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Newly found equilibrium lures apartment industry back into action

The apartment industry is in very good health. Anecdotally speaking, people in the industry seem to be generally upbeat," says Jonathan Kempner, president of the National Multi Housing Council in Washington, D.C. "As I measure it, if they are up-beat but not ecstatic, then I see that as a very good sign."

There are actually a number of good signs and all point to a strengthening industry. Last year, apartment occupancy hung in at 94%, edging up 0.1% in the fourth quarter over the year before, reports M/PF Research from a national survey of professionally managed apartment communities. The trend indicates demand has been sufficient to absorb the increase in new supply entering the market. The same report notes apartment rental rates averaged$697per month, up 2.5% over the past year.

The big story in the apartment market is the continued investor interest in this property type, the solid performance in market fundamentals, burgeoning construction and the success of the Low Income Housing Tax Credit Program (LIHTC), according to Valuation International Ltd.'s Viewpoint 1996 Real Estate Value Trends. Clearly, the apartment market was the first sector to experience recovery and, to date, the best performing property type in the 1990s.

Prior to 1995, strong investor interest was attributed primarily to the repulsion of other property types, making apartments the only viable opportunity to the investment community. However, other property types have enjoyed significant market improvement, thus, diverting investor focus from the apartment market

"Generally, the apartment market is viewed positively by investors even as most major markets have reached equilibrium," says Brian K. Austin, vice president and director of research and analysis of Dallas-based Lincoln Property Co. "This is because this sector of the real estate market has historically maintained relatively stable returns and, except for a few markets, the current supply and demand for apartments," says Austin. "Areas that are projected to either have an economic rebound, i.e. California, or above-average job growth - the Southeast and Southwest - will tend to perform better than other areas. Additionally, the Mid-west U.S. has typically been a very stable market as supply has tended to be more stable."

Another good sign of the rising apartment industry is the rising interest rates for home loans. "As interest rates begin to move upward again," says Greg Almquist, executive vice president of Atlanta-based Pinnacle, "many first-time home buyers are selecting to remain in amenitized, rental communities, thereby reducing turnover and strengthening apartment returns."

The National Multi Housing Council, itself, was very optimistic. Its 1996 report indicates the leading companies in the U.S. apartment industry experienced a year of stability in 1995, reflecting favorable apartment market fundamentals and abundant capital availability through the year. "Large apartment management firms continued to grow larger," the NMHC report says, "at least in part via acquisition and consolidation, as the industry seeks more efficiency via economy of scale."

"We see some consolidation in the REIT apartment industry as some of the 'weaker' participants are either liquidated and/or acquired by other public/private entities," says Austin."The apartment industry has always been a very localized business, and it will continue to be that way, although there are several companies who are headed toward controlling/managing 2(%) to 5% of the overall U.S. apartment market."

"Because of the growing demands of apartment owners to provide quality, innovative and competitively priced services in multiple markets, only a few property management companies are positioned to handle these demands," says Almquist. "As that trend continues, fewer property management firms will be able to remain competitive with the increasing cost of upgrading technologies to satisfy these institutional reporting requirements."

"There has been and will continue to be a consolidation of the 'players' in the apartment market whereby the big will get much bigger," says Wayne Vandenburg chairman and CEO of Chicago-based TVO Real Estate Services. "There will be a consolidation of the public REITs due to the pressure on earnings; several of the private investors will continue to grow."

Insignia Financial Group, based in Greenville, S.C., the country's biggest apartment owner and manager, for example, also sported the largest portfolio growth, adding 26,457 apartments in 1995 - and the company hasn't slowed. Already this year Insignia Financial purchased all the residential assets of National Property Investors, which included general partnership interest in and management rights to 35,000 multifamily units.

Other big investors were National Partnership Investments, which added 14,104 apartments in 1995, and NHP Partners, a company that picked up 11,554 units.

The broad picture is, says Kempner, vacancies have not kicked up; rental prices are healthy; REITs are playing a much more significant role; consolidation is beginning to happen and, on the downside, there is some concern about overbuilding in particular markets although there are a number of safety valves in place to prevent the massive over-building that occurred in the 1980s.


From the Bay Area around San Francisco south to Silicon Valley, there is just not much to show anyone moving into the area and looking for an apartment. Occupancy in San Francisco is running close to 96%, while Keith Guericke, president and CEO of Essex Property Trust Inc., a Palo Alto, Calif.-based REIT, claims the Silicon Valley is literally, across-the-board, 99% occupied. "Rent has moved up about $100, an 8 to 10% increase, and going forward we expect it to move up 6 to 8% over the next 12 months." The difficulty with the Bay Area and Silicon Valley, Guericke adds, is that it is too expensive yet to build. "A year ago, conventional wisdom held that cost per unit of new construction was about $110,000, but we have been chasing two or three different pieces of land and the cost of new construction is about $135,000 to $140,000. I can't think of another market that is so expensive."

According to M/PF Research, San Francisco is the priciest big city in the country with average monthly apartment rents at $1,105. In third place, across the Bay, is Oakland at $921. Coincidentally, the second and fourth expensive markets are also in California Orange County at $959 and Los Angeles at $864.

The latter two cities, however, are rising but still problematic.

"In Southern California, we are still coming out of that REO marketplace," says Harvey Green, COO at Marcus & Millichap in Palo Alto. Rents have not begun to move although prices are starting to firm as the default pipeline diminishes." LaSalle Advisors puts Los Angeles as well as Orange County in itsrising market" category.

Essex Property Trust likes the Los Angeles suburban metro areas of Orange County and Ventura County where it already has almost 600 units at a 97% occupancy. "There is now little construction going on so the market, which is still recovering, is benefiting from the lack of new supply," says Guericke. "The interesting thing about Orange County is that the cap rates, despite the fact that county went into bankruptcy and Southern California was in a recession, never moved. They have been consistently low."

Pacific Northwest

Two cities showing some of the biggest rental increases from 1994 to 1995 were Seattle, which saw rates move up 6.5%, and Portland, which enjoyed a 5.2% increase. Seattle also was ranked by LaSalle Advisors as a rising market, while Portland was considered a market at peak and, according to Valuation International, one of the top 10 apartment markets with the best opportunity for investors.

Essex Property Trust, which has eight properties in Seattle and one under construction in the Portland area, has been doing well by its investments. Essex invested mostly in the suburban community ties just east of Seattle and, with cap rates currently in the 8.5% to 9% range, the company is in contract to purchase several more properties. Occupancy in the Seattle area charts in at 94.4%.

While,the Seattle market is good, Portland may be even better, says Guericke. "There is a lot of new construction, probably 3,000 to 4,000 units in what is called the 'Silicon Forest' area around Beaverton. The area has benefited from the shift to high-tech, primarily the manufacturing that is going on up there."

When Essex Property Trust started building its 200-unit apartment complex back in October, it underwrote the project at $0.78 per sq. ft. By April, a survey of the market showed rents were at $0.83 per sq. ft.

Portland boasts an occupancy rate in the apartment market of 96%.

"As has always been true, the strongest markets are those driven by long-term job growth," saysPinnacle's Almquist. "As high-tech firms are expanding to the northwest, we see good growth opportunities in those markets."

Desert Southwest-lntermountain

The outlook for the desert Southwest and major Rocky Mountain cities are generally very sanguine, although there is some concern about cities like Phoenix, Las Vegas and Denver where construction has been very active. All three municipalities were in the top 10 last year in terms of reported building permits for multifamily housing: Las Vegas charted third with 8,781 permits, Phoenix fourth with 8,103 permits while Denver checked in at eighth with 5,317 permits.

The big question with these communities says Richard Gold, vice president and director of research at Boston Financial is that with a lot of properties under construction now and some new ones coming on-line, is demand going to keep up with supply? "My fear in places like Phoenix and Las Vegas is that they are going to have rising vacancies. Denver fits in there as well, but less intensely."

At the moment, Phoenix is still a healthy market with 96.6% occupancy, while rents have come up about 8% over the past year, but Gold says Phoenix has reached its peak in the cycle.

As for Denver, Merrill Lynch's research on Key Apartment Markets in the Southwest reports occupancies of 94.5% by the end of 1996, down slightly from 1995. Nevertheless, rents should still rise although at a slower pace than 1995.

Salt Lake City and Las Vegas are two cities presently considered at peak, but they maybe going in opposite directions. Salt Lake City has the second best occupancy rate of all the major metro areas at 97.7%.

"You are looking at a lot of construction in Las Vegas," says Thomas Shuler, president of Insignia Management Service. Indeed, the Las Vegas market has been humming with 37 projects and 10,885 units under construction. Although the economy has been good in Las Vegas, apartment supply may finally be outpacing demand. "There is a lot of product under construction; vacancies are appearing, and rental increases are slowing. Las Vegas is going to be very competitive," says Douglas Crocker, president and CEO of Equity Residential Properties Trust, a Chicago-based apartment REIT.

Occupancy rates in Las Vegas peaked at 96.4% in 1993 and have been slowly sliding ever since. Merrill Lynch expects a big dip to 93.5% by the end of 1996, noting, apartment rent growth has shown puzzling restraint in view of lower vacancies, however, "we see no reason for thinking that rents will take off in the coming months."


Texas is a big state, and it does things in a big way. Its construction booms are big, but its busts, unfortunately, are just as big. For the past three years, most of the state's major cities have gotten back in the apartment construction business, none more so than Dallas, which could see almost 11,000 new units in 1996. To a lesser extent there has been boomlets in Houston, San Antonio and Austin. The latter two municipalities, plus Dallas, should experience increased vacancies over the coming year, while there might be some improvement in Houston - that's only because its occupancy rate has been stuck below 90% for the past decade.

"In Texas, real estate moves in cycles, because everybody waits for something to look good and theneverybody jumps in," says John Petrovski, senior vice president and regional manager for Heller Real Estate Financial Services, Chicago. "Heller invested equity with a number of developers, and they have done quite well, but now we are seeing too much in the pipeline, especially in Dallas where there are 10,000 new units coming online. There is downward pressure on occupancy rates."

Things are a bit more uptempo in Houston. The city felt the positive effects of blue-collar job growth, and that has translated into higher occupancies and rental rates, says Stacy Hunt, senior vice president of Greystar Management Services LP in Houston. "Last year rental rates were flat, as there were quite a fewspecials, that were available. During the first quarter, the specials went away as leasing traffic picked up quite dramatically." Houston could pass the 90% mark in occupancy this year.

Merrill Lynch predicts rent growth will slacken in Dallas, San Antonio and Austin. Houston looks better, yet the market still is not healthy enough for material improvement in rents.


By most key measures, the South has been the best regional market in the country. If one begins with a basic standard, employment growth, which is often used as a bellwether for apartment health, the South has outperformed the rest of the country over the past five quarters, reports the National Multi Housing Council. In the more direct measurements of apartment starts, the South again out-classes the nation, up 35% through the third quarter of last year, almost double the starts of the closest region, the Midwest. Perhaps reflecting the continued expansion, vacancy rates weakened across the South, dropping almost one full percentage point over the past year.

If there is one key southern market that really worries pundits, it's Atlanta. The city, which ranked number one in multi-family building permits in 1995 with more than 13,100, may be showing signs of overbuilding. Or is it? The hullabaloo concerning the 1996 Olympics obscures the basic growth fundamentals for the city.

"If you talk to 10 people in that market down there, you will get at least 10 opinions," says Ken Edmundson, president and COO of LEDIC Management Group, part of Memphis-based SPL Corp. "Atlanta right now, is being defined by the Olympics unfairly. I'm not sure the Olympics have done anything more than move us a year or two forward."

He adds, what is going to happen after the Olympics is that Atlanta will enter a quiet period and rents which were moving up double digits, will probably slow down to the 4% to 6% range.

The brakes may already be on. "Atlanta has been going strong," says Insignia's Shuler, "but the submarkets, which experienced a lot of construction, are not seeing as much rent increase as in prior years." In 1995, Atlanta reported rental increases of 5.7%, still in the top 10 in the country.

Two other southern markets with a lot of new construction include Memphis and Nashville. In Memphis last year, new construction vaulted a whopping 250% over the year before, says Katherine Eidson, a vice president of marketing at SPL, and with the rise in building has come a drop in occupancies to 94.1% and a slowing down of rental rate increases. A similar situation is occurring in Nashville, which added 1,531 units last year, up from 264 apartments the year before. Occupancy declined from a very high 97.2% to 96.3%, while upward rental movement slowed to 6.6% from 9.5% the year before.


Economically, the Midwest was a strong performer last year although employment growth seriously slowed down by the end of 1995, reflecting the national economy as a whole. New rental starts moved up 18%, which wasn't bad, but it did trail the West and South. Again, reflecting the new construction activity, vacancy rates declined 0.8%. For investors, the NCREIF Property Index found apartments appreciated 2.63% in the fourth quarter of 1995, which was second only to the West on a regional basis.

"The Midwest is holding its own. It's neither going up nor down as construction is constrained," says Boston Financial's Gold.

A number of Midwestern cities such as St. Louis and Detroit are considered over-supplied, while Cleveland may have already passed its peak and could be on a downward tend, reports LaSalle Advisors Market Watch.

On the other hand, Chicago and Minneapolis maybe two cities worth watching. Valuation International picks Minneapolis as one of its top 10 cities for investors, while Chicago, with a 5.2% rental rate increase, is also rated in that top 10, which might be one reason its average monthly apartment rent of $842 is the fifth highest in the country. Minneapolis at $766 a month chalks in at number eight.

Chicago has been a good market with new supply not anywhere near the demand, says Equity Residential's Crocker. There is not much happening in the city itself, but there is a lot of building going on in the suburbs, which is indicative of Chicago permitting over 5,300 units in 1995, the ninth busiest market in the country.

Rental growth may slow to 3% to 4% this ear says Heller's Petrovski nevertheless, the company ny is considering the funding of some new developments. At the end of 1995, Chicago area apartment's were showing a vacancy rate of 94.7%, just slightly above the average for the region as a whole.

"The Minneapolis market is extremely tight," says Christy Lockridge, an investment officer with Heller Financial. "It is reporting over 95% occupancy, and it has been witnessing double-digit rent increases. They are really at the point where they have not had a great deal of new supply so owners are comfortable with increasing rents."

One of the difficulties with the Minneapolis market is that the cost of development is high in the $80,000 to $100,000 range, so financing those costs can be difficult, Lockridge says. Still, Heller is considering getting involved in some apartment projects in the area.


There were little if any economic, bright spots in the Northeast. Employment growth was much smaller than any other region in the country, while new apartment starts not only showed negative growth (the only region to do so), but it was down a whopping 50% through the third quarter of last year. Apartment vacancy was on par with most of the nation, off just 0.8% in 1995, the same as in the Midwest and South. And apartment rental inflation, as reported by the National Multi Housing Council, was 2.9%, lower than the previos two years, and lower than all regions in the country except the Midwest, which also showed a 2.9% increase.

New building across the region has been slight, says Hassam Nadji, a vice president and national director of marketing research at Marcus & Millichap. According to his statistics, Boston added less than 2,000 units; New York put up 1,500 apartments, while Philadelphia and Northern New jersey built less than 1,000 units. "What is happening in the Northeast is that it is difficult to find land to build and, secondly, the permitting processes are strict," Nadji says. "As a result, it is harder to pencil out a project that makes sense anywhere else."

In addition, population growth in the Northeast is not as robust as elsewhere in the country.

Still, there were some surprisingly strong markets in the Northeast. According to M/PF Research, Newark, N.J., had the highest occupancy of any large city in the country at 99.2%, while Middlesex County in Northern New Jersey was third highest at 97.5%. The Middlesex area notched in as the seventh most expensive rental market with an a average monthly rent of $767, while Washington, D.C., was two slots below at a $766 average monthly rent. In terms of new development, Washington, D.C., was number five last year with over 6,000 permits for multifamily units. And of the cities showing the biggest monthly rate increases last year, coming in at number two was Pittsburgh, with an 8.9% increase.

Also, Fannie Mae has announced an $8 billion, five-year House New York investment plan, which will provide affordable homeownership and rental financing for 120,000 families in the city of New York's five boroughs. Over the next five years, Fannie Mae, the nation's largest source of mortgage funds, will make available @ l billion in financing for multifamily housing initiative including small properties and permanent financing for acquisition, new construction and rehabilitation. Over the next month, Fannie Mae and the city will develop a financing program, designed with emphasis on the outer boroughs, that will provide a stable source of mortgage credit to small, existing rental properties.

In Manhattan, the Halstead broad market index and the Halstead silk stocking index of super luxury properties have now posted new record highs with the broad market index hitting almost $107,000 per room in January 1996, the highest level the broad market has seen since August 1988 when the record stood at $106,500, according to Halstead's New York, a quarterly statistical report on the Manhattan residential real estate market below 96th Street. For the first quarter of this year, not only did prices climb on properties along Central Park West, but Halstead's New York also reports that prices were up compared to the first quarter of 1995 in nine of the 14 neighborhoods tracked by the survey. Although studio prices dropped, prices for all other size properties increased from the first quarter of 1995 to the first quarter of 1996. These record numbers mean that the market has now returned to a price level that can support co-op buildings that were caught between failing prices and rising debt rations in the late 1980's.

When considering the Northeast, Nadji says it is important to note some very positive factors: since it is so expensive to do new construction, it is correspondingly more difficult to over-build in the Northeast markets; the affordability of private homes is high, which forces people into apartments; and it is a very stable market in that people stay longer in their apartments - an important attraction for apartment investors.


The mortgage end of the capital sector has experienced some major changes over the past two years as companies began to unite to gain more financial power or disunite to refocus efforts. The altering of the mortgage landscape is occurring at a time when capital continues to flood into the apartment market, increasing competition among lenders, but creating plenty of opportunity for refinancing, new construction and acquisition of properties.

"The competition is fierce because there is so much money available for investment in this product type along with money already invested in the system," says TVO's Vandenburg.

On the mortgage side, two well known names underwent some major alterations. Arbor National Holdings Inc. split apart selling the residential side of its business to Bank of America, then taking the commercial work, including multifamily, private under the name of Arbor National Commercial Mortgage LLC. With the split, Arbor National narrowed its efforts solely to multifamily and that trend is continuing into 1996 with three primary areas of focus: traditional conduit lending ($100 million in conduit loans in 1995), Fannie Mae Delegated Underwriter and Servicer (DUS) loans (just ramped up in 1995, but in April closed over $60 million) and structured transactions including acquisitions and gap equity and bridge financing ($64 million in 1995).

"What happened with Arbor is a definite indication of what is happening in the market," says Scott Brown, senior vice president-capital markets for the Long Island, N.Y.-based company. "The sale of residential was due to the banks really moving aggressively to consolidate that business. Consolidation is a megatrend in the financial services industry, and multifamily is not exempt from that."

Perhaps the best example occurred early Mortgage Financial Group was purchased by NHP Inc. While the acquisition marked the first time a large existing Fannie Mae DUS company and FHA mortgage banking firm joined up, it should be noted that NHP is also the second-largest manager of apartments in the country.

The acquisition of Washington Mortgage gives NHP an opportunity to expand services in an area that it didn't address before. "NHP did not have a mortgage finance unit, did not provide its own financing, but it acquires apartments, manages apartments and does all the other things associated with providing services to landlords," says Shekar Narasimhan, the former CEO of Washington Mortgage and now executive vice president of financial services for NHP. "From NHP's standpoint, it adds a unit that provides services to the broad population but also to its own portfolio needs."

On the other hand, the merger fulfilled Washington Mortgage's need for capital. The company had been expanding rapidly, growing from $338 million in servicing to $4.5 billion from June 1990 to January 1996. Last year, the company did over $800 million in loans.

This year should be even better. As Jeffrey Davis, president of Cambridge Realty Capital Ltd. in Chicago says, "I would be surprised if it is not a good year for everybody. There are a lot of opportunities. It will be up to individuals to figure out what to do with those opportunities."

Those opportunities are not only coming from and for the mortgage companies, but lenders and investors of all types seem to be scurrying about the apartment market. The big investors over the past few years have been the REITs, but pension funds, other institutional investors and even high net-worth individuals have gotten back in the game as well. A lot of capital is coming from Wall Street. In addition, the lower interest rates allow individual investors to refinance old, expensive loans at a much lower rate, freeing up capital for expansion.

"The refinancing market has been good. All the buttons have been green for the last couple of years," says SPL's Edmundson.

To which Edmundson adds, "Everything has worked for multifamily over the last couple years but, when it happens, everyone tries to figure out how to get more of the pie. We have a lot of money out there now, but it is tough to get everything to turn up right. Money is not the problem. The problem is buyers don't want to buy at the peak and the sellers don't want to sell below the peak."

JPI Cos., based in Dallas, not only manages apartments but builds in-house as well. Today, it boasts 8,500 units under construction. As a builder, Bobby Page, COO of JPI, takes a slightly different view of the market. "Capital available for new construction has peaked. There are still some deals out there, but it is harder to get the right deals to make money. From a development standpoint, the market is about as good today as it was three or four years ago."

Profit margins for development are down, says Page, while construction costs are way up. "As profit margins come down, it is generally a year or two later before sources of capital figures it out."

The outlook for investment is much more optimistic.

Prices for existing apartments appreciated 5.7% in 1995 and rose 13.7% during the 24 months of 1994 and 1995, significantly surpassing the performance of all other real estate property types during the same periods, according to the National Real Estate Index. Meanwhile, the average apartment sales price has been steadily climbing from a low of about $56 per sq. ft. in the fourth quarter of 1992 to almost $65 per sq. ft. by the end of last year. According to one survey, prices for apartment acquisitions are likely to rise in 1996 with pension funds and other institutional investors dominating the market.

If one is wondering just where the best investments are, the Center for Real Estate Studies in Rolling Hills, Calif., reports the top 10 markets for apartment investments based on forecasted rent increase are in descending order. Sarasota-Bradenton, Fla.; Hint, Mich.; Albuquerque, N.M.; Shreveport-Bossier City, La.; Provo-Orem, Utah; Phoenix-Mesa; Roanoke, Va.; Salt Lake City-Ogden; Nashville, Tenn.; and Colorado Springs, Colo.

"We predict improved occupancies, an increase in investment capital and a sharp rise in investor return. Apartments are popular with small investors, and the mortgage markets are supporting more transactions by individual and limited partnerships," says Eugene E. Vollucci, director of the Center for Real Estate Studies. "There will be good opportunities. A strong tenant demand will accelerate rent increase, and new construction will still be modest by historic standards."

Apartment REITs

It wasn't that apartment real estate investment trusts fell out of favor in 1995, it's just that there were hotter sectors such as office and hotels that caught the investor attention. Total returns for the REIT industry in 1995 amounted to 15.3%, with apartment REITs coming in just below that at 12.3%.

While performance on annual basis wasn't great, as 1995 went on, apartment REITs got continually stronger, and investor sentiment toward the sector seem, to be turning positive, mostly in response to a modest decline in projected supply and continued strong operating performance by the better quality companies.

"Institutional investors are now more involved in the apartment market than in the past several years due to its stability," says Vandenburg. "Also, they are involved through the public market investing in multifamily REITs. Stability and steady growth of income are the primary reasons for multifamily investment."

"Pension funds, REITs and what we see as large, portfolio owners are the investors most heavily involved in today's apartment markets," says Pinnacle's Almquist. "Many of the more traditional apartment investors such as life insurance companies are divesting their ownership in apartments and re-investing those products in debt origination products,"

Throughthe first quarter, apartment REIT's were up 3.7%, as compared to the overall REIT market, which was up 2.3%, and the general S&P 500 at 5.4%.

"There is only a limited amount of money so far in the REIT industry," says Equity Residential's Crocker. "And last year you had people transitioning their investments from the apartment sector into office buildings and hotels. Now they are cycling back into apartments."

"The REIT market is looking ahead," says Jacques Gordon, director of research for LaSalle Advisors, Chicago. "It is pricing earnings on a forward looking basis, and evidently, the market is telling us the earnings outlook for apartment REITs is better this year than last year."

He adds, it is not just a question of which sector's earnings are going to grow, but at what price would someone buy in expectation of earnings growth. "What is happening in apartments is that people are now willing to pay a slightly higher multiple for each dollar of earnings in the first quarter than they were last year." Why? Probably because the slight uptick in interest rates has raised the question of housing affordability for homebuyers, while at the same time, some of the markets where apartment REITs have concentrated efforts should do well according to demographic trends.

However, Salomon Brothers, which has downgraded its investment rating on some apartment REITs, warns that the REITs themselves are using the wrong demographics to estimate apartment demand. Most apartment REITs used employment, but Salomon maintains using employment is flawed and that a better gauge would be household formation.

Apartment REITs will have a "reasonably good year" in 1996 as individual companies should show modest rental growth, suggests Keith Pauley, a managing director at ABKB\LaSalle Securities in Baltimore.

Despite the fact that there were no new REIT initial public offerings in 1995, apartment REITs are the second-largest sector behind retail in the REIT universe with 39 separate companies valued at $13.1 billion. The average market capitalization at $336million is larger than retail, but smaller than health care. Apartment REITs were active raising money last year, doing 16 secondary offerings, which raised $1.34 billion dollars.

Part of the problem with apartment REITs last year was the concern about apartment overbuilding in key geographic areas such as Texas and Atlanta, says Essex Property Trust's Guericke. "Now, investors are beginning to realize that overbuilding may not happen except in very select areas so they are generally feeling more comfortable about apartments.

For the REIT market in general, Mark Decker, president of the National Association of Real Estate Investment Trusts, expects a 15% total return for REITs as compared to a 9.5% return for the broader stock market. "Clearly we are in a different real estate environment today, which bodes well for REITs in 1996 and for the remainder of this decade."

Seniors Housing

In March, Marriott Senior Living Services, the third-largest seniors housing company in the country, completed its takeover of the Forum Group Inc., which at the time of the merger was the second-largest company in the industry.

It has long been predicted that the seniors housing industry would start to consolidate, but until Marriott went after Forum there was little if any movement in that direction. In fact, one of the busiest aggregators had been Forum, which last year acquired National Guest Homes and Hearthside, providers of assisted living and dementia-related care, and Health Care Industries, a provider of home health care services.

Instead of large mergers, most of the acquisition activity has been of local, individual operations. "We see a lot of mom and pop operations or smaller chains being consolidated into larger chains. A lot of independent living communities that were built in the 1980s were purchased by larger companies on a one- or two-off basis," says Michael Giacopelli, Marriott Senior Living's senior vice president for development. In the longer term, over the next five to 10 years, Giacopelli expects more consolidation among the larger companies in the industry.

As a result of the Forum merger, Marriott Senior Living could now boast 69t facilities with more than 14,500 beds, number one in its quality tier, but still second in total facilities and beds behind Holiday Retirement Corp.

There were a number of other changes in the industry as well. Hillhaven Corp. of Tacoma, Wash., became part of Vencor, which is the second-largest, long-term care company in the country, while another Washington state company called Emeritus Corp. successfully completed a $100 million initial public offering last year.

The rate of investor interest in this industry is expanding, says Mel Gamzon, president of Senior Housing Investment Advisors in Newton, Mass. "There is a tremendous amount of capital starting to chase this emerging industry."

Overbuilt and unfocused in the 1980s, the senior housing industry has emerge in the mid-1990s with a better handle on its potential market, with a more focused product and healthier operations. "The difficulties of the last generation of senior housing products have all dissipated, and we are now looking at an industry that has solid financial performance and a consistent track record of financial success," says Gamzon.

Nationally, occupancy in senior housing runs in the mid- to low- 90% range, well up from a low of 1986 in 1992. A lack of construction in the early 1990s helped reduce vacancies. However, the market started to expand once again with the construction of 60,000 new units in 1994 and about 80,000 units last year.

"In a large part, what you are seeing is a recognition on the part of the lending community for the product in terms of where it fits in the long-term, care-delivery system," says David Schless, executive director of the American Seniors Housing Association in Washington, D.C. "The industry went through a very difficult period in the late 1980s and early 1990s where many markets were overbuilt. By 1994, most markets saw occupancy levels in the low- to mid-90% range while rates have gone up steadily at about 3% to 4% clip annually, and that has stimulated new production."

Seniors housing is a very segmented industry with a variety of housing and services from nursing homes and continuing care communities which offer housing, health care and support services to congregate care which usually offers a common dining facility and minimum services tailored for the elderly. In between is something called assisted living and this has been the hottest segment of the market.

Assisted living targets frail, elderly people who need some help in everyday life and heretofore without the product would have had limited options in terms of how they were going to live - either residing with their children or in an institutional nursing home. Assisted living allows them to live independently in a residential setting but with support services.

"Theprimary focus of expansion in seniors housing is assisted living," says Giacopelli, "because there is limited supply and tremendous demand."

Looking ahead

Multifamily complexes were among the first property investments to attract purchasers following the credit crunch of the early '90s since residential supply and demand equilibrium was better than that of commercial properties. Consequently, pricing levels in the apartment sector have advanced to levels where new construction is economically supportable in markets across the nation, and a new development cycle is already under way, according to the CCIM/Landauer Investment Trends Quarterly.

Predictions of the industry for the 12-month period ending January 1997 show the market maintaining its rise to the top. The multifamily sector is expected to be in supply and demand balance, which is a sign of a strong market, according to Salomon Brothers, Apartment Balancing Act. Development has been remarkably well-restrained thus far this decade.

Lehman Brothers reports that it is still bullish on the apartment market for 1996 in its Commercial Real Estate Annual Review and Outlook. However, its enthusiasm is tempered by several factors. Household formation will slow due to a decline in employment growth, and lower mortgage rates are increasing housing affordability. These factors reduce demand for rental units.

The pace of new supply is expected to move up slightly, driven by capital availability and low rates, reports Lehman Brothers. More importantly, supply levels in some metro areas, such as Phoenix, Orlando and Dallas, could get ahead of demand. Markets with these high "supply propensities" bear watching, although they presently appear to be on track.

On the flip side, Lehman Brothers expects markets with strong demand and supply constraints that limit the risk of excesses will have additional rent growth and commensurate increases in value but at a slower pace than recent years. Cities included in this category are Boston, San Francisco, New York, Seattle and Portland.

Although investor interest is still strong, prices have escalated dramatically. In turn, profit expectations have declined for those investors looking to enter the market. Clearly, all the signs of a peaking property type are being witnessed. As apartment markets continue to develop additional supply, overbuilding could saturate markets, according to Valuations International Ltd.'s Viewpoint 1996 Real Estate Value Trends. A significant portion of the new apartment construction has been affordable housing or luxury housing with many amenities.

"More and more residents are choosing apartment living as their first choice over home ownership for all of the conveniences and amenities which a well-developed and managed community may offer," says Almquist. "Apartment developers are building many new developments with top of the market amenities including many new technological advances, which are not found in first or second time home purchases."

As for the LIHTC program, it has been so successful that nearly all states have received requests for tax credits exceeding their allotment, according to CCIM/Landauer. Since 1986, over 750,000 units have been constructed under this program. Unfortunately, the program faces uncertainty as key congressional leaders have targeted the program for ultimate extinction.

Case Study

Prime Residential

So what do you do when the product you are using at your corporate office works well there, but doesn't work out down at the local level. Well, that's the problem that Prime Residential, a Chicago-based REIT which owns and manages its 35-property portfolio, was facing.

It was using the product Skyline in its corporate office, but the program didn't provide enough reports for use on site at their properties. At the time they were with Quantra Corp. (formerly Melson Technologies), and they were using its Site Manager program, which was not working out. They needed a change.

"We didn't want to give that (Skyline) up, because the reports it provides for us are very valuable and work well for our company," says Kelly Haskin, senior site controller for Prime Residential. "So we were looking for a product that was going to work in conjunction with Skyline. Melson said, `well, we can write an interface program that will interface Rent Roll with Skyline,' which is the product called STS. So we said `yes.'"

So Prime Residential was able to put Carrollton, Texas-based Rent Roll Inc.'s multifamily software product to work at their properties. Rent Roll[R], an accounts receivable software product customized for multifamily, creates files at the sites and at the end of the day, the information comes up through the communication system. The information is then changed into a language Skyline can understand and put into STS to feed into the proper Skyline file.

With Rent Roll, Prime is able to get reports and information they didn't have before.

"As long as Melson was willing to provide us with the STS product," Haskin says, "we were more than happy to convert over to Rent Roll, because it basically balanced where Site Manager did not.

"We get a lot of good reports; we really, really like the reports that Rent Roll comes out with."

Case Study

Krauser, Welsh & Cirz

As a valuation and consulting firm that provides services to major lenders and institutional investors, Morristown, N.J.-based Krauser, Welsh & Cirz (KW&C) needed a reliable software product that could provide very specific tasks.

In any given year, KW&C is involved with approximately 1,000 properties. Their number one requirement in a software product was flexibility. They needed a software product that would be able to accept various investment formats reported by their clients.

They went with New York-based HB Pascal & Co. Inc.'s Apartment/3.

"We have an extensive multifamily valuation practice which is directed by one of our principals," says Raymond Cirz, MAI, CRE, a principal at KW&C. "Apartment/3 permits large valuation assignments to be prepared in common formats. This allows a large portfolio to be valued individually as well as combined. The impact of a single property on the overall portfolio can then be analyzed."

Cirz says speed in a product is also important to his company. "Processing speed becomes a more critical issue when large portfolios are involved."

WMF/Huntoon Paige acquires

ACR's loan production system

WMF/Huntoon Paige Associates, a wholly owned subsidiary of Vienna, Va.-based Washington Mortgage Financial Group, has agreed to purchase Atlanta-based American Capital Resource Inc.'s loan production operation. The transaction, which closed May 14, has been in process since February of this year, says Kathy Buchanan, vice president of marketing for WMF/Huntoon.

This transaction will make WMF/Huntoon the largest originator of FHA-insured multifamily mortgage loans in the country with a nationwide retail and wholesale loan origination system.

Along with all of American Capital's loan production offices in Atlanta, Chicago, Dallas, Denver, Portland (Oreg.), Los Angeles and Seattle, WMF/Huntoon will gain the leases and servicing portfolio of ACR, which is valued at approximately $300 million.

"The American Capital Resources name is gone," says Buchanan. "All of the ACR offices will change their names to WMF/Huntoon Paige, and ACR will cease operations as a lender."

"With this acquisition, we now plan to become the dominant lender in the FHA arena," says Shekar Narasimhan, chairman of WMF/Huntoon. "We understand this business and believe both the Congress and the administration realize the value FHA brings to millions of Americans in terms of affordable housing."

Case Study


When you manage about 14,000 to 15,000 units in 14 states and employ around 500 people, linking them together through software is no easy task. So when Camco Inc., a Chicago-based residential management company went looking for a new software provider, they had a few things in mind.

"We were looking for some marketing information to be obtained at the properties, we were looking for a good communications package to transmit the information from the properties to the home office and we were looking for a good vendor relationship which we didn't have before," says Gayle Townsend, computer support manager at Camco.

A good relationship was key, says Joseph Candella, CFO with Camco. "With our previous vendor, there was no response time so we were looking for a good relationship vendor, and we wanted someone who we could really work with and help them improve their product and in the meantime it would help this line."

Three and a half years ago, Camco found AMSI, a product now owned by Dallas-based Geac Commercial Systems Inc.

"We tested a number of different products, we interviewed different companies that we were considering and we talked to some of their clients to see how happy they were," Candella says. "We then put the software packages next to each other and tried to see which did most of the things we wanted, and AMSI just blew the others out of the water."

"So what we ended up doing for about a month was running the residential receivable packages at the home office side by side; that's where we verified the reports and made sure everything was coming in fine," Townsend says. "We were looking for a good residential receivable package, and we found that with their product called Power Site."

During this selection process, Townsend went to Houston and visited the staff as well as some of their software clients to really see how the product was used and how happy th users were with it.

Candella points out that the product has been changed quite a bit to suit Camco's needs, but what is more unusual about the changes is that the software was not customized just to meet Camco's needs, the changes were integrated into the software package as a whole.

"When we signed the contract three and a half years ago, there was, I believe, a ten item list that they said they would change in th product," Townsend says, "but what we did not want was for us to have our own (original software product), because it's too hard for them to keep up an make sure we're getting our version. They ended up writing the code for those 10 different things that we needed in the software but giving it to every user who uses Power Site. And that happens to date."

Townsend says that requests for changes to the software are reviewed by Geac every Monday and, if they feel the change would be beneficial to all the users, then they go ahead and make the change in their next update.

"If it's not going to be part of the software, because they don't feel that it's something every user would need, then they will ask you if you want to get customization, but 99% of the time, they say it will be in the next release. They do lots of changes for us."

New kind of renter forces apartment developers

to provide new apartment product

In many of the country's fastest growing regions, such as the Pacific Northwest, the Southwest and the Southeast, a new kind of renter is paving the way for many of the changes in the apartment industry. Today, renters in these high-growth areas are more demanding than ever and can afford to pay for amenities they want. Average household incomes are on the rise, and the result is that these more affluent renters demand better quality.

Although many can afford to buy homes, they want the flexibility of an apartment with the amenities of a house, creating a demand for a new product of apartments - the lifestyle developments. The lifestyle developments are carefully designed and planned communities that offer the renter many of the same amenities single-family homeowners enjoy - attached garages, individual unit entry and large, highly functional floor plans without the burdens of home ownership.

The challenge for today's apartment developers is to design and build units that meetthe needs of tomorrow's working professional.High-tech amenities such as video conferences, Internet access and video on demand will become standard for today's at home executive. Technology is changing rapidly and developers must be proactive in keeping pace with these changes in order to persuade affluent white-collar renters from choosing to stay m rentals when they can afford to buy.

In order to build, developers need construction equity and financing. To meet such capital requirements, developers are utilizing more innovative structures. Today, investors seeking higher yields are investing directly with merchant apartment developers. These investments are typically 20% to 30% of the total projected cost and allow developers to use conventional domestic and foreign banks to finance the balance. Domestic and foreign commercial banks, which are staffed with real estate professionals able to understand the construction process, have been able to capitalize on these financing opportunities. These transactions are structured on either an "open-ended" basis with no presale in place or alternatively using a tri-party forward purchase agreement with an institutional buyer. The terms of the purchase price are typically prenegotiated based upon lease-up requirements and a prefixed capitalization rate. The buyer typically benefits through an increased yield equating to approximately 25 to 75 basis points.

Private apartment owners who have been cash-starved and wanted to be publicly owned companies now want to stay private and become cash rich. The investment vehicle making this possible is a private REIT. Private apartment REITs are currently the hottest investment vehicle being considered by apartment owners' developers and institutional equity investors.

Private REITs will be the preferred investment vehicle for today's largest private apartment owners, because it offers access to significant capital with fewer strings attached than ever before.

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