BFP Management Blog

Archive: February 2011

Mixed Messages Abound

Before I leave for work every day, I read the Los Angeles Times, Wall Street Journal and Financial Times along with my local paper. As I keep seeing the economy’s “recovery” heavily covered in the headlines, I note many retail and office vacancies all around Southern California. These vacancies in particular cause concern since those spaces used to employ people and many of those folks used to be renters. The juxtaposition between what I read and what I am seeing is striking.

For example the graph in Figure 1 from the National Real Estate Investor, the headline read “The 10-year Treasury yield climbed more than 10 basis points for accelerating economic growth.” I studied the chart and thought back to April of 2010 when the yield was 50 basis points higher and remember Mr. Bernanke calling for more quantitative easing because the economy was stalling and he wanted interest rates to remain low. Now because investors are selling or not purchasing US Treasuries, it is assumed that it is because of their confidence in economic growth.

Figure 1

10 year US Treasury Yields

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When bond yields rose precipitously in Portugal, Ireland, Greece and Spain, the news was greeted as a lack of investor confidence or the glass being half empty and leaking fast. In the US, that same yield spike is being reported as the glass being half filled en route to running over. Is Figure 1 really good news when higher borrowing costs put pressure on an already weak real estate market?

As a fellow owner of apartments and offices, I wanted to share what I am seeing as far as performance at my buildings in Southern California. Since I’ve owned many of my properties for over 10 years, I’ve gotten a good feel for their usual profitability which is primarily driven by vacancy and delinquency rates, respectively. This year has been extremely challenging as I’ve seen rents drop to varying degrees on all of them. I’ve also seen both vacancies and delinquencies rise with an overall increase in turnovers. On top of that I’ve had to offer concessions (lowered or free rent) to entice new residents to move to many of my properties.

A case in point is a 25 unit building in Inglewood that I bought in 1998. For several years, the property collected over 99% of gross potential rents, meaning it lost less than 1% from both vacancies and delinquencies combined for the year. In November 2010, there were 2 evictions in process with one vacancy sitting for nearly 60 days. The evictions were both caused by job losses, including a now former professor at UCLA who refused to move since she “had nowhere else to go.” The vacancy was created because that resident (who had lived there for over 10 years) took advantage of the low interest rates, 40% decline in real estate prices and bought a house. 2010 will be the toughest economically for that property since we purchased it.

Some positive news from December was that the Bureau of Labor Statistics released unemployment data and while 21 states and the District of Columbia saw unemployment rate increases, 15 states experienced declines while 14 states posted no change. Hopefully we are seeing a plateau with decreases in unemployment in our future. In Figure 2, we see that Nevada had its first decline in unemployment in October 2010 before bumping up slightly in November. The last drop previously was in December of 2005.

Figure 2

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At the same time, California’s unemployment remained the same for the last 4 months at 12.4%. While these statistics in and of themselves don’t immediately show that occupancy percentages should increase, it does say that employment is not in freefall right now as it was.

While I’m certainly hopeful that the US and respective state economies are preparing to turn a corner, a “jobless recovery” is simply an oxymoron. I watch the positive reporting in the media and note the struggles of day to day management at properties all over the place. The mixed messages blare but I believe the bottom line and not the hype. We will certainly recover but as anyone who is operating rental properties knows, it is likely not imminent.

 

 

 

Kyle Kazan

 

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