AND before you can get green shoots like these in the commercial real estate markets … the first step is the market fundamentals have to stabilize. At some point rent and occupancy simply must stop falling and enter the category of “No Change” as the analysts in our industry survey the national markets. Only then can the turnaround … and those little shoots … begin to emerge.

Here’s a sign we may be seeing some stabilization sooner than most pundits had predicted.

Most of the national “experts” reported in the press over the last several months have gone on record predicting it will not be until the 3rd quarter (and most then say “at the earliest”) until we see the Commercial Real Estate Markets recover.

Here is a report showing 16 of 28 major markets in the US where multifamily rents are NO CHANGE in the fourth quarter of 2009. See the report at this link …

Could this be the first sign that some “green shoots” are on the way – might they be curled up under the surface yearning to emerge when the sun comes out all the way? Stay tuned …

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• In 2006 Fannie Mae originated  just 34% of apartment loans
• In 2008 that share rose to 84% !! – my oh my
• Current delinquencies are at only 1.6% on the $4.5B of apartment loans that mature in 2010 – good
• Fannie and Freddie only back $300B in apartment loans … as opposed to the $5 Trillion in SFR loans they hold – good
• $180B of Fannie’s apartment loans were originated at the top of the market in 2007 – not so good

So riddle me this …

with Fannie and Freddie as basically the only functioning multifamily lenders in the nation … how will the government continue to support them in 2010? At least we can play the political card of supporting “affordable housing”. I would expect that Apartments would garner the same level of support the SFR markets have received to this point.

And I wonder … won-won-won-won- wonder when the banks and other traditional apartment lending sources will jump back into the pool … if ever?

Here’s the full article (note: you have to be a WSJ subscriber to see the whole thing)

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She reports that her contents are pointing to the 3rd quarter of 2010 as the expected time when sales volumes will pick up. We’ll see …

“Apartment Vacancy Rate Hits 22-Year High !” and I murmured to myself … here we go again.

It just reminded me why newspapermen are NOT Real Estate Investors … they are just out to sell papers and a sensational headline will always beat out a rational article.

But wait … there’s more …

If you read the last line of paragraph three you found that, “Of the 79 Markets tracked by REIS, 45 showed an increase in Vacancies.” That sounds really BAD now doesn’t it? We should panic … right? Hmmmm … Remember now, this is coming from a newspaper and there is most certainly more to this story. Hold on just a minute …

As an Investor, what I find MOST interesting in this article is this.

• In the face of the worst economic downturn since the great Depression.
• In the face of the worst residential housing market in anyone’s living memory
• In the face of hundreds of thousands of foreclosed / vacant / rental single family homes competing with apartments for renters
• In the face of ALL of this …

43% of the markets tracked by REIS showed STABLE OR DECREASING VACANCIES !!

That’s right 34 of those same 79 Markets preserved or decreased their vacancy rates. That statistic is truly amazing given the national economic circumstances. And that’s not all … In the next to the last paragraph we learn that suburban Maryland and Washington, D.C. even saw a 0.3% rent increase in the second quarter. WOW.

What is the Press Missing here?

The media propagates one of the big myths in Real Estate when they report on national statistics in this fashion.

Here is the myth … “There is a “National Real Estate Market”  That statement is simply not true … never has been and never will be.

Here is the truth…

You can aggregate statistics and report on the national data with big screaming headlines, but All Real Estate Is Local. There is no mythical “National Apartment Market” that moves in sync from coast to coast taking all Multifamily Projects up and down with its gyrations.

The Profit is in the details

The savvy investor is still doing the same things despite this article …

• Working to find a market in the right phase of the market cycle
• Then finding well priced properties where they can make a profit by improving the performance under their management.

And those local markets exist right now.

The timeless rules still apply … LOCAL market conditions will determine much of the profit in your Commercial Real Estate projects. One of the key skills for Commercial Property Investors is understanding Market Cycles and timing the markets to ride the LOCAL wave. If you are invested one of the 43% of Markets where vacancies are stable or falling … you and your investors are doing just fine. These headlines may cause your investors to give you a call with concerns … AND the cash flow from your property is probably stable.

Here is the biggest challenge for Project Sponsors in Multifamily as a result of this article … Your Investors and potential investors read this article too … darn.

Now you have to provide some education about the myth of the “National Apartment Market” to bring them on board.

It won’t be that difficult to do. Some local market research will quickly prove to them that you know more than the Wall Street Journal about your local market and why Apartments are still an excellent investment. The ability to find a profitable apartment project may actually be increasing in this economy because of distressed commercial property for sale in many solidly performing markets at once in a lifetime prices.

Here is my advice. Don’t believe ANY headline in ANY article claiming to report on ANY national trends in Real Estate in your chosen niche. All Real Estate is Local … from now until the end of time.

Your job is to find those local markets where you can make a buck. And there are a lot of them still out there despite the WSJ blaring, “Apartment Vacancy Rate Hits 22-Year High” last week. Then show your investors the difference between what you know about Real Estate as an Investor and what the Wall Street Journal says as a bastion of the media.

I am sure both of us would have written a different headline.

This Recession is FAR from over
The PAIN in Real Estate is FAR from Over

AND I think I have found some really good reasons to back that up from two different articles in the last week in the Wall Street Journal. Both report on the Massive Job Losses this Recession has caused and why even with rapid economic growth it may be nearly 10 years until we are out of the woods.

1) Start Ups and Employment
Here’s a stat for you … Did You Know That Businesses in the first 90 days of their existence account for 14% of the new hiring in the US economy? Fascinating!
AND in the third quarter of 2008 the number of new businesses launched was the lowest in a quarter since 1995.

Imagine when the burning desire to start your own business will return to our general population given the current economy. They may be our only hope with large businesses in layoff mode. AND I think the general feeling out there is that booming startups are a long way off.

2) Job Creation and the 8 Year Hole
We have lost 7.2M Jobs since December of 2007 – the steepest job contraction since before WW2.
AND the economy needs to create 100,000 jobs a MONTH to keep up with population growth.

Even if a recovery speeds job creation up to the 2.15M jobs a year we saw at the peak in the 1990’s …
Projections show we won’t reach 5% unemployment again until 2017 !!

What does this mean for Commercial Property? As if real estate didn’t have enough headaches of its own … this jobs data is a strong indicator of a large delay until markets “recover”. AND the boom days of 2003 – 2006 are likely gone for the remainder of my lifetime.

The silver lining?
With far fewer folks able to get a mortgage, Multifamily may be positioned strongly soon … just watch out for markets holding a tsunami of vacant SFR.

My two cents

All the experts lamented the puny deal volumes this year and none of them seem to have a clear prediction of when deal flow will pick up however …

When asked, “How would you invest $3M in this Market?” Here is what they said …

Most responded that they would look for small, quality assets. May said that he would buy good core real estate on the west side…small retail that has long-term potential. “I am seeing a flight to quality,” he said.

Salis said that a lot of the volume that you are seeing right now is on the residential side, such as the 10- to 25-unit multifamily projects in infill locations such as Anaheim or Santa Ana, so that is a place he would look.

Roth would also look for quality. “The nice thing about quality properties is that there will always be tenants who want to park themselves there ”

Click here for the full article

This is a very basic screening for potential warm multifamily markets … ones with lower levels of both rates. AND remember, just because state level statistics are negative does not mean there are no local markets in the same state that show promise … all real estate is very, very local.

Here is the map … enjoy…

This month there were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June 2009 and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes.

This is the Double Dip we have been anticipating … release the moratoria and open the floodgates.

AND don’t forget the “Double Double Dip” …

These are the houses that are empty and for sale that have been pulled off the market by the sellers when they didn’t sell 6-12 months ago. The Double Double Dip will occur when these “Shadow” homes come flooding back onto the market once sales finally do take a significant upturn.

This will almost certainly give a “W” shape to the eventual market recovery in single family homes in many areas. First the forclosures must be absorbed … then the shadow market of unlisted homes must be absorbed … and only then does true recovery occur.

Here is the full article on CNN/Money

One Bright Spot: the ETF “URE” is up to its highest level this year and may be a fun way to play these residential see saws as they ripple into sentiment about the commercial markets.

Turns out the worst thing that could happen to our already punch drunk economy is for people to start saving money. Our national savings rate has been a negative number – meaning we spent more than we earned – for years now … until last quarter. Here’s how frugal we have become …

• In the third quarter of 2008 consumer debt fell for the first time SINCE 1952 !
• Consumer spending fell for the first time in 17 years !
• Goldman Sachs is predicting a 2009 savings rate of 6% – 10% ….. YIKES

This new trend is incredibly important if we are thinking Economic Recovery means a return to the boom economy of 2000- 2008, powered by consumers spending home equity withdrawals. If “Recovery” means a return to those “spend the money you don’t have” days, I have news for you – IT AINT GONNA HAPPEN.

Which brings up the age old saying — “This time it’s different.”

And this time it really may be different. The deleveraging of the financial markets and the “Brick Wall” effect of housing market collapse on Mortgage Equity Withdrawals has made the old Economy impossible to recreate.

This is why any “economic stimulus” package should no longer contain direct payments of cash  – people will just save it … the horror !!

So what’s next … and this is Really why it is different this time. What’s next?

NO ONE KNOWS WHAT IS NEXT … AND ANYONE WHO SAYS THEY DO IS FULL OF BALONEY. I can’t count the number of pundits in the WSJ or Barron’s or the investing news networks who have simply thrown up their hands and admitted as much.

We are in uncharted territory. It is just going to take a while to find out what the new economy looks like.

• What will the new driver of economic activity become?
• Will the government backed stimulus have the desired effect?
• Will the value of the dollar fall to zero after multiple years of trillion dollar deficits?

These are all good questions we will have to wait to be answered.

In the meantime, buy value add multifamily … and get an owner carry while your at it.

Here are selected comments: (view the full article here)

“For the second straight month, and the second time in the history of the index, the national composite recorded a negative annual growth rate, but there are some potential signs of improvement in commercial real estate prices,” 

“”In the property sector, three of the four sectors had negative returns for the month and year-over-year period. Office recorded its lowest annual return in its history, -3.1%.”

“On the positive side, Blitzer notes that apartments recorded positive returns for the one-month and 12-month periods, with indices up 1.6% and 1.7% respectively. ”

Note that these positive results are for one and twelve month periods in what has been an absolutely horrible year for every other category of real estate.

Keep your lead generators out in selected apartment markets. Look for areas of continued job and population growth – we like Dallas, Austin, San Antonio and Salt Lake City.