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02 Jun, 2011

For apartment investors, risks in unabated enthusiasm.

Five years into the housing downturn, the latest data show little sign that a rebound in housing prices or volume is in the offing. The S&P/Case-Shiller index, amongst the most widely cited measures of home values, fell to an eight-year low in the just-released report of March 2011 activity. Distress continues to play a significant role in exerting downward pressure on prices; a larger overhang of foreclosures relative to demand for owned housing suggests that the index will trend even lower. Anticipating higher residential mortgage rates over the next year, significantly stronger job growth is a necessary but unlikely condition for housing market stability.

Apart from its drag on the broader economy, the Miami Real Estate Club has noticed that housing’s woes have clearly shaped the recovery in the apartment sector. Setting aside more stringent underwriting and the failure of many of the recession’s housing policy interventions, the prevailing perception of homeownership as a risky investment is amongst the key drivers of current apartment market trends. Why buy an asset when you expect prices to decline in the short-term? In 2010, ownership was down from its peak by over 500,000 households. Meanwhile, renters increased their ranks by almost 4 million households between 2005 and 2010.

With so many new renters, a relatively slow expansion of the rental inventory, and varying rates of substitution between the rental stock and various subsets of the shadow inventory, it is hardly surprising that the apartment sector was the first to record an inflexion in fundamentals. At a national level, apartment occupancy reached its nadir in 2009. Momentum has been building in the ensuing period. Just before the Memorial Day long weekend, Axiometrics reported that the national occupancy rate increased to 93.8 percent in April; effective rents were roughly 5 percent higher than a year earlier.

The shift in tenure bias away from ownership and towards renting, the improving apartment fundamentals that have followed on stronger demand, and competitive credit conditions have converged to support investment in the sector. In coastal markets, in particular, recent high-rise property sales suggest that the top-end of the market is priced to perfection. Emboldened by rising asset values and expectations of continued improvements in cash flow, lenders are now financing an uptick in construction activity. In some cases, underwriting assumptions belie any potential for the pendulum to swing back, even in part, to ownership.

While a degree of enthusiasm is certainly warranted amongst apartment market participants, investors and lenders should be careful not to ignore the medium- and long-term risks embedded in the sector’s current trajectory. After all, our industry’s own history is replete with evidence that unabated enthusiasm can ultimately prove destructive. Looking to the future, housing finance reform will keep more Americans in the rental pool, even if homeownership remains a central feature of the American Dream. But a diminished role for the government-sponsored enterprises in subsidizing mainstream multifamily credit is almost certainly a part of that bargain. For many of today’s buyers, the landscape of apartment finance could change dramatically before they refashion themselves as sellers.

02 Jun, 2011

Miami's Viceroy Hotel sells for $37 Million

MIAMI-Viceroy Miami, a 148-room luxury, full-service hotel in Downtown Miami, has traded for $36.5 million. Located along Brickell Avenue and constructed in 2009, the hotel calls the ICON Brickell complex home.

Pebblebrook Hotel Trust acquired the asset, which is located in one of the three ICON Brickell towers overlooking the Miami skyline, Miami River and Biscayne Bay. The ICON Brickell is a 10-acre urban development that also includes condominium residences. Viceroy Hotel Group will continue to manage the property.

“Miami has historically performed very well in recovery cycles and the distinctive quality and location of the Viceroy Miami creates a very strong investment opportunity for our company,” says Jon Bortz, chairman and CEO of Pebblebrook Hotel Trust. “The hotel benefits from its location within the ICON Brickell complex along Brickell Avenue, a high-end business district in Miami."

Like the Miami Real Estate Club, Bortz sees Downtown Miami as a cosmopolitan area that has redefined itself in recent years as the city’s work-play epicenter. Indeed, the Miami metropolitan market has experienced unprecedented growth over the past 20 years, benefitting from a healthy international tourism industry and a strong connection to South America’s rapidly expanding business centers.

“Pebblebrook Hotel Trust’s entrance into Downtown Miami through the purchase of the Viceroy Hotel is yet another sign that this market is strong, viable, and ripe for continued investment,” Leo Zabezhinsky, manager of Business Development and Real Estate for the Miami Downtown Development Authority, tells “With nearly a dozen new luxury hotels adding 2,000 rooms to the area over the past decade, Downtown Miami has emerged as an international destination for business and tourism on par with major global cities around the world.”

In 2010, during the early stage of ramp up from its prior year opening, the Viceroy Miami operated at 68% occupancy, with an ADR of $183. During the next 12 months, Pebblebrook forecasts that the hotel will generate earnings before interest, taxes, depreciation and amortization of $2.4 million to $2.7 million and net operating income after capital reserves of $1.7 to $2 million.

02 Jun, 2011

U.S. house fall beats the Great Depression house slide.

   The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.
The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.
The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world's largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.
And in the latest Conference Board consumer confidence survey more people expressed uncertainty over their future economic prospects including the Miami Real Estate Club. The confidence index fell unexpectedly to 60.8 from a revised 66.0, when economists had expected it to rise to 67.0. Falling house prices and negative equity combined with high petrol and food prices and a still-weak jobs market to raise consumers' fears for the future.
Thomas Di Galoma, the managing director of government securities at Oppenheimer & Co, said: "Based on the weakness in housing prices, Chicago PMI and consumer confidence, it appears as though the economy could be headed for a double dip, especially as federal and state spending slows rapidly over the next six months."
Economists warned not to expect any immediate relief to the gloom from the housing market. Banks continue to demand high deposits from potential buyers and are pressing on with foreclosures against those who have fallen behind on mortgages, adding to the glut of unsold homes on the market.
Prices are back to their 2002 levels, according to the Case-Shiller National House Price Index out yesterday. "The national index fell 4.2 per cent over the first quarter alone, and is down 5.1 per cent compared to its year-ago level," David Blitzer, the chairman of the Index Committee at S&P Indices, said. "Home prices continue on their downward spiral with no relief in sight."

17 May, 2011

Fannie Mae is back in the loss column and need your money

Fannie Mae reported a net loss of $6.5 billion for the first quarter as a weakening housing market dashed hopes that the company had stabilized.

Fannie said Friday it would ask the government for a fresh taxpayer infusion of $6.2 billion after paying dividends to the Treasury. The loss follows net income of $73 million during the previous quarter.

Fannie's loss came as it increased its loan-loss reserves after it revised down its home-price forecast for 2011, and took bigger-than-expected losses on the sale of foreclosed properties. The mortgage-finance giant booked $11 billion in credit-related expenses, up from $4.3 billion last quarter.

"Right now, we're not seeing a lot of good things in the residential real-estate markets," said David Hisey, acting chief financial officer for Fannie Mae.

Home-price declines pose a big risk to Fannie and its smaller sibling Freddie Mac because the firms could take steeper losses on a rising number of foreclosed homes that must be resold. Fannie and Freddie owned 218,000 homes at the end of March, a 33% increase from a year ago.

The rising losses came despite a decline in the share of single-family loans that were 90 days or more delinquent. Those fell to 4.27% at the end of March, down from 4.48% at the end of last year. Fannie has around $206 billion in delinquent loans on its books, "so with that much exposure, if you just have a little bit of negative things happening, it can have a big impact," said Mr. Hisey.

Fannie's report comes days after Freddie Mac reported net income of $676 million for the first quarter.

"It is clearly too soon to say that they've turned a corner," said Jim Vogel, an analyst at FTN Financial.

The federal government has committed unlimited sums to prop the companies up and keep mortgage markets from collapsing. So far, taxpayers are on the hook for around $138 billion, with $86 billion for Fannie and $52 billion for Freddie.

The government receives preferred shares that pay a 10% dividend in exchange. At the current rate, Fannie must pay the government $2.3 billion each quarter. Fannie has posted losses for 14 of the past 15 quarters.

01 May, 2011

Real Estate prices continue to decrease

The downward spiral of housing prices continued in February, according to the closely watched S&P/Case-Shiller home-price indexes released Tuesday. The battered market, which has already seen prices fall by more 30% nationwide, is in double-dip danger and there’s more pain to come.

“There is very little, if any, good news about housing,” says David M. Blitzer, chairman of S&P’s index committee. As we report, the Case-Shiller index of 10 major metropolitan areas slipped 1.1% compared with January, and the 20-city index also fell 1.1%. Adjusted for seasonal factors, both the 10-area and 20-area indexes declined 0.2%. Compared with a year earlier, unadjusted February prices declined 2.6% for the index of 10 metro areas, while the 20-city index was shaved by 3.3%.

Here’s what economists have to say:

    Patrick Newport, IHS Global Insight: “Are we nearing the end of falling house prices? Probably not. …The vicious cycle in which falling prices lead to more foreclosures which lead to even lower housing prices, continues to play a role in keeping housing on the mat.”
    Paul Dales, Capital Economics: “House prices have started to drop at a faster pace and on some indices are now falling at rates not seen since the financial crisis. …With the foreclosure pipeline still full to bursting, there is risk that a vicious circle of rising foreclosure sales and falling prices develops. If so, there is a real risk that prices could slide by more than our current 5% forecast.”
    Aichi Amemiya, Nomura Global Economics: “Depressed levels of home sales and massive foreclosure inventories will keep the price index weak over the next few months. That being said, the combination of imperfect seasonal adjustment and a surge in home sales in the spring time may alleviate the downward pressures on the index to some extent.”

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