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Multifamily Starts Up

APARTMENT FINANCE TODAY • June 2008

Apartment developers are taking the plunge. In the first four months of 2008, builders started construction on new multifamily projects at a rate high above the unusually sluggish levels seen in early 2007, according to the National Association of Home Builders (NAHB).

In April, multifamily starts reached a seasonally adjusted annual rate of 340,000. That’s up from just 289,000 the year before. The rate of starts in January and February was also up significantly compared to 2007, more than making up for a slow rate of starts this March.

NAHB’s numbers include both new rental apartments and condominiums. However, experts say rental housing accounts for the increase as starts of new condominiums continue to fall. “The condo component of the multifamily sector is destined to lose more ground,” said NAHB Chief Economist David Seiders.

Some apartment developers have taken over failed condominium projects. Others have benefited from falling prices for low-rise construction materials like lumber and drywall.

Given the time needed to entitle and finance multifamily projects, many of the apartments started this spring have been in the works for a year or more and were conceived before unsold condominiums flooded the rental markets in places like South Florida and Las Vegas.

Fears of a softening rental market and an overall housing recession drove permits for new multifamily projects down in each of the first four months of this year, to reach a seasonally adjusted annual rate of 332,000 in April, compared to 411,000 the year before.

Housing Bill Details Ironed Out

Senate Banking Committee leaders announced they have reached a consensus on a hotly debated housing bill to prevent foreclosures and restructure how Fannie Mae and Freddie Mac are monitored, said CNNMoney.com.

Under the plan, the Federal Housing Administration (FHA) will be allowed to insure $300 billion in new loans for borrowers whose lenders write their loan balances down to less than the home’s appraised value.

The bill also seeks to create an affordable housing fund that would be used to provide funding for the FHA mortgage program in its first year.

Hudson Yards Finds Savior

New York City — Less than two weeks after Tishman Speyer backed out of a billion-dollar deal to develop Hudson Yards, a new developer swooped in to save the plan: The Related Cos.

Stephen M. Ross, CEO of Related, signed an agreement May 19 with the city’s Metropolitan Transportation Authority (MTA) to develop 12 million square feet of office towers, apartment buildings, and parks over the 26-acre railyard, which sit on both sides of 11th Avenue, between 30th and 33rd streets on Manhattan’s Far West Side. The project will have thousands of multifamily units, as well as office and retail space.

Ross, who had bid on the yards before, basically agreed to the same tentative $1.1 billion deal that Tishman had signed in March.

The deal requires the approval of the authority’s board, which was expected to approve the agreement at a special meeting slated around press time. Subsequently, the two sides are expected to take the next four months to complete a contract for the purchase of the development rights.

The MTA balked at a Tishman proposal to “change a central deal term in an effort to postpone the closing on the Eastern Yard until the Western Yard was satisfactorily rezoned,” according to an MTA statement last week.

Related must spend about $2 billion erecting platforms, columns, and foundations over a working railyard before it can build the first tower. The company will also be competing for commercial tenants against three big developers: Brookfield Properties, which plans to start construction at a site at Ninth Avenue and 33rd Street; Larry Silverstein, who is building three towers at the World Trade Center site; and the Port Authority, which is building the Freedom Tower there.

Related’s plan calls for about 5.5 million square feet of commercial space, including a hotel, 5,500 apartments, a park, and a cultural center.

Equity Pulling Up Stakes in Lone Star State

Austin — Equity Residential, the largest multifamily real estate investment trust (REIT) in the nation, is pulling out of Texas. The Chicago-based company has placed its entire Austin portfolio on the sales block. The offer totals nearly 3,000 units.

The REIT is leaving the Texas market to focus on “markets that have better long-term prospects,” mainly on the East and West coasts, according to Equity spokesman Marty McKenna.

McKenna did not discuss further details of the Equity plan in the Austin American-Statesman, but GlobeSt.com, a real estate news site, reported that an unidentified buyer has a contract on the Austin properties, which include the Madison at the Arboretum and River Stone Ranch and seven more developments in Northwest Hills and north and southwest Austin. The REIT has already sold its properties in Houston. Equity also owns 17 assets in the Dallas area and two in San Antonio.

Equity’s apartments in Austin have a 96 percent occupancy rate for the first quarter of 2008. The average occupancy rate in the area is 93 percent. The Austin portfolio consists of nine Class B properties built between 1984 and 1997, with an average monthly rent of $841.

Although investors are interested in the Austin market, analysts are concerned. Nearly 10,000 new units are expected to be completed in the next year. New supply is expected to raise vacancy rates and slow the increase in average rents. Rents for apartments in the Austin area have steadily climbed since 2005. Monthly rents are projected to increase by $42 this year, according to an Austin Investor Interests report.