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Summer Leasing Craze

For some people, the summer season is when work slows down and they can enjoy the warm sun on a vacation. For property managers, it’s just the opposite. Summer tends to be a peak time of the year for relocation, driven by numerous factors: longer daylight hours, better weather, the arrival of tax refunds that can be used for rent deposits and down payments, and kids are out of school.

As the temperature continues to rise, so do the demands of potential prospects and current residents on property managers. “There’s a lot of movement around kids’ school schedules,” said Chad Dewald, vice president of Multifamily at Franklin Street. “Based on various prospects’ needed or current residents’ needs, there always seems to be more timing issues. People need something faster in order to have an established address to get into the school zone they want to be in. There always seems to be movement, but this is more frantic movement or urgent movement.”

“Ever time the end of April comes we just have to put our running shoes on because it truly gets very, very busy,” said Melissa DeMayo, asset manager at Walters Group. “The phone is nonstop, we know through August it’s our busy time so we try to capture as much as we can during t his time.”

This increased demand clashes with a current market that has very limited availability. As prospects fight the clock on their own schedule, they also face competition. “We have a lot of traffic and a lot of people looking for the end of June or beginning of July and they left deposits,” DeMayo said. “We also have a waiting list; we only have about four units available through the summer which is huge. People hear “waiting list: and they get scared. They would even go to our sister property and leave a deposit there if we didn’t have what they wanted.”

Dewald said with fewer options in today’s market, people don’t waste any time when they find something that fits their needs. “They’re not going to leave without doing whatever it takes to at least hold it and have some skin in the game to come back to it if need be. We’re definitely seeing people act with more urgency because in most cases they’ve already been looking for a little while and they realize how limited the availability is. So, if they find something in their range, they typically pull the trigger much more quickly than in previous years.”

June is the perfect time for property managers to go the extra mile to ensure a first impression is a lasting impression. It can be a time for increased rent prices or it can be a window of opportunity to take care of outdoor repairs.

Freshening up the landscaping, pools and exterior common areas are all important to ensure your property looks its best. “We like to plan a lot of colorful flowers to enhance the property’s curb appeal, especially around the rental office,” said Alec Lowenstein, managing partner at Waverly Properties. “I think you always want your curb appeal to attract potential rents, but on the East Coast we must take advantage of the short spring planting season and strategically place a lot of colorful flowers.”

Your property isn’t the only thing that can use a little makeover in the summer. Now is a great time to review marketing efforts and figure out what’s working and what’s not. Companies are continuously increasing digital use, so your efforts could possibly make or break a deal for a potential resident. Does your website need to be revamped? What does your social media presence look like? Do you have an up-to-date blog?

“When it’s hot, people don’t like to have to work or be indoors, and looking for an apartment can be a long, demanding process,” Lowenstein said. “People would rather be at the pool or on the beach in the summer, so we must work extra hard to keep our apartment marketing sharp, and to follow up on any calls or leads immediately. Marketing efforts mean doubling the number of ads, infusing them with pictures of flowers and colorful things, like balloons, on the property. We are sure to emphasize distance from the beach or the availability of the municipal pool, for example.”

So you’ve reeled in a potential resident – now you should be making the leasing process as easy as possible to lock down the deal. Companies are utilizing more digital space for marketing and presentation these days, so why not put your leasing online too? Technological advances and increased mobile applications are your friend. If you have access to e-applications, online tenant screening, and digital signature options, your new resident can sign the lease as soon as they find the home of their dreams. This will save time for both parties, give you the competitive edge over other industry players, and let the resident get to the pool or beach – where they actually want to be. It’s a guaranteed win-win.

And lastly, it’s crucial to always be thinking ahead. April might still have a focus on wrapping up the spring leasing season, but that doesn’t mean summer isn’t following quickly behind. Getting a head start on your marketing efforts can only be beneficial. “April and May I would call the critical marketing times so that we’re capitalizing on June and July,” Dewald said. “Whether you market aggressively or not, come August thing historically slow down for us. There’s a small window in there, so you need to start early on the marketing front so you can spend June and July writing leases and not trying to bring people to the door.”

Summer leasing season is upon us, don’t be left behind.

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How the port dredging project may affect commercial real estate

The Business Journal recently spoke with veteran real estate professionals Peter Anderson, vice president of Pattillo Industrial Real Estate and Northeast Florida NAIOP president; Hobart Joost Jr., principal and industrial team director at Colliers International Northeast Florida; and Monte Merritt, senior director with Franklin Street’s Jacksonville office, to discuss their opinions and predictions on the Jacksonville port dredging project and its effects on the commercial real estate market. Here are their edited responses:

How important is the dredging for Jacksonville’s economy and CRE markets?

Anderson: Jaxport is an important component of Jacksonville’s diverse economy. Some goods flowing through Jaxport are stored in Northeast Florida, which leads to meaningful capital investment in commercial real estate and jobs. Dredging is not required for auto imports or break-bulk imports. Dredging is not required to maintain Jaxport’s existing primary container traffic with Puerto Rico and the Caribbean. However, dredging is required to handle post-Panamax ships, thus dredging may lead to increased flow of goods through Jaxport and thus lead to additional jobs and capital investment, including commercial real estate.

Joost: The Jacksonville Port Authority is a leading driver for industrial real estate development throughout the region. Jaxport is also, in an indirect way, a driver for the area commercial real estate markets. One case in point is Crowley Maritime Corp.’s ownership of a 113,000-square-foot office building at Regency. If Jaxport was not active, neither would be Crowley. And as a result of Crowley being in Jacksonville, they recently received federal government approvals to ship LNG [liquefied natural gas] to the Caribbean market, another big win for Jaxport.

How long before the dredging will affect the commercial real estate market?

Anderson: Most experts believe that, given a best-case scenario, the dredge completion is seven years out. This is based upon the need to obtain the commitments to fund the project, obtain permit approval, and complete the actual dredging. Consider how long we have worked on the Mile Point issue, which is still incomplete. Thus, there is not a near-term impact on the commercial real estate market in regard to dredging.

Joost: In my opinion, deepening the [shipping] channel to 47 feet will have more of an immediate impact on the industrial market, and over time, more of a residual effect on the balance of the commercial real estate market. As employment and jobs increase, so does the demand for retail services, office space and housing. Supporting this are facts and figures from the Jaxport website:

• The number of positions [jobs] related to cargo activity at the Port of Jacksonville has grown to 108,260, up from 42,647 in 2008.
• A new overall job figure of 132,599 has more than doubled since 2008.
• Direct jobs generated by container activity at Jaxport have grown by 57 percent.

Merritt: The deepening must occur before expansion is evident in the office and industrial markets. I would estimate about a year after completion is when we should start seeing more demand for warehouse space and other industrial/office properties. Originally, local officials were saying the project would be done in 2016, but the completion estimate has now been pushed back to 2017 or 2018.

What are the negative impacts that come with deepening of the port?

Joost: The first is the cost. Over the past history at Jaxport, the Army Corp of Engineers has not been able to give accurate cost figures associated with prior deepening operations. Then there are the environmental concerns with saltwater intrusion and the effect on the plants and animals. This may be lessened by some extent by breaching the Rodman Dam. There needs to be more science. And lastly, blasting the lime rock in certain areas, and the concerns that come with that process.

What are your predictions for the future of Jacksonville’s industrial and office markets?

Merritt: Local real estate executives remain optimistic about the expansion and development of these markets, and I believe the port dredging project is a significant contributor. Although the funding sources are still unclear, it is important for the city to look forward. For industrial, a deeper port will attract additional shipping lines, thus creating a need for more warehouses and distribution centers. For the office market, it will entice businesses that rely on large cargo shipments to relocate or expand to Jacksonville to have a presence near the port.

Major brands that currently operate through the Port of Jacksonville:

Bacardi: Product is distilled in Puerto Rico and shipped through Jaxport in containers and bottled here in Jacksonville, for distribution throughout the United States.
Wal-Mart Stores Inc.: Product is shipped in containers to supply retail stores in Puerto Rico.

Bridgestone Firestone North American Tire LLC: The largest distribution center in the area, at 1 million square feet, uses Jaxport for Asian imports.

The Walt Disney Co.: A recent win for Jaxport. All Disney products bound for Disney World now come through Jaxport.

Volkswagen
Chrysler
Mercedes-Benz
Coach
Rooms To Go
Samsung
Costco
Havertys
Coca-Cola Co.
Bedrosians Tile
Hanes
Heinz

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National operators react to early plans for Channelside Bay Plaza

National retailers, restaurant operators and entertainment concepts are mostly receptive to early redevelopment plans for Channelside Bay Plaza, though some are more confident than others that the plans will come to fruition.

Franklin Street — tapped by Tampa Bay Lightning owner Jeff Vinik to oversee the leasing and management of the property — had 16 meetings concerning the property in two days at the International Council of Shopping Centers’ national convention in Las Vegas last week.

The feedback was largely positive, said Brian Bern, senior director of retail brokerage with Franklin Street in Tampa. Many of the potential tenants were familiar with Vinik’s plans for downtown Tampa and were impressed by the financial wherewithal of both Vinik and his financial partner on the development, Cascade Investment LLC.

In a couple of the meetings, some operators questioned the timeline of the project.
“It was a good starting point,” Bern said.

It’s too soon to sign any deals, Bern said, as Port Tampa Bay hasn’t yet signed off on the redevelopment plans. Vinik has a ground lease for the plaza with the port, which owns the land underneath it.

The group won’t be able to finalize deals until the port signs off on its plans, which haven’t been made public and were shown to operators at the convention after they signed confidentiality agreements.

Once the port signs off on the redevelopment plan, the group can finish bids with contractors and finalize construction costs, which will determine rental rates.

The 4 million visitors a year who pass through downtown Tampa and the Channel district — from cruise passengers to conventioneers to those attending events at Amalie Arena — caught the interest of several retailers and restaurants, Bern said.

The potential for more foot traffic — from the University of South Florida medical school and Vinik’s plans to build a corporate headquarters campus — was also a big selling point.

“They said, ‘The drivers are there to make this district real,” Bern said.

Plans for that district — a mixed-use development of nearly 3 million square feet— continue to evolve, said Jim Shimberg, chief operating officer of Strategic Property Partners, Vinik’s real estate company.

In mid-March, SPP brought on two nationally renowned urban planning consultants: Jeff Speck, author of “Walkable City: How Downtown Can Save America, One Step at a Time,” and Dave Dixon, Stantec’s Urban Places Group.

“They’ll be coming back with final recommendations by the end of June,” Shimberg said, “I think we’re making a lot of progress.”

Infrastructure work on the district is slated to begin in August, and SPP plans to begin the formal process of shutting down the streets in the coming weeks. The infrastructure improvements total nearly $30 million, including close to $2.7 million in road construction and $4.9 million in stormwater work. Tampa City Council has already signed off on reimbursing Vinik for half the cost of the infrastructure work.

“We still hope to have multiple buildings under construction in 2016,” Shimberg said.

That would include the USF Morsani College of Medicine downtown campus — for which the state legislature still has to approve funding — as well as a 400-room hotel and the renovations to Channelside Bay Plaza and “hopefully a new corporate office building,” Shimberg said.

Vinik and SPP are working to lure a corporate headquarters to the district. That process is “going well,” he said.

Slightly behind schedule are the $25 million improvements to Amalie Arena, which will upgrade concession areas, add new seats and rebuild the club level. Those were delayed by the NHL playoffs, Shimberg said.

“It’s been really crazy, but really exciting and fun for everybody,” he said of working on the development plans during the playoffs.”

 

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Vacant 1970s Multifamily Building Gets New Life

ATLANTA—The vacant Forty One Marietta for has a new owner. 41 Marietta Investments paid $4.7 million, or just over $36 per foot, for the vacant 1970s office building.

Jake Reid and Ricky Jones, both of Franklin Street’s Atlanta office, represented a private seller in the sale of the 13-story multifamily building. Forty One Marietta is located in the heart of Downtown Atlanta.

“The absence of off-street parking and desirable location make the property ideal for repositioning in a growing office market, or as a mixed-use redevelopment consisting of student housing or a hotel with ground floor retail,” Reid said. The building is within walking distance to Georgia State University, the Atlanta Streetcar, and the Five Points MARTA station.

“Given all of the recent activity in the often overlooked downtown submarket, the investor is considering multiple scenarios relating to their investment in the property,” says Reid. “With strong demand, limited supply, and rising rental rates in the downtown submarket, multifamily is an obvious play for the building. However, the investor will likely take into account rising construction costs in their immediate plans for the property.”

Georgia State University, The Atlanta Street Car, and the Atlanta Falcons Stadium are major catalysts to economic growth in Downtown Atlanta. Reid attributes strong demand in the market to the increased infill housing and office needs.

“While markets like Midtown and Buckhead have been the frontrunners for investment in Atlanta, investors, both regional and international, are just beginning to recognize the potential for the Downtown submarket,” Reid says.  “With economists predicting more than 140,000 new jobs in Atlanta in 2015, employing mostly Millennials, the demand for urban living is at an all-time high.”

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Casey Siggins promoted to Director for Capital Advisors

CaseySigginsCasey Siggins

Date added: May 26, 2015
Submission Type: Promotion
Current employer: Franklin Street
Current title/position: Director, Loan Originator
Industry: Commercial Real Estate
Position level: Director
Previous position: Senior Financial Analyst
Duties/responsibilities: Siggins specializes in the origination, placement, and the financial analysis of all types of income-producing real estate investments.

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Urban Core Maintaining Interest

Franklin Street announces the sale of the vacant Forty One Marietta for $4,686,500. The sales price represents just over $36 per foot for the vacant 1970s office building.

Jake Reid and Ricky Jones, both of Franklin Street’s Atlanta office, represented the seller in the sale of the 13-story building, located in the heart of Downtown Atlanta. Forty One Marietta is a repositioning opportunity within walking distance to Georgia State University, the Atlanta Streetcar, and the Five Points MARTA station.

“The absence of off-street parking and desirable location make the property ideal for repositioning in a growing office market, or as a mixed-use redevelopment consisting of student housing or a hotel with ground floor retail,” Reid said.

41 Marietta Investments, LLC purchased the property from a private owner. “Given all of the recent activity in the often overlooked Downtown submarket, the investor is considering multiple scenarios relating to their investment in the property,” Reid said. “With strong demand, limited supply, and rising rental rates in the Downtown submarket, multifamily is an obvious play for the building; however the investor will likely take into account rising construction costs in their immediate plans for the property.”

Georgia State University, The Atlanta Street Car, and the Atlanta Falcons Stadium are major catalysts to economic growth in Downtown Atlanta. “While markets like Midtown and Buckhead have been the frontrunners for investment in Atlanta, investors, both regional and international, are just beginning to recognize the potential for the Downtown submarket,” Reid said. He attributes the strong demand to the increased infill housing and office needs. “With economists predicting more than 140,000 new jobs in Atlanta in 2015, employing mostly millennials, the demand for urban living is at an all-time high.”

About Franklin Street: Franklin Street is a family of full-service real estate companies focused on delivering value-added solutions to meet the evolving needs of clients. Through a collaborative philosophy of leveraging the resources, expertise, and experience of each of its divisions—Real EstateCapitalInsurance, and Management—Franklin Street offers unmatched value and optimal solutions for clients nationwide. For more information on Franklin Street, please visit FranklinSt.com.

 

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How Port Dredging Will Impact Office Market

MIAMI—Can JaxPort compete with South Florida ports? Monte Merritt, senior director with Franklin Street’s Jacksonville office, has some thoughts on that. But he’s more concerned with how the port dredging is going to buoy Jacksonville’s own industrial and office markets.

GlobeSt.com caught up with Merritt to take the pulse on JaxPort’s standing and how it will ultimately impact the local commercial real estate market. He drills down specifically into office and industrial space in part two of this exclusive interview.

GlobeSt.com: What major brands are currently working with the Port or in talks?

Merritt: Volkswagen recently signed a five-year contract to begin importing Volkswagen, Audi and Bentley vehicles through the port. Last year, GE Oil & Gas, a division of Fortune 500 company General Electric, announced plans for an advanced manufacturing facility in Jacksonville and in March Duke Indiana Construction Limited Partnership announced the company will build a $5.6 million office building for the General Services Administration near the port.

GlobeSt.com: How long before the dredging will affect the commercial real estate market?

Merritt: The deepening must occur before expansion of office and industrial will be seen. I would estimate about a year after completion is when we should start seeing more demand for warehouse space and other industrial/office properties. Originally, local officials were saying the project would be done in 2016 but the completion estimate has now been pushed back to 2017 or 2018.

GlobeSt.com: What are your predictions for the future of Jacksonville’s industrial and office markets?

Merritt: Local real estate executives remain optimism about the expansion and development of these markets, and I believe the port dredging project is a significant contributor. Although the funding sources are still unclear, it is important for the city to look forward.

For industrial, a deeper port will attract additional shipping lines, creating a need for more warehouse and distribution centers. For the office market, it will entice businesses that rely on large cargo shipments to relocate or expand to Jacksonville to have a presence near the port.

 

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Luxury Apartments Galore: At What Cost?

Marshall Rosen doesn’t really want you to read this article.

That’s because the CEO of Summit, N.J.–based Solomon Organization, which owns 10,000 predominantly Class B apartments spread across New York, New Jersey, Pennsylvania, and Connecticut, doesn’t want you bidding against him on his next deal.

After all, he’s enjoyed relatively little competition from other operators going after Class B assets in his core markets: He closed on approximately $200 million in properties in a recent 12-month span—and he’d like it to stay that way.

Take, for instance, the Addison at English Village, a 600-unit, 40-something-year-old property in Horsham Township, Pa., just 11 miles from the Philadelphia city limits. Rosen was able to acquire the property quietly, in an approximately $75 million value-add deal that closed in January, and is now working to put in upgrades including granite counters, new appliances, and hardwood-style flooring.

A purveyor of what he refers to as “affordable luxury with a small ‘a’,” he plans to push rents by approximately $200 per unit. That means one-bedrooms will go from approximately $800 to $1,000 in rent per month, with two-bedrooms increasing from around $1,000 to $1,200.

At existing cash flow, the deal came in at a 5.4% cap rate, with an anticipated cash-on-cash return of 9% after improvements are made, and overall returns of 15% expected on a 10-year time horizon. That’s a huge premium compared with the sub-4% cap rates being written on deals for luxury apartments that rent for $4,000 a month or more in not-too-distant Manhattan. And the number of other bidders Rosen faced to win that outsized premium?

Two.

“It was ourselves, one of the better-known public REITs, and another Philadelphia-area private REIT,” Rosen says. “The other local player fell out pretty early, and then it was just us and the big public REIT going after it. Since we had closed on more than a hundred million dollars in properties in this asset class in the last year, that made the owner eventually feel most comfortable with us.”

The story of the Addison with its $1,200 rents and outsized returns, as well as the dearth of other bidders Rosen encountered buying it, illustrates both an untapped opportunity, as well as a burgeoning affordability crisis developing for multifamily today.

Namely, while Rosen and other operators focused on the mid-tier apartment market say demand for the sub-$1,200, workforce apartment is nearly unlimited across the country, major institutional money has shunned the sector, focusing instead on new, shiny, luxury apartment deals located in the urban core that bring in $2,500 a month in rent and above.

This institutional money, seeking to put a huge amount of cash to work, has helped push  a breathtaking ascent for rents across all apartment types, with new development focused almost exclusively on the high end, and a near vacuum — or unlimited opportunity, depending on how you look at it — for capitalizing deals in the lower, more affordable tiers of the market. “I hate to publicize it, but yes, that seems like a fair assessment of this market right now,” says Rosen. As affordability continues to dwindle within the multifamily market, those operators, like Rosen, who can operate affordable market-rate apartments outside the luxury realm, while making a solid a return, are faced with a tremendous opportunity.

Indentured Renters 

To understand the situation, its best to start with  the affordability gap first, and what’s causing it.

Consider these statistics, compiled by Zillow. Nationwide, renters making the median income of $53,602 can expect to spend about 30 percent of their income on rent, or 5.5 percentage points more than the historical average between 1985 and 2000.

That’s a notable increase, of course, but in what Zillow refers to as the Unaffordable Six—New York, San Francisco, Los Angeles, San Jose, San Diego and Miami—rents are now approaching nearly indentured levels. There, residents can expect to pay, on average, 39.4% of their income for rent. In San Diego, the number is 43.2%; in San Francisco it’s 44%; and in Los Angeles, it’s a whopping 48.2%, or nearly half the area’s median income.

“Renters are getting absolutely crushed,” says Zillow senior economist Skylar Olsen. “Rent is getting less and less affordable, and it’s a problem that’s getting worse at a faster pace than we’ve ever seen before.” Olsen’s colleague, senior economist Krishna Rao, sums it up thus: “Nationally, renters are spending more of their income on rent than they have at any point in the past 30 years.”

The picture becomes even more imbalanced if you consider just new apartment construction between 2011 and 2014—the core luxury sector that’s gotten so much attention from operators and investors during this cycle. For those units, nationally, residents can expect to pay 37% of the median income toward rent, according to Axiometrics. But that’s just the average. Want to rent a new apartment in New York? It will cost you 67% of the median income. San Francisco, by comparison, is still a bargain: you can get fresh digs there for just 53% of the median income. 

The numbers provide a stark—some might say appalling—contrast to how the apartment industry painted its own image less than a decade ago. At that time, when single-family home prices were soaring and many apartments stood vacant, the multifamily industry heralded itself as the first—and last—option of affordable housing for millions of Americans. But today’s numbers paint it instead as a bastion of over-the-top luxury apartments and ever-increasing rents pushing workforce renters to the brink. 

Compare this trend to the economics of owning a home today, if you can come up with a down payment and qualify for a mortgage. Zillow says that homeowners in the U.S. today can expect to spend only about 15% of their income on their mortgage. That number is actually down from the historic norm of 21%. Which begs the question: Who in this market is still a renter by choice?

“After the housing bubble went bust, a lot of people lost the ability to own their own home,” says Olsen. “Now, because they were foreclosed on, or inventory is still so constrained in the for-sale market, they have to rent. They don’t have the down payment, they don’t have the credit, and they certainly don’t have the ability to compete with other home shoppers for the limited amount of inventory in the market.”

Obstacles of Affordability 

Of course, the hangover of a nearly non-existent development pipeline during the Great Recession is still contributing to demand outstripping available supply today, which accounts for a good portion of the overall surge in rents. But observers say there are many other reasons for the myopic focus on luxury that’s driving this affordability gap, and they don’t all have to do with developers chasing multi-thousand dollar rents.

“I think it’s hard to blame developers for building what the market demands, whether they believe that demand makes sense or not,” says Dan Miller, co-founder and president of real estate investment crowd-funding site Fundrise. But Miller isn’t referring exclusively to demand for luxury apartments by residents, per se. Rather, he’s also talking about the demand in the capital markets to put money to work. With overseas capital flooding the deal pipeline, many large investors can’t even consider the lower end of the market because they simply can’t deploy enough cash there.

“Even if there’s more inherent, unmet demand for apartments in tertiary markets farther out, it’s much harder to put the financing together for those kinds of deals,” Miller says. “If I’m running a billion dollar fund, I can’t afford to do a $10 million deal. It’s just a lot easier to raise capital for the bigger deals in L.A., San Francisco, D.C. and New York.”

That lack of institutional interest at the middle and lower end of the market actually led Miller and his brother Benjamin to co-found Fundrise to pool together smaller real estate investors so those kinds of deals – like the ones Rosen sees little competition for – can get done. The sons of Washington, D.C. developer Herb Miller of Western Development Corp., the pair originally figured with their family’s network of connections, finding investors to help them finance smaller projects in less marquee neighborhoods would be a no-brainer.

“We went out and approached some big institutional investors that our family had worked with for years, people we knew personally,” Miller says. “And we thought, this makes perfect sense. They know us, and we’ll give them access to underserved neighborhoods. But the response we got was, ‘Well, we don’t really know the area you’re looking at.’ And even if they did, they couldn’t write a check for less than $10 million. Even our midsized transactions were too small for these guys.”

Building new affordable apartments isn’t any easier. The cost of land and the battles developers face for entitlements today push costs up to almost luxury levels before construction even starts. “When you layer on the costs, regulations, and review time in many cities, it’s extremely difficult to get something approved,” says Zillow’s Olsen. “If it’s that hard to get any one project approved, as a developer, you need to get the most bang for your buck. Which is why it’s not surprising we’re seeing so many luxury apartments.”

For Kevin Finkel, executive vice president at Philadelphia-based Resource Real Estate, which targets 1980s-era properties as value-add acquisitions and operates approximately 34,000 units, the imbalance between luxury and other apartment classes all comes down to market incentives. Namely, when it comes to building apartments that are affordable to rent, there are none.

“There is virtually no incentive to build new apartments in the Class B market,” Finkel says. “Developers need to get generally over $2,000 per unit in order for them to hit their rate of return hurdles. The only place they can do that is downtown, with high-end units.”

Jay Denton, senior vice president of research at Axiometrics, says that’s simply the nature of new multifamily product – now and always. “That is true this cycle, and it was true in previous cycles,” says Denton, whose firm tracked 474,436 new units coming online from 2012 to 2014. “It really doesn’t matter which market, we see this trend all over the country. It’s simply how the market works.”

Which is why any modicum of market-rate affordability can only be achieved in value-add deals today. Indeed, Rosen is candid about the numbers, and the rents, that are in place at his “affordable luxury” apartments at the Addison. “There’s no way we could have done this for replacement cost,” Rosen says. “If we were building new in that location today, we’d have to charge between $2,200 and $2,500 a month instead of $1,000 to $1,200.”

Easy Money at the Low End

Now, consider the opportunity this affordability crisis has created. As investors chase Class A, competition drops lower down the quality scale. And, for operators who focus on the low end, success seems almost assured.

John Lauder, senior acquisitions analyst for Chicago-based 29th Street Capital, which runs a portfolio of 5,500 Class B & C apartments, sums up the competitive landscape thus: “Class A is big, and it’s a very competitive bidding process. But most of our deals range from just $8 to $20 million. There’s a lot less competition where we are, with virtually no institutional investors. We see a lot of off-market deals that result in better pricing for buyers such as ourselves.”

MINIMIZING CREDIT RISKS

Finkel points to the colossal size of this underserved market. 

“In the middle tier, you can charge around $1,300 a month, which just happens to be 30% of the average median household income in America,” Finkel says. “What’s incredible is that represents over half the population of this country. That’s a huge number of Americans who aren’t being supplied with apartments.”

And, in many cases, this demand persists through economic ebbs and flows. “There is, and will always be, a strong demand for a more affordable, no-frills type of apartment, no matter what the economy is doing,” says Chad Dewald, vice president of multifamily management at Tampa, Fla.–based Franklin Street Real Estate, which runs 2,500 Class B and C units. “If you’re able to keep expenses reasonable while still providing a clean, safe place for hardworking people to rest their heads, there’s almost no limit on the demand side.”

The same can’t be said of all those luxury units dotting the skylines of America’s premier cities today, whose owners will still have to pay debt service when this cycle inevitably turns.

But for the rest of the apartment market, if you can do what people like Rosen, Finkel, and Dewald are doing—providing that clean, safe, no-frills apartment at a livable price point—profits are yours for the taking. Plus, you’ll be providing an affordable place to live for an underserved market that multifamily’s obsessive focus on luxury has all but left behind.

Depends Where You Look

The sub-$1,200 lease isn’t a thing of the past everywhere. Michael Taus, vice president of marketing at Abodo, the map-based apartment search app founded in Madison, Wisc., says there is an abundance of affordable apartments for rent today, if you know where to look.

“Yes, rents are high. Yes, it’s becoming increasingly unaffordable. But then there’s this huge swath of the country – where most of America still lives – that doesn’t suffer from the same problem,” Taus says. “Renters do have a lot of choice, but up until now it’s been difficult to access because the data is very fragmented.”

For example, Taus points to Minneapolis, where a recent screen on Abodo culled 812 active listings below $1,200. He then filtered for apartments that had amenities, such as free Internet and utilities included in the rent, and found hundreds within that selection. From his perspective, that’s representative of owners who are providing value to renters, just not in the coastal cities. 

“Minneapolis is a thriving, downtown, urban environment,” Taus says. “It’s a pretty good example of what middle metropolitan America looks like. And in that environment, if you can screen for value, and the exact amenities you’re looking for, you’ve still got plenty of inventory to choose from.”    
       
To be sure, there are already operators targeting this niche, where opportunities abound not only to make outsized returns, but to help improve outdated housing stock as well.

Take Chicago-based Pangea, which was founded on the principle of acquiring distressed buildings in sometimes blighted areas and catering to higher credit risk individuals. Launched six years ago by investors with a background in the short-term consumer credit industry, the company has amassed a portfolio of 10,000 units in underserved portions of Chicago, Indianapolis, and Baltimore, and charges an average of about $700 for apartments with new kitchens, updated bathrooms and hardwood-style floors.

“Many of the buildings we’ve been able to acquire were in a less-than-desirable condition,” says Pete Martay, the firm’s chief investment officer. “In some cases, we’ve been able to change entire neighborhoods, upgrading a dozen vacant buildings to livable apartments and turning those areas around.” The financial results for Pangea, according to Martay, have been “double-digit, unlevered returns.”

 

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Franklin Street Office and Industrial adds Associate Director and Brokerage Coordinator

BradSaulson_smallBrad Saulson
Date added: May 21, 2015
Submission Type: New Hire
Current employer: Franklin Street
Current title/position: Associate Director, Office and Industrial
Industry: Commercial Real Estate
Duties/responsibilities: Saulson specializes in landlord representation for property owners and institutional clients throughout Tampa Bay. He also represents tenants for the acquisition and disposition of real estate.

JackiCoolidge_smallJacki Coolidge
Date added: May 21, 2015
Submission Type: New Hire
Current employer: Franklin Street
Current title/position: Brokerage Coordinator, Office and Industrial Services
Industry: Commercial Real Estate
Duties/responsibilities: Coolidge is responsible for her division’s administrative, market, research, and analytical functions, contract management, financial and revenue reporting duties, and supporting office and industrial staff.

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Franklin Street Brokers $4.7M Sale of Vacant Office Building in Downtown Atlanta

ATLANTA — Franklin Street Real Estate Services has brokered the $4.7 million sale of the vacant 13-story Forty One Marietta office building in downtown Atlanta. The property offers a repositioning opportunity within walking distance to Georgia State University, the Atlanta Streetcar and the Five Points MARTA station. 41 Marietta Investments LLC purchased the property from a private owner for a little over $36 per square foot. Jake Reid and Ricky Jones of Franklin Street’s Atlanta office represented the seller in the transaction.

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