April 2008 Newsletter
Interview - Craig Brown, President, Rancho Financial (San Diego)
"Apartment buildings are the best commercial properties to buy now. We're seeing four months of residential credit turmoil spill over into commercial capital markets. Cap rates have risen on income properties and commercial lenders are pulling in their horns.
Interestingly, while office, retail and R&D properties face rising vacancy rates in a slowing economy, apartments benefit from some of the same forces. There's rising demand due to the housing slowdown as previous homeowners return to more economical apartments. Many apartment properties converted to condo and were taken out of the rental pool. This increased value for the remaining rental units.
Entry home values in the Phoenix and Tucson markets are soft, but apartments are in demand. LA, Orange, and San Diego are seeing stronger demand for units and vacancy rates are below the magical 5% number where rent increases are warranted.
Previous home owners won't leave apartment life quickly, as the single family residence market is still being sorted out. With few new apartment buildings being permitted and built, we can expect to see rents rising as much as six percent regionally per year. Vacancy rates shouldn't go up in this environment.
Despite the economic doom and gloom, there are ample lenders willing to lend money for investing in properties with good business plans. With a less robust market and rising cap rates, commercial lenders aren't aggressively lending construction and rehab money. Increased risk may require greater liquidity, equity, personal guarantees and more experience in managing these properties.
Boom and bust cycles are legendary for the Arizona markets. But this is Southern California's first exposure to the bubble phenomena now happening in these markets.
Bottom line: Owners with a history of managing through the highs and lows without losing their tails will be favored over the novices. Your profitability will carry you far in these time. I say keep your powder dry."
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