Ten Days of Buzz: March 21st-30th, 2012

Welcome back to Ten Days of Buzz! Let’s get right down to it.

“A demographic boom among young adults, who are traditionally the target audience for rental properties, as well as continued immigration from abroad are further supporting the rental market over home ownership.”

Dan Caplinger, Financial Planner. Where to Make Money in Housing, The Motley Fool, 3/21/2012.

“There seems to be a lot of demand for single-family homes and rental condominiums with rents of maybe $2,000 or more. We don’t seem to have enough of those properties to offer.”

Jay Young, co-owner of Seattle-based Real Property Associates. Is now the time to become a landlord? Seattle PI, 3/22/2012.

“Managers are getting more bullish about increasing rents. This is clearly the year to do it. Our survey found managers plan to increase rents 2.6% in the next six months. That’s the biggest increase they have planned since 2008.”

Dupre + Scott, Apartment Advisors. Apartment vacancies hit five-year low, Seattle PI, 3/26/2012.

“The population has continued to grow (it’s around 310 million now, maybe a little more), but home sales have been stuck at levels we last saw 10 years ago, despite the country having more people.”

Robert Freedman, Economist. Conditions Suggest Sustained Market Improvements, National Association of Realtors, 3/27/2012.

“The dynamics of falling rental vacancy rates mean increased owner pricing power. Naturally as a consequence rents have been pushed higher… Rising rents mean an improved rate of return for property investors.”

Lawrence Yun, NAR chief economist. Real Estate Investing: How To Make Money In A Down Market, NuWire, 3/29/2012.

That’s all for this week. See you next time!

Rental Market Tightens; Vacancy Lowest in Five Years

Did you see the numbers Dupre + Scott put out recently? The rental market has been tightening for awhile now, but their new report confirms it: Seattle area vacancies have hit a five-year low. This record is discussed in detail in Aubrey Cohen’s new article in the Seattle PI.

So what kind of vacancy rates are we talking about? That’s just under 3% vacancy in multifamily buildings–we haven’t seen vacancies this low since 2007. Altogether, King County currently has a market vacancy rate of 4.1%; this is big news!

The exodus from home ownership within the past five years, coupled with the momentum the job market has been gaining just recently, have helped contribute to the current renting boom. Of course, lower vacancy means landlords can charge more per unit; average Seattle rent is currently $1,178, which is over 5% higher than just one year ago. What’s more, Dupre + Scott have found that apartment managers are planning to raise the rent further–nearly 3% just in the next six months. Coupled with fewer incentives, it’s clear the landlords have the upper hand in an unparalleled way in the current market.

Of course, this low vacancy rate hasn’t been lost on developers–while last year had amongst the lowest apartment production of the last forty years, that’s all about to change. According to Dupre + Scott, more than 5,000 units will hit the market in the Seattle Region in 2012 alone.

For even more details, check out the article in the Seattle PI. In the meantime, are you enjoying low vacancy in your building? Tell us all about it in the comments below.

Speaking Empirically…Seattle Rocks.

It’s not like we need persuading, but sometimes Seattle’s damp reputation makes people think twice before relocating to this beautiful place. Do you have friends or family (or potential tenants) who are thinking of making the move? We went looking for proof of Seattle’s appeal and found out what we had long suspected–Seattle is a good place to live. It consistently ranks in top ten lists from sources across the country; whether it’s literacy, capitalism, exercise, or child-rearing, Seattle is simply a great place to do what you love. We’ve listed some of our findings below.

Seattle ranks #10 in Under30CEO.com’s list of the best cities for young entrepreneurs. “Seattle has always been driven by old industrial companies,” they explain, “but recently newer technology and internet companies have begun to call it home.”  Seattle’s beautiful surroundings and a startup-friendly culture allow new businesses to flourish.

Seattle ranks #8 in Parenting Magazine’s list of the best cities in which to raise a family. The magazine cites locally grown veggies, the city’s crown as one of the most literate cities in the US, and its nearly 5,000 acres of parks among their criteria.

Seattle ranks #4 in the CBS News list of the happiest large cities. Not only that, but in the top ten list of the happiest small cities, four of the winners are in Washington state. Not too shabby, Washington!

Seattle ranks #2 in a major university’s list of the most literate cities. Bested only by Washington D.C. (with Portland really bringing up the rear at #9), the city’s newspaper circulation, number of bookstores, library resources, and educational attainment were among the criteria that launched it to the top.

Seattle ranks #1 in the Men’s Health list of the most active cities. That puts us above San Francisco, Salt Lake, Portland, even Denver. Looks like those runners I see zooming around Green Lake every morning on my way to work are on to something!

Ten Days of Buzz: March 11th–20th, 2012

Give us ten days and we’ll give you the news–that’s what Ten Days of Buzz is all about. Enjoy the bite-sized morsels!

“The current level of pent-up demand for new households is three time higher than it was at this point in the economic cycle in the past recoveries.”

Calvin Schnure, VP of Research for NAREIT. Housing Shortage Makes Winners Out Of Apartment REITs, Forbes.com, 3/12/12.

“[This project is] an opportunity to be sustainable and productive members of our community.”

John Schoettler, Amazon’s director of global real-estate facilities. Amazon will decide by June on 3-block property deal, The Seattle Times, 3/13/12.

“Doug Daley, Harbor’s president and CEO, said Harbor’s shareholders have no stake in the new company, called Harbor Urban, although Harbor’s development team will stay in place.”

Eric Pryne, Business Reporter for the Seattle Times. Longtime developer Harbor Properties sold, The Seattle Times, 3/14/12.

“The foreclosure crisis is essentially a giant engine converting owner households into rental households.”

Stan Humphries, Chief Economist for Zillow.com. Rising rents could signal housing market strength, Seattle Times, 3/16/12.

“The objective was to ‘go green’ and make it easier for residents to pay rents by having an online method.”

Ellen Kaufman Wolf, Attorney for Jones and Jones. Tenants fight policy requiring online rent, Seattle Times, 3/17/12.

“We’re investing a lot of capital, a lot of time, with the expectation that this is a very small beginning to a very big movement.”

Sean Dobson, CEO of Amherst. Wall Street Keys On Landlord Business, The Wall Street Journal, 3/18/12.

“Our February National Housing Survey has shown the impact of recent strong private sector employment growth on Americans, as consumer confidence in the direction of the economy has improved by 19 percent since November 2011.”

Doug Duncan, Chief Economist for Fannie Mae. Economic Growth Continues; Employment and Income Growth Lead the Way, MarketWatch.com, 3/19/12.

“The market for condos isn’t there right now, nor is the financing. But since the market for rentals is, we’re proceeding on that basis.”

Martin Ginsburg, Founder of Ginsburg Development. Rentals to the Rescue, The New York Times, 3/20/12.

And that’s it for this week! Tweet us with your favorite stories, and maybe they’ll show up next time. Until then, cheers!

The Expenses and Budgets Report: Part 2

On Wednesday, we covered the first half of Dupre + Scott‘s annual Budgets issue of Apartment Advisor. Check it out for some general information on budgets and expenses, and for some in-depth info on vacancies.

Today we’re covering the rest of the issue. We’ll be talking more in-depth about expenses…but also about our favorite part of budgeting: income! Let’s jump right in.

Concessions and Credit Loss and Operating Expenses, Oh My!

Dupre + Scott list plenty of ways to lose money in their report. But try not to worry too much; generally there was good news, with only moderate percentage increases in 2011 and/or over the past ten years.

First there are concessions, which 27% of properties offered in Fall 2011. The average was $528 per twelve-month lease. The use of concessions has been falling recently; in 2011, concessions ate 1.2% of gross rental income.

Then we have credit loss, which tends to sink as the rental market gains strength. It averaged 0.7% in 2011–that’s the lowest it’s been since 2008. Investors sometimes forget to allocate for credit loss; while it’s nice and low at the moment, it can’t be ignored entirely!

Other expenses include real estate taxes (increased 1.2% in 2011, eating 9.4% of gross income); insurance (yearly average hasn’t actually increased since 2003); owner-paid utilities (jumped 5.1% in 2011 to $964/unit); resident management (negligible increases at $625/unit); office administration (up 1.4% to $144/unit); turnover (up less than 1% to $780/unit); and repairs (also up less than 1%). While there were others as well, we won’t list all the nail-biting details here; suffice it to say that total operating costs and capital expenses rose 2.7% in 2011; that’s 3.4% compounded annually over the past ten years.

Enough of That…What About Income?

First of all, when Dupre + Scott talk about income, they’re referring to Effective Apartment Income: that’s your total income, with financial vacancy, concessions, and credit loss subtracted. As they put it, EAI is basically “the actual rent collected for the year.” It excludes other sources of income, such as parking fees. And we have good news on this front–in 2011, EAI increased 4.4% from the previous year, hitting $9,825/unit.

And what of those other sources of income? These include laundry money, parking fees, late fees, nonrefundable deposits, and more. These averaged $962/unit in 2011–that’s a whole 8% more than 2010. While Effective Apartment Income has only climbed 2% compounded annually over the past ten years, other income has climbed 13% in that time. Let’s hear it for parking and laundry!

The Whole Story

So now that we’ve taken both expenses and income into account, we can talk about Effective Gross Income. Dupre + Scott define EGI as follows:

After taking into consideration all of the additions and deductions to the scheduled gross income discussed above, we’re left with Effective Gross Income–that’s what goes into the bank.

And there’s good news on this front as well–EGI went up 4.8% in 2011, hitting $10,750/unit. It’s increased 2.5% compounded annually over the past ten years. Due to these numbers, Dupre + Scott have forecasted gains for the next three years: 2% for 2012, 2.8% for 2013, and 2.7% for 2013.

And that’s the news from the Expenses and Budgets Report. Comments? Questions? Weigh in below.

The Expenses and Budgets Report: Part 1

Expenses: we may not like to dwell on them, but they’re a huge factor in every landlord’s business–and they just can’t be ignored. That’s why Dupre + Scott puts out an issue of Apartment Advisor each year that is solely dedicated to analyzing expenses. So batten down the hatches and cue the Jaws music–the issue just came out, and we’re here to break it down for you.

Profit or loss?

This post will be a two-parter. Today we’ll talk generally about budgets and expenses, and get into the specifics of vacancies; on Friday, we’ll pick up with the rest of the issue, which talks about utilities, office expenses, insurance…but also the fun part–income!

Total Yearly Expenses: What’s Typical?

Dupre + Scott begin by telling us the typical yearly expense per unit for 2011, which is $5,395. Note that this is the median cost, meaning that about half of properties spent more than that, while the other half spent less. Of course, there are always the extremes at each end of the spectrum–about one-quarter of surveyed properties spent less than $4,691/unit, while another quarter spent more than $6,291.

You may be wondering where Dupre + Scott get their numbers; in this case, they came from the 2011 operating statements for 910 properties, with a total of 97,200 units.

The Expense/Income Dance

They say it takes two to tango, and expenses are no exception. While operating costs rise steadily from year to year, income rises as well, so it’s vital to look at the relationship between these two if you want an accurate picture of the role expenses play in your business. In 1999, due to the late-nineties boom, costs only ate about 45% of a property’s income. By 2004, this had jumped to a 52% peak, but then it began to back off again. Recently, expenses have been dropping; they hit 49% in 2011, and are expected to continue dropping through 2012.

It’s important to note that when advisors say that expenses are just 1/3 of revenue, they are referring to scheduled revenue, not collected revenue–and the difference between, say, 35% and 40% can make a big difference to investors.

Are Buyers Budgeting Enough?

Dupre + Scott found that brokers and buyers of 20-unit or larger apartments budgeted a median $4,952 in 2011; that’s about 8% below actual $5,395 per-unit cost that the study found to be accurate. Investors have always tended to overestimate cash-flow–in fact, this 8% difference is “the closest these budgets have been to actual costs since the 1990s.”

Let’s Talk Vacancy.

Are you familiar with the difference between physical and financial vacancy? Dupre + Scott explain it as follows:

Physical vacancies report the vacancy rate in the market based on the number of vacant units found from the survey; financial vacancy is measured by comparing total rent collected, prior to deductions for credit loss and concessions, with the rent schedule.

The financial vacancy rate climbed from 3.7% to 4.6% between 1997 and 2001; by 2004 it had hit higher than 7%. It’s been dropping since then, and hit 5% in 2011; if it follows recent patterns, it should continue to drop throughout 2012. Meanwhile, physical vacancy mirrored the financial vacancy rates fairly closely, usually with a difference of less than 0.4%.

Occasionally, concerns are expressed over whether survey respondents accurately report vacancy information; however, over their 30 years in the business, Dupre + Scott have found that “as long as we respect the privacy of information people share with us…they will share information honestly.”

And Don’t Forget Economic Vacancy…

Of course, physical and financial vacancies are just two ways to lose money–there are plenty more. The economic vacancy rate takes concessions and credit loss into account as well. This rate increased steadily between 1998 and 2004, when it hit about 12%; it dropped to 5.2% in 2008, but jumped back up to 10.1% in 2009. It’s been dropping since then, hitting 8.7% in 2010 and 6.9% in 2011.

…And that’s all for today. Check in on Friday for The Expenses and Budgets Report: Part 2. Until then, see you in the comments or on Facebook!

A Layman’s Guide to Apartment Damage

In a perfect world, nothing ever damages your lovely, home-sweet-home apartment. But the world isn’t always perfect. What if something has happened to (or in) your apartment, and you’re not sure what to do about the damage–what’s your next step? We consulted the experts at Servpro Restoration for a few tips.

Water Damage from Clean Water

Here’s what to do:

  • Shut off the source of water, or contact a qualified party to stop the water source
  • Turn off circuit breakers for wet areas, when access to the panel is safe from electric shock
  • Remove excess water by mopping and blotting
  • Wipe excess water from wood furniture after removing lamps and tabletop items

Here’s what not to do:

  • Don’t enter affected areas is electrical equipment is exposed to water
  • Don’t leave books, newspapers, magazines or other colored items on wet wall-to-wall carpets
  • Don’t use your household vacuum cleaner to remove water
  • Don’t use appliances while there is standing water on the floor

Water Damage from Contaminated Water

Here’s what to do:

  • Avoid all contact with sewage and items contaminated by sewage
  • Wash your hands thoroughly after contact with contaminated items

And what not to do:

  • Don’t spread contaminated water by walking unnecessarily on damaged or wet areas
  • Don’t turn on the HVAC system if there is a possibility of spreading contaminated air
  • Don’t use household fans to dry the structure and spread contaminants
  • Don’t use products for personal hygiene and cleanliness if exposed to the contaminated areas

Damage from Vandalism

Here’s what to do:

  • Hose or wash egg damage from the building exterior as soon as possible
  • Vacuum glass particles from carpets and upholstery
  • Save containers which reveal the ingredients of spilled inks, cosmetics, and paints

And what not to do:

  • Don’t attempt to remove ink, paint, or cosmetic stains
  • Don’t operate damaged lamps or appliances
  • Don’t discard furniture wood chips, broken pieces of porcelain, furniture or art objects

Still not sure what to do? Check out Servpro’s website–although here’s hoping you never have occasion to!