Editor’s Letter

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Opportunity Amid Chaos

BY ANDRE SHASHATY

After several years in which buyers lined up for each apartment building that came on the market, suddenly, I am getting mass mailings announcing apartments for sale.

As you plan your business for 2008, it’s clear that sellers no longer have their pick of offers in many markets. A pricing adjustment may be in the works in many regions as fewer buyers are willing to pay any price to get a property.

At press time, the capital markets had rebounded substantially from the shock waves caused by too many home mortgage defaults. But the brief surge in pricing of debt was enough to trigger a change in the dynamics of apartment deal-making.

Sprinkle in an increasing degree of pessimism about job creation and rent growth, and you have the recipe for a slow year for deal making. Owners are not giving in to buyers’ demands as they find it harder to get the generous financing that once made any deal doable.

Analysts report that capitalization rates are already rising and prices are dropping in secondary and tertiary markets for B- and C-class properties.

Anyone who owns properties in markets with high job losses or high single-family home foreclosures may find it hard to sell at any price.

But there is a silver lining for apartment owners. It’s a great time to buy land, as single- family home builders stop buying and in many cases start selling. By one estimate, the cost of land is down 10 percent to 20 percent this year.

While high-leverage loans won’t be easy to come by, debt financing is not likely to get any pricier. The yield on 10-year Treasury notes and core inflation are likely to remain well below long-term trends.

The best new opportunity to consider is entering the affordable housing business, or selling to affordable housing sponsors, who often look to acquire older market-rate properties in need of rehab.

State and federal policymakers are increasingly concerned about meeting the growing need for housing for low- to moderate- income workers, or workforce housing. Nationally, the industry expects a large increase in renters as immigration increases, “echo boomers” come of age and form households, and the long-term increase in homeownership rates reverses course. The bad news is many of them cannot afford to pay the median rent for a decent apartment.

Affordable housing is complex, but the challenges are offset by the availability of subsidies, like the low-income housing tax credit, to raise equity for such purchases. In other words, the absence of the high-leverage loans that drove the market-rate apartment business in recent years is not a problem in the affordable housing industry.

And with a Democratically controlled Congress, look for more federal subsidy dollars to flow to this sector. In October, the House passed H.R. 2895, the National Affordable Housing Trust Fund Act of 2007, by a vote of 264 to 148. The bill, which provides the largest expansion in federal housing programs in decades, will initially allocate up to $1 billion annually directly to states and local communities, without increasing government spending or the federal deficit.

The Senate had yet to act on the bill, and President Bush had threatened to veto it at press time. If you are involved in affordable housing, or hope to be, this is a great time to step forward on this issue. Write to your senators and tell them to pass the bill, and tell them to override the veto, if it should come.

At a time when more and more Americans are having problems finding affordable housing, the trust fund is long overdue, and there really is no reason to oppose it.

After all, if we can spend billions to rebuild buildings and infrastructure in Iraq, we can certainly afford to spend $1 billion a year on something as basic as helping to house our own citizens.