivot toward acquiring warehouses instead of developing new ones.
“We killed a lot of deals. We did keep one deal that we were bullish on because of this location and the basis from a rental rate increase,” he said. “Nobody is going to be in a rush to catch the falling knife.”
Source: Smaller Banks Are Stepping Into The CRE Lending Void
https://www.creconsult.net/market-trends/smaller-banks-are-stepping-into-the-cre-lending-void/
Introduction
Savvy real estate investors are always looking for ways to increase the returns associated with multifamily investors. This is true whether someone has owned the property for decades. Or whether they are looking to acquire an asset and need to justify the purchase price. There are many value-add strategies investors can consider. However, those looking simply to boost net operating income can begin by making modest improvements and operational adjustments that instantly add value to the property.
This article looks at ten ways to improve NOI at multifamily apartment buildings.
Net operating income, generally referred to as NOI among real estate investors, is the total income a property owner collects after operating expenses and other costs have been deducted.
Note, however, that debt service is not included as part of the NOI calculation. Neither are capital expenditures, depreciation, and amortization. NOI is focused exclusively on gross operating income less operating expenses.
NOI is especially important to multifamily investors as they compare potential investment opportunities. One of the primary ways investors evaluate properties is by looking at their going-in cap rates. The higher the cap rate, the more profitable property is said to be. One of the key inputs to the cap rate calculation is NOI. Typically, the higher the NOI, the higher the property value on a cap rate basis.
There are several implications for this. For example, an investor looking at a property with a low cap rate may want to consider whether certain improvements could be made to increase the property’s NOI, either in the short term or long term. This creates a delta between a going-in cap rate and an exit cap rate. However, investors will want to determine how much those improvements will cost. As well as if those costs are justified based on the resulting cap rate (i.e., property value).
Net operating income (NOI) among real estate investors refers to
the total income a property owner collects after
operating expenses, and other costs have been deducted.
Moreover, an existing owner can utilize various strategies to improve the NOI at their multifamily buildings. Doing so should generate additional cash flow that can be distributed to investors during the hold period. It will also increase the property’s value, benefiting all parties upon refinancing or selling the asset.
1. Increase Base Rents
The obvious way to increase the NOI at a multifamily property is by increasing the rent charged for each individual unit. This strategy is typically deployed upon lease renewal or unit turnover.
Landlords will want to be sure that the rent increases are at least keeping pace with the inflation rate. Generally, this is measured by an increase in the Consumer Price Index (CPI). In recent years, the CPI only increased by 2-3 percent per year. More recently, inflation has skyrocketed to upwards of 6.5 percent yearly. Increasing rents by this amount may seem unpalatable to some. To combat tenants’ sticker shock upon lease renewal. The landlords should consider adding language to their lease agreements that stipulate that lease renewal rates will be indexed, at a minimum, to any increases in the CPI.
In an inflationary environment, the costs associated with owning and operating a multifamily property will increase (think utilities, property maintenance/management, etc.), which is why rent increases are important to not only cover these costs but also to increase NOI.
This is also why it is so important for prospective buyers and/or existing owners to have a strong grasp of the local market. Longtime owners often have a low-cost basis and, therefore, are not pressured to increase rents significantly. A prospective investor will want to look at the current rent roll and assess whether the rents are on par with market rates, and if not, should consider rent increases upon taking ownership of the property. Bringing them to market rate will automatically improve NOI.
2. Evaluate Fees
Another way to boost NOI at multifamily properties is by increasing revenue associated with fees charged back to the tenants. This includes application fees, credit reporting, and late fees.
Many tenants also have pets, so landlords should consider charging pet fees every month. This strategy is decidedly different from simply charging pet owners an additional security deposit. Fees can be pocketed by the owner, whereas security deposits must be held in escrow and returned to the renter if there is no obvious damage caused by the said pet(s) at the end of the lease term. Landlords who do not currently accept pets today should consider whether allowing pets for an additional fee would make sense given their property type, layout, demographics, and insurance policies.
3. Consider Utility Income
Utility income can be a tremendous source of income for multifamily apartment owners. If an owner has not done so, they should consider individually metering each unit. Doing so will allow the owner to shift the cost of utilities onto renters. Renters would be expected to put each utility bill in their own name and then will pay those bills accordingly. This may require landlords to adjust the base rent downwards initially, but the landlord will immediately start saving on utility costs.
An alternative approach is to implement what’s often referred to as a “RUBS” system – or “ratio utility billing system.” Rather than submetering each unit, the landlord instead bills tenants for their pro-rata share of the building’s utilities based on several factors such as unit square footage, number of people living in the unit, or some combination thereof. Utilities billed back to tenants include heat, hot water, gas, electricity, and trash removal.
Let’s say, for example, that a RUBS system allows the owner of a 20-unit apartment building to earn an additional $30 per month per unit. This generates $600 per month or an additional $7,200 per year. That additional revenue will surely boost NOI if costs remain the same.
A RUBS strategy is arguably more affordable for owners since they do not have to incur the costs of metering each unit. Moreover, it can increase NOI at an apartment building without increasing rent. One drawback, however, is that tenants must agree to the RUBS billing system as part of their lease agreement, which means it can generally only be implemented upon unit turnover when new tenants sign a new lease agreement. Existing tenants would need to agree via a lease addendum, which can be a hurdle for some landlords to overcome.
RUBS billing is not allowed in every city and town. Some municipalities have banned the practice, which is considered unfair to tenants. Landlords will want to check local regulations before proceeding with this approach.
4. Add On-Site Storage
On-site storage, usually in the form of storage closets with locks. It can be another great source of income for multifamily owners. Storage solutions can be added to any underutilized space, such as basements and/or desolate common areas. Owners can also explore adding an outbuilding – essentially, a new auxiliary structure designed specifically for tenant storage. Individual lockers can then be rented out to tenants for an additional monthly fee.
In some cases, landlords run the storage area like a separate business. Tenants may be given first priority to rent the storage lockers, perhaps at a discount. Then the remaining storage lockers can be rented to the general public. This strategy is most applicable when the storage area is located in an auxiliary building vs. within the apartment complex.
5. Increase Laundry Income
This may seem like a no-brainer and a concept most landlords will have already explored rather than providing free in-unit laundry facilities. Consider adding coin-operated laundry in a common area made available for all tenants’ use. In situations where in-unit laundry can be accommodated, landlords should charge a premium for those units.
Another strategy is to “rent” the washing machine and dryer made available to units when provided in-unit for a small fee (e.g., $10 per month). Tenants can defer these costs if they decide to supply their own washer and dryer.
(Note: if a tenant supplies their units, be sure to require professional installation to prevent any leaks, etc., that may occur if not installed properly.)
6. Maximize Parking Revenue
Most multifamily properties have limited parking, particularly those in dense urban areas. Multifamily owners will want to charge a premium for that parking, especially if parking is underground or covered. In some markets, a single parking space can rent for $100 or more per month. Tenants appreciate this flexibility: those with no vehicle are not paying a premium for parking they will not use, and those with more than one vehicle can rent more than one space if they so choose.
At a 50-unit apartment complex, spaces that rent for $100 per month will generate an additional $5,000 per month in rent – not an insignificant number, especially for owners looking to increase NOI at their rental properties.
An increasingly popular way of maximizing parking revenue is by adding EV charging stations. With gas prices on the rise, more people will be looking to purchase hybrid and all-electric vehicles. Adding an EV charging station is a forward-looking strategy for those looking to appeal to renters with electric vehicles.
7. Convert Select Units to Short-Term Rentals
A more management-intensive way of generating additional NOI at rental properties is converting one or two units into short-term rentals. Short-term rentals tend to generate more income, on a per-night basis, than traditional rentals.
However, there are some special considerations to keep in mind with this approach. First, these units must be fully furnished for short-term rentals. The landlord will also incur the costs of all utilities. Someone will need to be available to turn the unit over between stays, whether an on-site property manager or a third-party cleaning service. These costs should be factored in when considering how much additional revenue can be made using a short-term rental approach. Finally, be sure the local municipality allows short-term rentals. Some cities and towns have restrictions on properties listed on Airbnb, VRBO, and other short-term rental platforms.
In addition to the income-generating strategies noted above, there are also several cost-saving strategies that multifamily landlords should consider:
8. Reduce Turnover Time
“Turnover time” refers to how long a unit sits vacant between tenants. Turnover time generally depends on how quickly an owner can make a unit “rent ready” and ready to show to prospective tenants, as well as how quickly the landlord can sign new leases for those apartments.
Reduce Turnover Time refers to how long a
the unit sits vacant between tenants.
Landlords should conduct market research to understand how long it takes to rent-ready units in their market. Do units tend to turn over quickly, or should landlords expect some downtime between leases? What factors impact a unit’s ability to be re-leased? In some markets, particularly in college towns. Units turn over on August 31st, and tenants move in the following day, September 1st. In markets like this, landlords benefit from a little downtime. However, they must be able to move quickly to make any necessary repairs and clean units before the new tenants move in.
Multifamily owners should examine their processes for making units rent-ready. The less time a unit sits vacant, the lower the costs will be associated with that vacancy.
9. Reduce the Number of Turnovers
Related to the point above, multifamily owners should look for ways to limit the total number of turnovers they experience each year. This can be accomplished by carefully screening tenants (higher-quality tenants tend to stay longer) and offering multi-year leases instead of the standard one-year or month-to-month lease. Tenant turnover costs are one of the most frequently overlooked costs that landlords will incur. Therefore, reducing the frequency of turnovers is an excellent way of improving NOI at rental properties.
10. Rebid Vendor Contracts
A final way to increase NOI at multifamily properties is by rebidding vendor contracts. Many owners purchase apartment buildings with existing contracts in place. They assume the prior owner negotiated the best rate and kept the existing vendors in place for simplicity's sake. However, it’s worth revisiting those contracts and potentially rebidding the work from time to time. A modest 10% reduction in trash removal, landscaping, insurance premiums, and other costs can add up to thousands of dollars over the course of the year. It is important to ensure you get the best rates and terms on all contracts if you want to maximize NOI.
Finding new sources of income is incredibly important for landlords looking to increase NOI at their apartment buildings. There are endless ways to do so; the biggest limitation is an owner’s creativity. Identifying cost savings can be more difficult, as some costs are fixed (e.g., property taxes) or otherwise have little variability.
Net operating income is especially important to
multifamily investors as they
compare potential investment opportunities.
Given the importance of NOI to a property’s value, it benefits every multifamily owner or investor to consider the many ways of increasing NOI at apartment buildings. In the short term, this will generate additional cash flow that can be passed on to investors. In the longer term, this will enhance a property’s value. Essentially making it more attractive to potential buyers when it comes time to dispose of the asset.
Are you interested in increasing the value of your multifamily property? Contact us today to learn more about the strategies that boost NOI and increase the resale value of your property.
Source: 10 Ways to Improve NOI at Multifamily Apartment Buildings
https://www.creconsult.net/market-trends/10-ways-to-improve-noi-at-multifamily-apartment-buildings/
NOI – the unicorn we’re all chasing.
As you may know, increasing the Net Operating Income (NOI) of any commercial property will not only increase your cash flow but also increase the value of your property since the value is determined primarily through NOI and Capitalization Rates (quick refresher on how to calculate the value of the commercial property).
We obviously have no direct control over cap rates, so we’re left chasing NOI.
There are literally countless different ways to increase the income on your multifamily property, and it would be impossible to list everything. But I’ve put together a list of 29 ways to increase Net Operating Income (NOI), from the super simple to the creative.
There are three basic categories where you can squeeze some extra income: maximizing current revenue streams, decreasing costs, and finding new sources of revenue.
As you can see, there are dozens of easy ways to increase your NOI. It may not be realistic for you to implement every single line item in this list, but there is no reason why you shouldn’t pick a few and put them into place immediately.
The best thing you should do is estimate all the different revenue streams and different ways to decrease expenses and punch them into your deal calculator.
Then you’ll get a good handle on how the changes affect your overall NOI.
Source: How to Increase the Net Operating Income (NOI) of a Multifamily Property
https://www.creconsult.net/market-trends/how-to-increase-the-net-operating-income-noi-of-a-multifamily-property/
When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.
The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’
Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?
So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.
There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.
However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?
As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.
Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?
https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/
