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Friday, June 22, 2007

Hot investment for this year. Apartment buildings.

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Apartment trends in your area

posted by Bob at Friday, June 22, 2007

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Blogger Bob said...

The year's hot investment? Apartment buildings
Rents are up, vacancies down - that's good news for Twin Cities investors
BY JENNIFER BJORHUS
Pioneer Press
Article Last Updated: 06/22/2007 10:31:44 AM CDT


Swenson and Terry McNellis are co-investors buying Centennial Gardens in Roseville. They're getting some help from the city of Roseville, which agreed to issue $12.5 million in tax-exempt revenue bonds to raise money to rehab the complex and keep some of the units low-income. (JOHN DOMAN, Pioneer Press)Flat-roofed and 50 years old, Centennial Gardens in Roseville is a sturdy 190-unit apartment building in need of a facelift - not a show stopper. Nonetheless, the brick complex attracted 12 written offers when it hit the market in April and is scheduled to close in a few weeks.

Unlike houses and condos languishing on the market around the Twin Cities, apartment buildings are selling like Bomb Pops in July.

Investors, previously emboldened by low interest rates, chased them during the condo conversion craze. Although the recent surge in interest rates could cool things, they're chasing them again for somewhat more sober reasons: rent.

Apartment vacancies are down, and rents are rising. That's bad news for renters, of course, but it's music to the ears of owners, investors and their brokers.

"It's hot. It's unquestionably hot," said Abe Appert, the Fransen Appert Real Estate broker handling Centennial Gardens, of the market.

The median sale price for all classes of apartment buildings in the Twin Cities was $63,000 per unit in the 12 months ended March 31, up 18 percent from the previous year, according to research from real estate investment company Marcus & Millichap's Bloomington office.

Appert calculates total Twin Cities apartment sales at $821.5 million last year, with an average sale price of nearly $92,000 a unit. About 70 of those deals were Class B and C - smaller, older buildings under 200 units - and with deal flows high, Appert and
brokers expect to exceed that this year.
Appert's price average is skewed by the record number of Class A buildings unloaded last year as national real estate investment trusts sold off Twin Cities holdings and headed to the coasts for markets with faster growth. Class A buildings are newer buildings with at least 200 units.

Still, prices are high across the board, everyone agrees. Class B and C buildings are selling in the low $70,000s and approaching $60,000 per unit respectively. That's

up 5 percent to 10 percent over last year, Appert said.
There's plenty of pension fund money chasing Class A apartments in the Twin Cities, brokers report, but little available for sale this year. An unnamed pension fund is slated to close today on an estimated $37 million purchase of Parkway Apartments, a 375-unit apartment building in Eden Prairie.

Centennial Gardens is more typical - local investors buying Class B and C properties.

Neither Appert nor his two buyers will disclose Centennial Gardens' final price. It was half of the complex, or 95 units, that was originally listed in April at $5.9 million, or about $62,000 a unit, according to the prospectus. That's what attracted the dozen bids.

The buyers are commercial

Developer Mike Swenson checks out an apartment at Centennial Gardens, where he plans to install new kitchens and carpet, update the pool, add a second pool and expand the exercise room. Rents, he said, will increase moderately. (JOHN DOMAN, Pioneer Press)developer Mike Swenson of St. Paul-based Michael Development and Terry McNellis, a retired managing director at Piper Jaffray. Swenson said he and McNellis looked at the other half of Centennial Gardens and told Appert: "Would it help us get the deal done if we offered to buy both of them?"
It did.

They had some help from the city of Roseville. It just agreed to issue $12.5 million in tax-exempt revenue bonds to raise money to rehab the complex and keep some of the units low-income. The bond issue is a typical financing mechanism called conduit financing, and the city isn't on the hook for the bonds in any way, Roseville's finance director said in a recent public hearing.

Swenson said they plan to install new kitchens and carpet, update the pool, add a second pool, expand the exercise room and add bay windows. Rents will increase moderately, he said.

"It's good solid middle-class housing," said Swenson, adding that he's looking at two other properties, too.

Swenson's basic bet is that vacancies will remain low and rents will keep rising. Average rent across the seven-county metro area in March was $876, 2.4 percent more than a year earlier, according to GVA Marquette Advisors. Average vacancies dropped 1.1 percentage points to 4.4 percent.

But those are averages, and trends are spotty. Rents jumped in Chanhassen and downtown St. Paul, for instance; they dropped in places such as Edina, White Bear Lake and Lilydale.

Rising rents have some tenants

sounding the alarm. Mike Vraa, managing attorney at HOME Line, a nonprofit tenants' advocacy group in Minneapolis with a renters hot line, reports an uptick in calls about rent increases. There is no legal cap on rent increases in the state, he said, and complaints of rents jumping as much as $200 a month aren't that unusual.
Rental pros such as Swenson expect rents to continue rising, given constraints on new development, a growing population, rising foreclosures turning homeowners back into renters, tightening mortgage lending standards and rising interest rates.

The key issue, investors say, is whether buyers can raise rents fast enough to offset rising interest rates, which increase their borrowing costs. The yield, or interest rate, on the benchmark 10-year Treasury note was nearly 5.1 percent Wednesday, up from about 4.8 a month ago.

The spread lenders stick on top of the Treasury rate, too, is increasing as lenders adjust for greater risk following problems in the subprime mortgage market. It's early, lenders say, but that could hamper deals and lower prices as investors find they just can't pay as much.

"It's kind of a double whammy," said Pat Minea, managing director of NorthMarq Capital in Bloomington. "That might be the thing that slows this thing down."

Other gray clouds loom.

For investors considering building in core city markets, there's continued concern about the impact of the shadow rental market from unsold condos.

"With this kind of glut of condos that we've had, the real question mark is how many of those that aren't selling are going to end up back in the rental pool?" asked Brian Pergament, president of Pergola Management in St. Paul.

Pergament was still bullish enough, however, to bid on a 15-unit building for sale on St. Paul's Grand Avenue.

There also is concern about new apartment complexes starting down the development pipeline.

Only about 720 new apartment units are slated to open this year in the Twin Cities, according to Marcus & Millichap. But more are on the way. Marcus & Millichap counts 16 new projects, seven of them in Minneapolis, being planned, totaling 1,649 more apartments.

That's still low, said Solomon Poretsky, Marcus & Millichap's regional manager in Bloomington, given that the area is expected to add roughly 22,000 net new jobs this year. As Poretsky sees it, even if job growth gets cut in half, it's OK.

"We don't see it slowing down in this market," he said.

Jennifer Bjorhus can be reached at jbjorhus@pioneerpress.com or 651-228-2146.

Swenson checks out an apartment at Centennial Gardens, where he plans to install new kitchens and carpet, update the current pool and add a second, and expand the exercise room. Rents will increase moderately, he said.

10:55 AM  

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