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REAL ESTATE Subprime Good for Apartments?

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SteveO

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Here is an article from BMC Capital:

Subprime Fallout Good for Apartment Demand

Consumer demand for apartments remains strong as the subprime mortgage meltdown has decreased the number of renters leaving to become homeowners, according to the National Multi Housing Council's July 2007 Quarterly Survey of Apartment Market Conditions.

On average, survey respondents reported few changes in the strong market conditions recorded three months ago, with the exception of a significant worsening of debt market conditions.

When asked specifically about the impact of the subprime mortgage meltdown on the flow of apartment residents leaving to become homeowners, 18% said that there has been a big decrease and 37% noted a small decrease.

The continued strong demand conditions suggest that any supply spillover from the excess inventory in the for-sale market into the rental market has not exceeded the growing demand for apartment residences.

The biggest news in this quarter's survey was a significant deterioration in the debt market. Thanks to higher interest rates (compared to three months ago) and noticeably tighter underwriting by lenders, the Debt Financing Index dropped to 26, from 54 in April. This may be the low point for the Debt Financing Index since interest rates have retreated since the survey was conducted, unless lenders continue to restrict credit further.

"Conditions remain generally favorable in the apartment markets, with demand for apartment residences continuing its gradual, but sustained, rise" noted Mark Obrinsky, NMHC chief economist. "While debt financing conditions took a turn for the worse, equity capital remains abundant. This could lead to a shift in the composition of the investment market, however. If current conditions remain in place, highly-leveraged private buyers may lose their place to REITs and institutional investors who rely more heavily on equity financing."

The tightening in the debt market had little effect on the Sales Volume Index, which was little changed at 39. This was the seventh straight sub-50 reading, meaning that there are more markets with lower sales volume of apartment properties than there are markets with higher sales volume.

"It is clear that transactions peaked in the second half of 2005," noted Obrinsky. "Sales volume is down from the record levels posted in 2006, but remains strong by historic standards."

Finally, the Equity Financing Index dipped to 48, breaking the string of 15 straight quarters above 50 (indicating improving equity financing conditions). Still, more than two-thirds of respondents indicated that conditions were unchanged and a small 9% said equity was more available than three months ago, a sign that equity capital for investment in apartments remains easily available.


Keith T. Van Arsdale
Managing Director
BMC Capital, LP
1330 Post Oak Blvd., Suite 1600
Houston, Texas 77056
O: 713.622.4848
F: 713.513.7178
 

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kidgas

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I think the subprime mess may be good for landlords that cashflow. I just signed a tenant today that is letting his house go to foreclosure because the bank would not work with him. His rent is now half of what of what he was paying but he has saved a lot sinced he stopped making mortgage payments.

Banks are not in the market of renting out homes and so there will be more demand for those places that are available. Then, as the banks try to rid themselves of REOs, you might pick up some decent deals. Just have to be ready for anything.
 

andviv

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Steve, how is this going to affect your deal in Houston? (by the way, how's that coming along? do you have all the investors in place or there still some room in there for more?)
 

Sid23

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Hey Steve! Is the deal in Houston the one we discussed that you're working on with Jordan?
 

SteveO

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Interest rate spreads have been increasing. While this could raise the acquisition costs a bit, we have had some luck. The 10 yr note has been decreasing so the actual interest rates have held steady lately.

The project is coming along very well. There is still room. As you know, we just put it out recently.

This is the first deal that I have done like this for a while. I was just there yesterday and things are rolling along.
 

SteveO

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Hey Sean,

This is a different deal. Jordan may still be involved but this is a property that I located.
 

SteveO

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Just to elaborate more on your questions Andviv.

The subprime debacle should be a real boon to the apartment market. The housing market in Houston is still chugging along okay and the rental market is suffering. But, it is clear that the conditions are improving and occupancy levels are rising in the central part of the metro area. I am counting on income improving significantly as these fundamentals march forward.

This article supports my thoughts and projections.
 

andviv

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Hey SteveO, it's been almost six months since you posted this. How's the market these days? What changes have you noticed? I have seen the rates for buying apartment buildings go even lower. What else?
 

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