CLEVELAND, OH - Amid the rubble of the commercial real estate industry, there's a little bit of sparkle. Apartment buildings are holding up, even as developers are benched, retailers go bust and real estate groups beg for a bite of the government bailouts.
Sure, economists expect some pain for apartments in 2009. Mounting job losses and the sour economy could result in fewer new households, a blow to occupancy levels and landlords' abilities to raise rents. But apartments are looking pretty stable compared with other sectors of the ailing real estate industry.
"For as long as we're in this period of economic turmoil, it's going to be the most important product choice for us," said Peter Rubin, president and chief executive officer of the Coral Co. in University Heights.
Coral, a developer and homebuilder, can't find the large sums of cash needed to back up new projects. So the company has launched an aggressive plan to buy apartments in northern Ohio, Rubin said. Since November, Coral has purchased apartment buildings in Shaker Heights and Cleveland.
The reason: Even when they've lost jobs and are forced to cut spending, people need a place to live. And despite depressed home prices and low mortgage rates, there are plenty of renters out there - consumers who feel gun-shy about the tumultuous housing market, people who can't qualify for a loan, or recent college graduates who just prefer to rent.
"What really caused damage to most markets in the in the apartment business was when interest rates were at a historical low and anybody who could check a box got a loan to buy a house," said Jeffrey Friedman, president and chief executive officer of Associated Estates Realty Corp., a publicly held apartment owner based in Richmond Heights. "I don't expect that to happen again," he said.
When housing slumped in 2007, apartment vacancy rates in the Cleveland-Elyria-Mentor area dropped to 5.6 percent, their lowest level since the economic downturn of the early 2000s. Cleveland-area apartment owners reported rent growth of 4.5 percent in 2007, according to real estate research firm Reis Inc. of New York.
Last year's financial slide largely put the freeze on commercial real estate lending. What little credit was available didn't come cheap. But mortgage giants Fannie Mae and Freddie Mac kept up their work with lenders to support mortgage debt for apartments - even after the government took over the government-sponsored entities last fall.
That's not to say that deals were easy. Marcus & Millichap Real Estate Investment Services saw its apartment sales in Northeast Ohio fall to $102.8 million last year, from $174 million in 2007. The firm's local office estimates that the combined value of all apartment sales in Cuyahoga, Lake, Summit and Stark counties fell nearly 19 percent last year.
Sales topping $5 million have been difficult, as some large banks and insurance companies have moved away from commercial real estate lending, said Michael Barron and Daniel Burkons of Marcus & Millichap. And first-time or small-scale investors looking at properties worth less than $1 million have become more skittish.
But mid-size deals are still happening. Coral paid $1.35 million for Parkland Drive Apartments in Shaker Heights and $3.7 million for the 1900 Euclid Avenue Lofts in Cleveland. Smaller banks, such as FirstMerit Bank, which financed the 1900 Euclid Avenue deal, have filled some of the gaps left by large lenders.
"We're seeing interest," said Doug Price, whose apartment company, the K&D Group of Willoughby, is trying to sell buildings in Euclid and Cleveland. "It's not what it was, but there's definitely interest, because the multifamily sector, of all the real estate sectors, has held up fairly well."
Barron and Burkons expect apartment sales to continue this year, though more deals could involve seller financing, to cover the distance between the available mortgage and the amount a buyer can put into a purchase. The brokers also expect more sales of "distressed" apartments, including properties in or near foreclosure.
The apartment industry is taking a cautious approach to 2009. The National Multi Housing Council and the National Apartment Association are asking the government to boost the secondary market for apartment debt - through efforts such as buying bundles of apartment mortgages.
Industry groups also are particularly worried about the future of Fannie and Freddie, which face size limits on their mortgage portfolios and which still are evolving under the government's hand.
"Apartment borrowers, if they've got maturing debt anytime in the next year or two, ought to consider refinancing as soon as possible," said Daniel Walsh, an executive vice president with KeyBank Real Estate Capital.
Walsh described 2009 as "transitional" for apartments. Property owners are watching carefully to see whether college graduates move back in with their families or renters facing job losses or pay cuts move in together to reduce expenses. Apartments, particularly in once-hot housing markets such as Florida and California, might feel more pain as condominiums and houses that haven't sold transform into rentals.
In more humdrum Midwestern markets such as Cleveland, however, apartment owners say they've seen strong interest from renters and aren't worried about occupancy levels, despite mass layoffs in the automotive industry and manufacturing. "We can stay full," said Friedman, whose company owns or manages 52 apartment properties, including buildings in Greater Cleveland. "It's just a question of how much we can charge in rents." In the Cleveland-Elyria-Mentor area, vacancy rates will rise to 6.3 percent this year, according to recent projections from Reis. Local rents could fall to $688 per month, from a peak of $705 last year.
Victor Calanog, director of research at Reis, expects apartment owners to make more concessions - such as a month's free rent for a new tenant - and muddle through the year. But limited recent construction of new apartments in Cleveland and other parts of the country should help ease the pain. And once the economy turns around, apartment owners will be able to raise rents again as their buildings fill up. "This is the sector that will bounce back," Calanog said. "If you wanted to put money on it, I would short retail and long multifamily."
Source: Cleveland.com