REIA WA Meeting Notes

I attended the Real Estate Investors Association of Washington meeting last night.  These are my notes from the meeting.

Two gentlemen from Marcus & Millichap came and presented information about the multifamily and commercial real estate markets.  Greg Wendelken, VP & Regional Manager, discussed the 2008 Ecomonic outlook and Corr Pearce, in the Capital division, talked about the financial elements of investing in these sectors.

Both of their powerpoint slides will be made available here.

Notes on Greg’s presentation:

• Important to know whether we are in a ‘creation of wealth’ or ‘preserving wealth’ phase.
• Condo conversion is effictively ‘dead’ in most areas in the Puget Sound area.  There still are some conversions occurring, but in most places, no new ones are in work.  Condo converters were often paying a 20-30% premium to buy an apartment building, so the reduction in condo conversions will bring down the sales prices of apartment buildings.
• Average home payments in the Tri-city area (King, Snohomish, Pierce) in 2007 were $2150 / month @ 6.75% interest rate.  Condo payments were $1584 / month.  Apartment rents were $1200 / month.  This gap creates a barrier that most renters will not overcome – keeping vacancies low in the region.
• Condo construction is still bullish in King county, but has slowed considerably in the other two counties
• Underwriting is now commonly using 3% vacancy rates in the Seattle and Bellevue, still using 5% elsewhere.
• Likely to be 3-4% rent increases in 2008 and 2009
• King County is seeing approximately $140,000 per unit values for apartment buildings, Pierce county is $80,000 and Snohomish is around $100,000
• Recommends we review the assessed value of any apartment buildings – the assessor may be using comps from a year ago which will still show the condo conversion premium.  If comps are restricted to near months, the valuation may come down which will save on the tax bill.
• Recommends we also review the insurance on the building – if the value is lower, then the premium will also be lower.
• Utility costs should be in the $55-70 / unit range.  If higher, check for the reason and save money!
• Cap rates for apartments in King County are approximately 5, Snohomish is 5.5 and Pierce is 6.  He thinks that these may rise a bit, but will not ever get back to the 9 – 10 range that we had in the past.
• Return on equity (after tax) is in the range of 2.5 – 4.5% in the tri-county area.  This number is based on the 600+ buildings that they analyzed in the office last year.

Notes on Corr’s presentation:

• Vulcan estimates that 135,000 people will move to this area next year.  Vulcan has put a lot of money in the South Lake Union area and has done a lot of research to mitigate the risk of this investment.
• In 2001, approximately 11% of the mortgages issued were in the Alt-A/subprime market.  By 2006, this had grown to 34% – which is certainly unsustainable.
• Urged us to
  1. Create a strategic plan – we need to know our end game vision.  What do we want to be when we grow up?  We need to run this as a business.
  2. Ask questions – maximize profits intelligently.
     • Raise the rents as long as the vacancy created does not reduce the overall revenues.  When the rent is raised, renters will complain, but few will move.  If the rent revenues gained by the rental increase are not more than the new vacancy losses, then the rental increase was not worth it.
     • Inteligently reduce expenses.  Keep the value to the tenant.  For example, if you renegotiate the landscaping services and the curb appeal (from the tenant’s perspective) falls too low, then it may affect your vacancy or ability to raise rents.
     • Makes sure that you pay yourself for your time and energies.
     • Generally expect an overhead of $3800 – 4100 / unit / year
  3. Take action – does the returns earned match the strategic vision?  What needs to be done to more likely align the return to vision.

Contractor Law

After the presentation, the floor was opened to questions.  There was a discussion about the change in the law that defines ‘Contractor’.  Shirley indicated that they had made some progress in starting the push to change the law, but that real announcements would come later.  I indicated that I would mention the law again here in this blog (see Law PDF and Contractor Law posts).