Patrick O’Connor a recognized expert in Real Estate Appraisal and commercial property advisor sees a U shaped recovery for Real Estate. He sees no meaningful recovery for the next year or two as we remain at the bottom of the U.
FINANCE
The FDIC is encouraging banks to work with borrowers. The FDIC can not afford to close all the insolvent banks. Banks will work with borrowers who are attempting to solve their problems. REO sales will come from Financial Conduits and mortgage backed securities lenders selling both loans and foreclosed assets. Bank foreclosures will be much farther off. Commercial Real Estate financing has increased but not from banks.
NEW HOMES
- There will be limited new home construction.
- Lenders refrain from loaning money for builders to build spec homes.
APARTMENTS
Houston is the epicenter of the US apartment community. There is rarely more than 90% occupancy since 1986. We are seeing apartment absorption in Houston. From 2001 to 2009 leaving out 2005 which was a hurricane year. There were 12,000 units absorbed or about 1,500 per year.
The occupancy rates are:
Class A 92%
Class B 87%
Class C 81%
Apartment owners have to give free rent to attract tenants. Owners of low income apartments are lucky to collect 75% of the rent due them. The operating status is bad for owners who have Class C apartments. When you add low collections and turnover, combined with having to redo the apartment to rent it. There is no money left for the owner after paying for the carpet, paint, and appliances.
The best news for owners is the lack of new construction. There were 17,000 units built in 2008 and 2009, with 11,00 units being built in 2010. That makes an extra 30,000 units for a city growing by 50,000 people a year.
Apartments are easier to finance than commercial buildings. There is a two tier market in regard to financing.
- GSE – Government Sponsored Entities
- Lenders
- Banks
- Life Insurance Companies
- Financial Conduits
There is a two tier marketing in pricing of Apartment buildings. There is a disconnect between buyers and sellers. A high dollar project in the prestigious Kirby area sold with a Cap Rate of only 4. There were 15 bidders who said banks did not pay anything, and they needed a safe place to put their money. On the other hand apartments in the low income Gulfton area are selling for prices between $5,000 to $10,000. We thought that there would never be another sale in single digits for an apartment in Houston. In summary the high dollar rental properties are well occupied and selling to investors. While distress properties are held mostly by banks and financial conduits. Banks aren’t selling these properties but the conduits are. There should be an additional 2% new apartment’s built in the next year.
Banks have been encouraged by the FED to adhere to the 300% rule. Commercial Real Estate lending is limited to 300% of a bank’s risk capital. Banks are encouraging their Real Estate investors to repay their loans rather than make more investments. Financial Conduits want their investment to be between $10,000,000 to $20,000,000 with the ideal loan being $100,000,000.
OFFICE CONSTRUCTION
Construction is down 80% in Houston for new office space. The only construction occurring is for build to suit. We have seen the economy decline. It looks like it is starting to recover, but the number of new leases has not increased sharply.
RETAIL
The retail market is healthy if you eliminate the trash.
What is retail? It is not a strip center located on Baker Cypress or another major street. In a lot of places these real estate investments with 10 to 20% occupancy will never become retail centers. They will eventually become a church, warehouse space, or bingo parlor. Well located Retail stores are not doing as well now as they did 3 years ago.
INDUSTRIAL
Wal-Mart built a major warehouse on the northeast side of Houston. The occupancy rate for this area is 74% for warehouse, and 80% of office warehouse. This area is not going to recover anytime soon. Baytown is in trouble. The rest of Houston will be okay.
Mr. O’Connor believes that we need the government to do two things: set the rules and get out of the way. Due to the level of uncertainty, businesses have become unwilling to make decisions and risk capital.
Call Bill Edge at 713-240-2949 to see Houston homes in 24 hours or less.
Source: TEDA meeting, January 20, 2011 featuring Pat O’Connor, Tierra Grande January 2011