BFP Management Blog

Archive: December 2010

Are Real Estate Prices at Their Bottom or a Temporary Plateau?

A reporter from an LA area newspaper called me two weeks ago to get my reaction to the report by RealFacts which said average apartment rents climbed in the 3rd quarter in both Orange and Los Angeles Counties, respectively. Vacancy rates fell again as well.

As I had not seen these quarterly figures (which are based on surveys from large apartment communities), I immediately wondered if the economy was indeed turning around. I closely follow the statistics from the many properties managed by my property management company and know that while we have many highly occupied buildings, concessions are plentiful to entice new renters. Also, many more residents are suffering from job losses and salary reductions than a few years ago which has increased delinquencies.

I checked the unemployment data from the California Employment Development Department (EDD) and found that it stayed relatively constant (within a ½%) for the last 12 months.


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Source: California EDD

Given that unemployment hasn’t decreased significantly and is actually higher on a year over year basis, why has occupancy seemingly stabilized? I believe the statistics to be accurate as our management can generally keep properties fully occupied as long as the units are in great shape and the personnel is quick to respond to prospective resident inquiries.


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Source: California EDD

Every month at my meeting with my management company’s on-site managers, I conduct a survey to see if the economy feels like it is getting better, staying the same or getting worse. For the last two years (over 24 meetings), not one manager has answered “getting better.” Most recently, the majority voted that the economy is “staying the same” with a smattering of “getting worse.” So why are apartments operations seeing an uptick or stabilization?

It is the vacant “shadow housing market.” In October, NY Fed President William Dudley said that there were over 3 million unoccupied housing units in the United States. Banks are foreclosing but are slow to list the properties for sale as there is an aversion to let the free market sort it out by selling or dumping the houses. The former owners are turned into renters and their now vacant homes are taken out of the housing stock for an undetermined period of time. In other words, the banks are creating renters while they seek an “orderly” disposition of the massive backlog of homes that they own.

At the same time, interest rates for loans on commercial and residential properties are at (or very close to) historic lows. Because of the inexpensive borrowing costs, capitalization rates on apartments have fallen (valuations reciprocally move up) again, much like they did under Federal Reserve Chairman Greenspan’s policies which helped supercharge the real estate bubble. While this is an excellent time to be refinancing properties (I have no less than 5 in process now), one must consider that rising interest rates may immediately sap value out of properties purchased in this environment unless the rents go up significantly.

The government’s invisible hand long ago turned into a giant shoe which kicked the can down the road. It did (and continues to do so) with the hope of stopping the value slides and subsequent foreclosures so that the economy can recover and stabilize the real estate market. Unfortunately that strategy is flawed as the economy can’t recover until the real estate market actually cleanses itself.

My Macro prediction is that we are on a temporary plateau and we will reach that oft kicked can which includes at least another 20% drop in housing prices. This will beget many more foreclosures. I also see the recent strength in commercial prices to be temporary. While there is a lot of money chasing deals right now, falling valuations will punish those who get caught in the cap rate / low interest rate bear trap. If the government stepped aside and let the market work itself out, we would see the drop occur immediately. The economy won’t enjoy a real and sustainable recovery until the real estate markets clear the massive glut of bad debt. The cloud in my crystal ball continues to be the invisible shoe and how far it can kick and delay the inevitable.

As we say goodbye 2010, I want to thank you for your loyal readership and the many who have contacted me with kind comments and inquiries. Best wishes to you and your family for a happy and healthy 2011!



Kyle Kazan


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