“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “ I AM YOUR LAND / INDUSTRIAL AND INVESTMENT SPECIALIST / LOOKING FOR OWNERS Call me if you want to sell your property and need an estimated value. Direct : 602-759-1209, Prefer cell: 520-975-5207 or email me email@example.com. A CLICK HERE TO VIEW ALL MY $ 60 MIL OF LISTINGS .
By David L. Church, CCIM, managing director at U.S. Realty Capital, LLC. | Mar.Apr.16
Capitalization rates for multifamily properties appear to have stabilized at very low levels after a veritable free-fall in major metropolitan markets since the end of the Great Recession. The drop in cap rates appears to be the result of low cost permanent financing, the perceived long-term stability of apartments as an asset class, and a lack of yield in other industry segments.
Investors purchase apartment projects in major markets as soon as they are listed – or in some cases before they are listed. The historically low interest rates provided by permanent lenders – Fannie Mae, Freddie Mac, conduits (until recently), and some local and regional banks – make acquisitions at high prices per unit and correspondingly low cap rates feasible. However, going-in cap rates tell only part of the story for long-term investors.
Discounted Cash Flow
Many real estate professionals eschew the use of 10-year discounted cash flow models to value multifamily properties because income and expense growth is typically forecast at a steady pace and because replacement reserves are assumed to be flat through the holding period. It is true that it is simpler to forecast the 10-year performance of multifamily projects than it is to forecast the performance of office and retail over the same period. It is not true that this assumed predictability lessens the need to analyze the performance of multifamily projects over a holding period, especially when comparing apartment projects with varying operating expense structures.
Two stabilized apartment projects may generate an identical net operating income after reserves, but it is the operating expense ratio and the potential volatility of certain operating expenses that will make or break targeted returns.
For example, assume that two stabilized multifamily properties are 94 percent occupied and that each has an NOI of $1,000,000. Property A has an expense ratio of 33 percent (utilities sub-metered) and Property B has an expense ratio of 60 percent (utilities master-metered). Armed with this information, the following basic operating statements can be constructed from the bottom up.
If NOI is capped at 6.0 percent, the value of each property is $16,666,666. Assuming a first mortgage of $13,300,000 (80 percent of the purchase price) at 4.0 percent on a 30-year amortization schedule, the debt service coverage ratios for the properties are 1.31x and the debt yields are 7.52 percent in year one. Both acquisitions require cash equity contributions of $3,366,666 (without transaction costs).
Assume that rents at Property A increase at 2.0 percent per annum and that expenses increase at 2.5 percent per annum over a 10-year holding period. Also assume that rents at Property B increase at 2.0 percent per annum but that expenses increase at 3.0 percent per annum.
The 0.5 percent increase in annual expense escalations for Property B is an attempt to account for the higher uncertainty associated with the master-metered utilities at Property B. The DSCR for Property A in year 11 is 1.56x and the debt yield on the outstanding principal balance at the end of year 10 is 11.34 percent. The same metrics for Property B are 1.37x and 9.94 percent, respectively.
Additionally, the value of Property A at the end of the holding period, less 3.0 percent for transaction costs, is $17,735,325 using a terminal cap rate of 6.5 percent, while the value of Property B is $15,540,850 (also using a 6.5 percent terminal cap rate) – a difference of almost $2,200,000. Obviously, refinance risk at the end of 10 years is markedly less for Property A than for Property B. Lastly the leveraged pre-tax internal rate of return for Property A is 14.7 percent versus an IRR of 10.4 percent for Property B.
The analysis above is purely “by the numbers” and, by definition, does not include non-quantitative factors. While the slightly higher annual growth rate in operating expenses attempts to take into account the uncertainty regarding the stability of utility costs for a master-metered property, spikes in utility costs would have a dramatic impact on the performance of Property B. As a result, the predictability of Property B’s cash flows is much more difficult to assess. Uncertainty is risk and a transaction with enhanced risk should be modeled to generate a higher IRR to an investor. However, as the analysis shows, when the same dollar amount is paid for Property A and Property B, Property B actually yields a lower return – not the higher return that investors should expect.
As this simple example illustrates, investors need to be wary of purchasing multifamily projects based solely on going-in cap rate analysis. The performance of various acquisition targets needs to be analyzed with a focus on operating expense ratios, the allocation of utility costs, and realistic projections for annual rent and expense escalations. Multifamily properties should be modeled over a 10-year holding period to test assumptions and make informed determinations about the value of the future benefits being purchased.
David L. Church, CCIM
David L. Church, CCIM, is managing director at U.S. Realty Capital, LLC. Contact him at firstname.lastname@example.org. A version of this article first appeared in the Mid-Atlantic Real Estate Journal.
Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also international as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial en.wikipedia.org/wiki/CCIM I AM YOUR LAND / INDUSTRIAL AND INVESTMENT SPECIALIST / LOOKING FOR OWNERS CLICK HERE TO VIEW ALL MY $ 60 MIL OF LISTINGS PLEASE CALL ME – Direct : 602-759-1209 , cell: 520-975-5207 or email me email@example.com
WEEKLY LAND SALES
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WEEKLY INDUSTRIAL SALES:
I AM YOUR LAND / INDUSTRIAL AND INVESTMENT SPECIALIST / LOOKING FOR OWNERS CLICK HERE TO VIEW ALL MY $ 60 MIL OF LISTINGS
Walter Unger CCIM
Phoenix , AZ 85018
“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “ ARE YOU READY TO SELL OR PURCHASE YOUR INDUSTRIAL / OFFICE OR RETAIL BUILDING OR YOUR LAND in Phoenix, Maricopa County and Pinal County, Arizona, please call me. Office: 602-445-4113, Direct : 602-759-1209 , cell: 520-975-5207 or email me firstname.lastname@example.org. … CLICK HERE TO VIEW ALL MY LISTINGS.
Let me know if you are interested in Apartments: CLICK HERE FOR APARTMENTS FOR SALE
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
- The average age of the population is 34 years old.
- The health cost index score in this area is 102.1. (100 = national average)
- Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Walter Unger CCIM
“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
Also Call me if you need an estimated value of your Property.
Call me if you want to see a map with what is in the Construction Pipeline for Apartments.
Kasten Long Commercial Group tracks all advertised apartment communities, including those advertised by other brokerages. The interactive map shows the location of each community (10+ units) and each location is color coded by the size (number of total units).
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
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