Not the Usual Pattern

It's not just the weather that's unusual these days. The state of the real estate market is abnormal as well. Generally speaking, real estate leads into a recession and out of a recession, with commercial real estate following residential trends nine months to a year later.

This time, we did lead into the recession, with the peak of prices and demand coming in about 2005, and falling every year since then. The big dip in the financial markets didn't happen for another three years, and, while the banks look as though they've come roaring out of the doldrums, real estate has not recovered. In fact, many economists say that only real estate has not begun to recover.

Why was this cycle different? For one thing, it was in many ways the perfect storm. One thing after another conspired to keep real estate from improving. More importantly, the one thing the government did do--the homebuyer tax credit--didn't work enough, and sent things crashing back down. Think of a ball that rolls uphill, but not quite to the top, and the speed with which it then comes back down, and replace that image with real estate. The most important factor, in my opinion, is that the government did help everybody else with actual cash--the banks, the insurance companies, and the automakers--leaving us essentially to fend for ourselves. As a result, we suffered even more than we otherwise would have, since the pain was not spread evenly.

If I sound as though I think that it was all a little unfair, that's true. And I'm more than a little tired of this market, as are all of my coworkers and industry compatriots. Instead of leading the country out of recession, we're still lagging. It looks as though we're in for another year of glacially-paced improvement, and maybe a couple of more years of slow progress before we really see good, or at least normal, times. The spring buying season will tell us a lot more, and, this time, I hope I'm wrong about the pace of recovery!

Senior Housing Presents Good Opportunties in 2011 and Beyond

For investors who like commercial real estate, but have no experience in or exposure to senior housing, now may be the time to investigate. Mel Gamzon, an industry veteran and a board member of The American Seniors Housing Association, recently shared his thoughts in an article on Commercial Property Executive. It's not news to us, but his article is a well-written, succinct summary of the market.

He shares several key factors that support why senior housing is and should continue to be a good investment.

• Occupancy levels push 90%+
• There is a relatively low industry loan default rate
• Historically controlled development
• Strong trending demographics

We would also add there are typically strong operating margins, at least on the assisted living side, which can push 40% (before rent charges). As Mr. Gamzon points out at the end of his article, there were more than $6 billion worth of non-skilled nursing facility transactions either announced or closed in the second half of 2010.

This is important for two reasons. First, there is a significant amount of focus, and consequently capital, on senior housing. Second, independent and assisted living continue to be the investment of choice, not necessarily skilled nursing.

We have seen both of these trends. There are well capitalized investors with whom we deal, such as REITs, equity funds, foreign investors and high-net worth individuals, that have shown a strong desire for senior housing and are primarily interested in non-skilled nursing. The exception to skilled nursing is when there is a continuum of care model, either as a full CCRC (rental, not buy-in) or with just assisted and skilled. That's not to say there is no interest in skilled nursing, but being significantly more reliant on Medicaid/Medicare creates a different investment model that is not as inviting as assisted or independent living.  

Because new development shut down with the rest of the real estate market, there is a deep need for new facilities to start being built. Construction financing remains very hard to obtain and the traditional GSE capital sources for senior housing (HUD, Fannie, Freddie) present so many challenges. This has created a need for alternate financing solutions and why all of our current senior housing engagements are to source construction and development capital.

According to The State of Seniors Housing 2008 report, nearly half of all independent and assisting living facilities were built before 1995. While we haven't seen the 2010 report, we can only believe that percentage has grown due to the limited development in the last couple years.

2011 is already looking like what most people thought 2010 was supposed to be - the year to rebuild. Though banks remain tight-fisted, capital is flowing from other sources. We believe that capital should and will be focused on senior housing. As everyone loves to talk about, the boomers are coming.

Independent Contractors

Yesterday I explained to a client that real estate agents are independent contractors. I know that most people realize that real estate agents, and companies, only get paid when someone buys or sells a piece of property. But sometimes I doubt whether they know the full extent of what that means. It means that agents don't get paid for their time. Or their gas. Or the lunch that they might buy you when you spend a long day looking at houses. Or their cell phone. Or their car, car insurance, and repairs. Or their real estate license, continuing education, Board fees, and MLS fees. Or the extra advertising and marketing that they may do on your property (while our firm pays for postage, advertising, and training, many firms charge agents for those services). It's expensive to be a real estate agent, and even more expensive to be a real professional, with all the tools.

Indpendent contractors, who don't get salaries or benefits, deduct their business expenses themselves. In effect, they run their own small businesses. They affiliate with brokers, and use the branding and offices of those brokers, but they don't work set hours. We aren't even allowed to carry worker's comp insurance on them. They assume the costs of working, and, as I often say, they "eat what they kill" in terms of compensation. They get paid for what they do, when it goes well. When it doesn't, they bear the risks.

Why, you may ask, did I decide to blog about this now? The simple answer is that, when I was told by this client that he understood that an agent only got paid when he bought, and that those were the breaks, I'm not sure he really got what he was saying. I guess it gets down to the Golden Rule, as most things do. How much time would you spend doing work for someone and not getting paid, before you felt that it was unfair?

Clients didn't create our compensation system in the real estate industry, and I'm not asking them to be responsible for changing it (although I would certainly love to change it!). I just want them to understand that, if they aren't serious, or they aren't willing to stay with someone until the transaction is completed, then they are really asking for services for free. And the way you treat someone who is doing you a favor may be different than the way you behave if you think it's someone's paid job to help you. It's that simple, and that complicated.

Bally's Fire

Guests of Bally's hotel and casino were asked to evacuate due to a small room fire yesterday afternoon. Local firefighters were rendered optional thanks to the building's sprinkler system. According to officials, the fire started in a mattress (another reason to not get a smoking room).

The fire started on the 25th floor of the hotel and only one person was injured. The gentleman was treated for smoke inhalation and the official cause of the fire is still under investigation.

An estimate of the damage has not been released yet.

Thanks for reading our Las Vegas Real Estate Blog.

Location: 3645 Las Vegas Blvd South, Las Vegas, NV 89109

Snowed In

When my children were little, and excited at the prospect of a snow day, I taught them that the sound of the phone was the sound of people cancelling their real estate appointments, thereby dampening slightly the joy of the day. Now that they are grown and gone, a snow day is entirely different. Today was a non-stop round of phone calls, lasting at least ten hours, preceded and followed by emails and paperwork. Since we're still not plowed out, it's been 24 hours since I've put more than a foot out the door; and yet, work went on all day. It began in the wee hours of the morning, when I left my warm bed to check the radar maps, to see whether I needed to cancel everything in our offices. I did. But most of us were busier than usual, handling crises and referrals, tied by Blackberrys and cell phones to our home offices.

It made me nostalgic for the "olden days" of my early years in real estate, where, once you had checked the daily mail, you knew that nothing much would happen until the next day's delivery. That was followed by the Fed Ex age, after which ensued the fax stage. Voice mail came next, and then everything changed with the arrival of email. Even though I realize that many of our clients are in different time zones and countries, where snow may never fall, it still seems surprising that I didn't even have time to read the morning paper (which I didn't even go down the driveway to look for, since I don't have boots that high!).

I know it's good that activity is picking up, and I was certainly grateful for the peace and quiet that allowed me to take my time doing things that had been put off earlier in the week for meetings. Now, however, I'm ready for an old-fashioned snow day!

Update from Arizona

It's 37 degrees here in Scottsdale as I write this, so it doesn't seem all that much warmer than at home, but it will get up to 60 by the time I finish my run. My daily path takes me past lots of For Sale signs, and the morning paper gives me news about the real estate market in Arizona.

The good news here is that the number of pre-foreclosures is down from what it used to be last year. That's sort of the silver lining on the cloud, since the total sales went down from 2009 to 2010 in Scottsdale, and the average price declined as well. The experts who were surveyed in the year-end wrap-up in the newspaper expressed a consensus that the big news was their surprise at a lack of improvement in the real estate market. Our driver when we landed said that there are still several thousand bankruptcies a month in the county. Commercial vacancies are sky high, and there are no new buildings planned or under construction.

The surprise at the anemic sales and loss of gains made during the tax credit months is true across the country. None of us expected that the second half of 2010 would be as bad as it turned out to be. The good news, however, for those of us in the snowy Northeast is that we never saw the boom that Arizona did in building. That means that we never got the spike that is now causing the abrupt fall out here. We had steady gains, and some inflated prices, but it was small potatoes compared to sun country.

Even here, there are signs of hope. On my daily running route, I see half as many For Sale signs as I did last year. And it's heartening for me to note that they are almost all local independent companies--another harbinger for us in Connecticut, I hope!

McQuaid Commercial Closes West Seattle Deal

January 4, 2010:

McQuaid Commercial Real Estate has sold a 24-unit multifamily property located at 3515 SW Ocean View Drive in Southwest Seattle.

“We are pleased to get this property closed in 2010, after an exhaustive marketing effort over many months” said Michael McQuaid, the broker representing the seller group.

The sales price of $2,050,000 equated to a CAP rate of 5.16 and slightly over $102 per net square foot. The building was in average condition with many long term tenants and was managed by one of the five owners, all but one of whom is a decedent of the original developers such that this is the first time this 1979 building has ever sold.

The buyer is David Katt, a local investor who lives within a few miles of the building and has many years of rental property experience, primarily with single family homes, some of which were sold and the proceeds invested in the 24-unit through the use of a tax-deferred exchange.

“This was a challenging sale due to the absolute lack of anything else in the area to look at for comparable rental or sales values.” McQuaid said Tuesday. “The property is nearly equidistant to the Fauntleroy and White Center neighborhoods, dramatically different market places. The buyer paid all cash and expects to spend another $200,000 on the building for deferred maintenance and upgrades.”

MCQUAID Commercial Real Estate is located at 400 Roy street in lower Queen Anne. It is an open concept, boutique-style firm offering advising services and focuses on superior client representation.

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Great News ... Maybe?

Last week the local paper had an article on the front page headlined “Apartments are red hot despite cool real-estate market”. I read it twice and think what it should have said is “lenders like apartments so developers will build them since they can’t borrow money to build anything else”.

I am a salesman so I am nearly always optimistic by nature as that is a job requirement, for sure. Developers are far beyond salesmen due to the relationship between enthusiasm/optimism and debt. The good news for developers is that lenders currently favor apartments. I suspect apartments are now in favor not because apartments have suddenly become scarce in supply but rather because they have exhibited the lowest default rates on lender debt. I am pretty sure lenders cannot make decent money without lending it out so here we go (again). My usual optimism is overcome with concern today that this is too soon. I have yet to talk with an apartment building owner who is enjoying rent increases, the usual harbinger of the time to build more. Moreover, I find most owners are still suffering above a 5% vacancy loss, yet another yardstick for the need to create new supply.

The issue driving the “red hot” apartments is really simply that lenders need to make loans and apartment loans look the least risky. So far.

For all my clients/friends who currently own apartments lets all hope together that we don’t experience a massive over-supply of apartments that simply cannibalize the existing tenants we all currently are fighting over.

In the meantime I suppose everyone should borrow all they can while these apartments remain in favor with the lenders. This would work well except that apartment investors are very cautious, risk-adverse types who won’t go over-leverage their portfolios so if a lender wants to make money they better lend to whoever will borrow it, hence the new development coming to your neighborhood soon.

I am optimistic that there will be a great new supply of renters though: the construction workers building the apartments. Of more interest to me is that if I have been an apartment investor for a very long time and want to retire I know that it is far easier to get a great price for a product selling upside than a product that looks like it may decline. The perception of upside, at least, is here today.