Login form
Sorry, User can NOT register!

Blog

It’s A Buyers’ Market and A Sellers’ Market

Today’s multifamily market offers an interesting dichotomy, with meaningful opportunity for both buyers and sellers. Significant overhang from the economic downturn continues to exist for buyers with cash and financing. While strong and growing industry fundamentals provide sellers with well-positioned, cash flowing properties a favorable position.

Buyer Benefit:
The economic downturn created a powerful position for buyers with liquidity and the ability to add value. Today, many properties are still floating in the market and have not received the adequate reinvestment capital needed to change their competitive position. This includes properties in need of renovation, or overleveraged properties that have broken capital structures. Many existing multifamily properties can be renovated at an all-in basis below replacement cost, as it still costs more to build than to buy and renovate. Renovating the property and reintroducing it to the market, usually with new management and a reinvigorated operational team, when fundamentals are strong will accelerate the ramp-up, thereby creating value. Many successful investors have capitalized on this strategy purchasing neglected multifamily properties, renovating them and raising the rents to align the property with the market. While lending markets continue to gain strength, it still remains difficult to secure financing for struggling properties, opening a door for investors and owners with available funds and resources to acquire properties and reposition them. The market continues to provide ample investment opportunity due to the numerous owners who are unable to reinvest in their properties.

Seller Benefit:Cash-Flowing Properties:
Multifamily fundamentals continue to improve with demand at an all time high. Meanwhile, new supply remains constrained, demand is outpacing supply. This leaves well-positioned, cash flowing properties in an attractive situation. Significant capital is searching for cash flow to replace anemic fixed-income returns including real estate funds, private and public REIT’s and high-net-worth buyers. The transaction and lending market is improving, but investors are especially yield sensitive, resulting in capital chasing cash flow properties, good multifamily properties that are well-positioned and well-located. Interest rates are low with favorable terms for these deals, with relativity low capitalization rates, making timing prime for sellers before interest rates begin to rise, taking capitalization rates with them.

Final Thought
It’s true that now is a favorable time to be in the market as both a buyer and seller, but the circumstances are very different for each. If you are in either of these camps, you are in a strong position. A buyer with liquidity and the ability to add value or a seller with a well-positioned cash flowing property. We have numerous Buyers some with all cash, and some who are very qualified but will look for financing, that are interested in purchasing your multifamily.

Read more...

26th Annual Hunter Hotel Conference

I recently had the pleasure of attending the 26th Annual Hunter Hotel Conference in Atlanta, Georgia where the theme was “The Time Is Now”. It is a great time to “refinance, buy, develop, sell and renovate”. There were 48 Lenders at this conference which confirms Money Is Back. Of the more than 1,000 attendees 57% of them stated they intend to develop a hotel in 2014.

Leadership and Experience
Private equity firms are buying existing hotels at a 9.0 cap rate. Apple REIT is still actively buying institutional grade hotels. The Economy segment has had the biggest percentage increase over the last 3 years, and it also had the largest decrease during the Great Recession. Restaurant and meeting room revenues are still down by 30% compared to 2007. Group demand is still off. Technology will have the biggest overall impact on the hospitality industry.

The Future Is Your Decision – 2014 U.S. Economy and The Lodging Industry
There has been a significant recession about every 7 years for the last 30 years. The economy is fluid it is always changing. Consumers and business spending has been muted for the last 4 years, this is changing. The economy is starting to rise at a faster pace. Cost of money will slowly rise. Inflation is under control. Overall we are in a growth mode. There will be steady but slow growth through 2017. Don’t expect hyperinflation. Consumer expectations are the highest in 6 years. Four percent retail sales growth, consumers are back they are spending money. Interest rates are not going to go up in 2014 and only slightly in 2015. Interest rates are not going to soar they are going to slowly rise. We now produce 50% of our energy needs. Our dependence on foreign oil has decreased by 50% over the last 5 years. We will have more recessions but probably not another Great Recession. United States has 21.0% of the World GDP. There are headwinds in the economy with health care being the strongest headwind. We see the world not as it is but as we see it.

Presidents Panel
We are in the 3rd to 4th inning of this recovery. Cycles are getting shorter and more volatile. Instead of the government buying paper the government should be investing in the Country’s Infrastructure, roads, highways, bridges and education. The unemployment rate for college educated people is less than 4%. The Penn State University Index of U.S. Hotels Values projects a 6.9% increase in hotel values in 2014. Hotel Values will probably peak in 2016-2017. Buyers and Investors are more knowledgeable today. Lenders are loaning 65 to 80% of the value of the property.

Supply Growth
Phase
In Construction 2014: 98 2013: 74 % Change: 32%
Final Planning 2014: 133 2013: 95 % Change: 40%
Planning 2014: 127 2013: 150 % Change: -16%
Active Pipeline 2014: 358 2013: 280 % Change: 12%

Total US Pipeline, by Phase, 000’s Rooms, February 2014 and 2013, STR

Historically 2% Supply Growth we have not had this amount of growth since 2009. Average life of a PIP is 7 years. Product is 2/3 of guest satisfaction.

U.S. Hotel Forecast
2014
Supply STR: 1.2% PKF: 1.2% PwC: 1.0%
Demand STR: 2.3% PKF: 3.0% PwC: 2.4%
Occupancy STR: 1.1% PKF: 1.8% PwC: 1.4%
ADR STR: 4.2% PKF: 4.8% PwC: 4.5%
Rev Par STR: 5.3% PKF: 6.6% PwC: 6.0%

2015
Supply STR: 1.6% PKF: 1.1%
Demand STR: 2.1% PKF: 3.3%
Occupancy STR: .5% PKF: 1.8%
ADR STR: 4.2% PKF: 5.6%
Rev Par STR: 4.7% PKF: 7.5%

Whether you are buying or building you need to have an exit strategy.

Hotel Values In A Rising Market
New supply, as soon as Brand Approval has been secured it has an adverse effect on the market even before ground is broken. Cap rates have increased as a result of increased net operating income. Not a significant increase in interest rates over the next few years, but a gradual increase. It is a good time to be doing something. It still makes sense to buy versus build, but it is getting very close. We are in the sixth inning of a double header game, there will be a lull and then it will pick up. New supply has the most adverse effect on the value of a hotel even more so than a PIP. The slower growth the economy is experiencing should cause this recovery to last longer. We are in a sweet spot. The uncertainty with the government is one of the strongest headwinds our industry is facing. Demand is up, occupancy levels are good, it is time to move the rate.

Buying And Selling Hotels In An Active Market
Cost of construction has risen by 20% to 30% over the last 2 years. Lack of labor is the problem, many of the subcontractors went out of business during the Great Recession. Their workers found a different industry. It will take about a year to gain back the subcontractors, and then prices will decrease by about 10%. Cap Rates going forward 8.5% to 9.50%. Cap Rates of 7% for the Investment Grade Quality Hotels for REIT’s.

Hotel Development Is Back
Construction costs are back to the 2007-2008 levels. $5.00 to $10.00/s.f. cheaper to build with wood versus block & plank. Wood construction has come a long way in controlling noise. There are over 2 Million decisions made when building a hotel.

Hotel Financing The Time Is Now – Finance Friday
The CMBS markets are back $45 Billion in 2012, $85 Billion in 2013 and over $100 Billion expected in 2014. Interest rates have risen. Slow to moderate growth has caused the abnormally low interest rates, too many headwinds holding the economy down. The time is now to lock in long term financing. LIBOR and Rev Par move in a parallel path. Incredible amount of Capital setting on the sidelines earning zero. The temptation is to overpay in order to put this money to work. Lots of liquidity in the debt market. Every month the Banks are required to submit a report to the Federal Reserve on every commercial loan of $1.0M or more part of Dodd Frank Regulatory Control. Lot of reporting requirements. The Industry will remain healthy as long as demand exceeds supply growth. Remarkably slow growth.

Creative Financing Techniques
Overabundance of Capital a few more years of growth. 4.5% to 5.0% interest rates on non recourse loans with 30 year amortization. Lot of capital debt has come to the market within the last year. Underwriting is aggressive but supportive. Lot of pent up demand. Loan to deposit ratios are extremely low. Debt service coverage ratio for Bank Loans is 1.25. According to keynote speaker Chris Nassetta, President and CEO of Hilton Worldwide we are in a very favorable economic condition for the lodging industry. He calls it “goldilocks”, not too hot, not too cold. “This is as good as I’ve seen it. I’ve been through a number of cycles but this is different, it’s a longer cycle. There’s been a lid on demand. The time is now to move rates. Demand is back, occupancy levels are high, its getting better. We should be smarter about it.”

We have lots of Buyers, more Buyers than Sellers. We have all Cash Buyers, Hoteliers, Private Investors and REIT’s all looking to purchase hotels.

Read more...

Hospitality 2013 YTD News

The hospitality industry in 2013 benefited from continued demand growth following the recession. As a result of continued demand growth, national average occupancy rates are projected to close out 2013 up slightly from 2012. Also, Average Daily Rates (ADR) are projected to close out 2013 by exhibiting moderate year-over-year growth, resulting in overall moderate growth in Revenue Per Available Room (Rev Par).

Transaction volumes from 2013 were up slightly over the previous three-year period’s average volumes, however 2013 volumes slightly lagged a 10 year national sales volume average.

National hospitality metrics for 2013 are on pace to continue the industry’s recovery from 2007-2008 peak levels. Average occupancy nationally is projected to end 2013 at 61.9%, a slight increase of 0.8% higher than the 61.4% average occupancy rate in 2012. While average occupancy rates are expected to exhibit only slight growth in 2013, ADR’s are projected to rise significantly (13.7%) through the end of 2013. The combination of slightly positive occupancy growth and moderately strong ADR growth is projected to result in strong overall Rev Par growth of 5.7% in 2013. Projecting out into 2014, operating metric gains are expected to maintain recent momentum but moderate slightly with occupancy growth estimated at 1.29% and ADR growth estimated at 4.6% resulting in overall Rev Par growth projected at 6.0% for 2014.

As exhibited by the chart below our market has higher cap rates in every category as compared to the national average.

Capitalization Rates Comparison

Cincinnati, OH – Full Service = 9.25;  Limited Service = 9.25
Cleveland, OH – Full Service = 9.0;  Limited Service = 8.50
Columbus, OH – Full Service = 8.50;  Limited Service = 9.0
Dayton, OH – Full Service = 9.50;  Limited Service = 10.0
Indianapolis, IN – Full Service = 9.0;  Limited Service = 10.0
National – Full Service = 8.31;  Limited Service = 8.96

We have Hedge Fund Buyers, Private Investors, REIT’s and Traditional Hotel Buyers interested in acquiring additional hotels. Many of our Buyers are “All Cash Buyers”.

Read more...

Multifamily 2013 YTD News

The apartment sector continued to lead the commercial real estate recovery in 2013. Property fundamentals continued to improve while capitalization rates continued to compress. While apartment cap rates are exhibiting historical lows, there are signs that cap rates may be reaching a floor and beginning to reverse course. Overall, the apartment markets’ performance has continued to lead the national real estate recovery.

One interesting trend to note is that Class B occupancy rates are actually higher than Class A peers. Another interesting trend is that the difference between the average Urban and Suburban cap rates compressed slightly in 2013.

Strong property fundamentals as well as the relatively strong availability of financing for multifamily assets has driven a strong demand to acquire multifamily properties.

Currently our market is described as being in the Recovery Stage characterized by decreasing vacancy rates, low new construction, moderate absorption, low to moderate employment growth and negative to low rental rate growth. This is why our market has higher cap rates than the national average as exhibited in the chart below.

Capitalization Rates Comparison
Urban Multifamily – Class A:  National = 5.76;  Our Market = 7.75
Suburban Multifamily – Class A:  National = 5.87;  Our Market = 6.75
Urban Multifamily – Class B:  National = 6.39;  Our Market = 8.0
Suburban Multifamily – Class B:  National = 6.53;  Our Market = 7.50

We have Hedge Fund Buyers, Private Investors, REIT’s and Traditional Multifamily Buyers interested in acquiring additional apartments. Many of our Buyers are “All Cash Buyers”.

Read more...

Self-Storage 2013 YTD News

Self-storage has proved to be a recession-resilient (but not recession-proof) property type considering its performance over the past five years. The most recent recession marks the first time this sector realized a pronounced decrease in operating performance. Although the recession caused performance to stumble, it generated a new demand from homeowners downsizing or losing their homes during the foreclosure crisis. During 2013, the self-storage industry has realized significant growth which has captured the attention of the nation’s investors. The Self Storage Industry exhibited materially positive absorption over the course of the year. This absorption has allowed the industry to decrease the amount of promotional discounts and concessions, further enhancing revenue potential within the sector. Occupancy increases will likely become less pronounced in the coming year and are expected to stabilize somewhat as rental rates continue to be pushed by operators. Revenue growth far outpaced occupancy growth for the industry. The amount of revenue growth should be attributed not only to occupancy growth, but also to operator’s success in increasing rental rates for existing customers and reducing discounts to attract new customers. As the industry’s track record of positive revenue growth extends, more capital has continued to flow into the asset class, making stabilized assets very attractive to investors.

Net operating incomes for the industry grew at a faster rate than revenue, indicating that operators were successful in driving top-line revenue growth while cutting expenses. A large amount of expense cuts came in the form of existing Yellow Page advertising and transitioning to online marketing. It is likely that expenses have been reduced to a point of stabilization. Expenses may actually start to increase in the coming years due to increases in property taxes stemming from higher accessed values. However, revenue increases will outpace any expense increases. Little for sale inventory over the past two years has pressured capitalization rates downward, to near record low levels. Coupled with income growth and lower overall rates, self-storage values are increasing and there is little reason to expect that the self-storage industry will reverse its recent positive momentum in 2014. We have Hedge Fund Buyers, Private Investors, REIT’s and Traditional Self Storage Buyers interested in acquiring additional self-storage space. Many of our Buyers are “All Cash Buyers”.

Read more...

Receivership Sale Ramada Plaza and Conference Center

Terry Baltes of Baltes Commercial Realty, Ltd. located in Dayton, Ohio recently concluded the sale of the Ramada Plaza and Conference Center located at I-71 Exit 116 at 4900 Sinclair Road, Columbus, Ohio. Terry Baltes was the Receiver for Hotel Investments I, LLC. The hotel was purchased by Pacific Rim Development, LLC an Indonesia Company. The 264 room hotel was purchased on December 20, 2013 for $2,640,000.00. The hotel sits on 6.865 acres, it has a restaurant and lounge, a conference center featuring 11 fully equipped meeting rooms, a 12,000 s.f. ballroom, an indoor and outdoor pool, whirlpool, fitness center and a business center. The hotel was originally constructed in 1971. The six story structure is comprised of 182,768 s.f. The new owner plans to make major improvements to the hotel.

Read more...

Self Storage Facility News

Every time we come out of a recession the Class A properties have lead the way in occupancy growth and rent growth, followed by Class B properties and then Class C properties. The last three years have been no different. Class A properties have been aggressively raising rents but are now starting to face some resistance while Class B properties have been showing stable growth. The Class C properties were the hardest hit in the Recent Great Recession as is typical in every recession. We are now at the point in the recovery cycle where Class C properties are filling up.

Class C naturally lags the other classes during the early part of the recovery. During the contraction period there is a domino effect that occurs as Class A properties lower rents to maintain occupancy. When that occurs residents are able to move up in class from a Class B to a Class A property. That occurs all the way down with Class C ultimately being hit the hardest. Class A properties are still raising rents more on an absolute dollar basis, but Class C has the best relative growth.

We have a number of well Qualified Buyers ranging from Private Investors, REIT’s, 1031 Tax Deferred Exchanges and Hedge Funds all anxious to invest in self storage facilities. Some require financing and some are paying all cash. As interest rates increase the gap will widen in seller and buyer expectations. Rates appear to be on the rise and it doesn’t look like we will see financing this cheap for another cycle, if ever. It is easier to cut a deal when financing is cheap. It can’t get much better than it is now so it is better to sell sooner than later.

Read more...

Multi-Family Properties…..

Every time we come out of a recession the Class A properties have lead the way in occupancy growth and rent growth, followed by Class B properties and then Class C properties. The last three years have been no different. Class A properties have been aggressively raising rents but are now starting to face some resistance while Class B properties have been showing stable growth. The Class C properties were the hardest hit in the Recent Great Recession as is typical in every recession. We are now at the point in the recovery cycle where Class C properties are filling up.

Class C naturally lags the other classes during the early part of the recovery. During the contraction period there is a domino effect that occurs as Class A properties lower rents to maintain occupancy. When that occurs residents are able to move up in class from a Class B to a Class A property. That occurs all the way down with Class C ultimately being hit the hardest. Class A properties are still raising rents more on an absolute dollar basis, but Class C has the best relative growth.

We have a number of well Qualified Buyers ranging from Private Investors, REIT’s, 1031 Tax Deferred Exchanges and Hedge Funds all anxious to invest in apartments. Some require financing and some are paying all cash. As interest rates increase the gap will widen in seller and buyer expectations. Rates appear to be on the rise and it doesn’t look like we will see financing this cheap for another cycle, if ever. It is easier to cut a deal when financing is cheap. It can’t get much better than it is now so it is better to sell sooner than later.

Read more...

The number of hotel transactions is up by more than 50% for the first nine months of 2013 over the comparable period last year.

The number of hotel transactions is up by more than 50% for the first nine months of 2013 over the comparable period last year. Sales transaction volume of hotels is nearing the long term annual average. According to Hotel Valuation Services (HVS) hotel values will continue to increase at an average rate of 12% for each of the next three years, this is substantially less than we have experienced the past couple of years, due to climbing out of “the Great Recession”, but still a nice increase in value. Hotel values are now reaching their 2006 peaks. There is an active market for hotels fueled by cheap financing. For existing hotels with cash flow, financing is available as cheap as 4% fixed rate 10 year money for prime assets, and only a little more expensive for non prime assets. Interest rate increases have taken a temporary pause as the result of the current Government Shutdown, but are sure to tick up slightly after Congress reaches a compromise. As interest rates rise values decrease.

Values have increased in part due to record low supply growth these past few years. That is about to end. New hotel developments in the pipeline will increase supply in the next couple of years, creating competition with older product, making it harder to continue Rev Par and profit increases in the future. Some areas already have more than their proportionate share of new development. If there are three or more new hotels coming into your market you should look at selling, as NEW ALWAYS WINS.

The only thing limiting the growth of hotel sales transaction is a lack of quality hotels that are reasonably priced. As interest rates increase the gap will widen in seller and buyer expectations. Rates appear to be on the rise and it doesn’t look like we will see financing this cheap for another cycle, if ever. It is easier to cut a deal when financing is cheap. It can’t get much better than it is now so it is better to sell sooner than later.

Read more...

“Slow and Steady” are the key words

“Slow and steady” these are the words I hear at the investment conferences and franchise shows I have attended recently. Things are certainly much better than the place we were in just four years ago. The lodging recovery is well under way and predictions are, barring any major catastrophes, we have another three to five years of continued steady growth. (See chart below)

2013 Predictions

Occupancy %:    PwC:  62.2    STR:  61.4
Occupancy Increase:    PwC:  .8%    STR:  3%
ADR:    PwC:  105.45    STR:  111.01
ADR Growth:    PwC:  4.4%    STR:  4.6%
Rev Par:    PwC:  5     STR:  68.17
Rev Par Growth:    PwC:  5.9%    STR:  4.9%
Demand:    PwC:  1.8%    STR:  2.0%
Supply Growth:    PwC:  .8%    STR:  1.4%

For Sellers it is a “Perfect Storm”. Historically low interest rates, lack of product to buy, and Buyers with lots of cash. Financing has loosened some, allowing good economic deals to be financed even new construction with experienced hoteliers. The consistent requirement from all lenders is that they want the Borrower to have hotel management experience. A hard lesson learned by the Lenders as a result of the Great Recession.

The housing market has stabilized giving consumers confidence once again. Interest rates have ticked up to 30 to 50 basis points over the last 30 days as a result of the economy gaining strength and the impending start of the winding down of stimulus from the Federal Reserve. Even with the slight uptick in interest rates that still remain historically low.

Read more...