In the Chicago suburbs, RMK Management president Tony Rossi is likewise welcoming a respite in turnovers and buyer-associated vacancies. With a portfolio consisting primarily of Class A apartments, RMK properties are traditionally the last rental step for many migrating into homeownership—and when the availability of sub-prime loans exploded, migrate they did.
“Absolutely the upside is that we don’t have as many homebuyers out there,” Rossi says. “We had properties where 35 percent [of the traditional turnover] was leaving to buy homes. You lost five occupancy points just in home-buyers. So all of a sudden a deal that was operating for years at 93 [percent] to 96 percent occupancy is in the ’80s.”
Despite a subprime foreclosure rate ticking towards the higher end of the spectrum, those in Illinois who may have been displaced are not coming back to RMK properties. “We haven’t seen any effect of it, and I don’t know that we are going to, quite honestly,” Rossi says. He echoes Campo’s sentiment, expecting those that do return to have the blight of bankruptcy on their credit report. Camden lease managers are reacting by modifying credit scoring to account for subprime mortgage defaults. “Often the income is good, the credit history is good, they just made a bad decision on housing,” Campo says. “As long as the credit history is good, they’re in. We’re OK with people having the problem with their homes.”
SHADOWBOXING The bottom line is that the subprime fallout has driven consumer attitudes away from single-family housing toward multifamily apartments. Even if a renter’s credit is not problematic, the foreclosed units returning to the market as shadow rentals could have a major impact on the competition for residents. Add to that the propensity for condo reversions as the for-sale market languishes, and the industry could be looking at some major inventory problems.
“The shadow market is sizeable and any comment to the contrary is horse puck,” says Jack McCabe, CEO of Deerfield Beach, Fla.-based McCabe Research and Consulting. “We are seeing monthly concessions return to the rental marketplace in Florida, which is a microcosm of everything that will happen in the rest of the country.”
While most occupancy levels in South Florida are still hovering between 92 percent and 93 percent, McCabe says that is a drop of 4 percent to 7 percent since the third and fourth quarters of 2006. “And they are giving away the leasing incentives. Apartment owners don’t give away their income and profit unless there is a reason for it, and that reason is the shadow rental market,” he adds.
Multifamily economists at the National Multi Housing Council and the National Association of Home Builders in Washington, D.C., agree. “The shadow market is absolutely another big factor affecting multifamily,” says David Ledford, NAHB staff vice president for housing policy. “You have a lot of properties that were intended for sale that have not been sold, and a lot of investors that were not able to get out of their properties. Their only immediate option is to rent.”
NMHC chief economist Mark Obrinsky also acknowledges the shadow rental market, but suspects that subprime foreclosures alone won’t flood markets with empty units. Of greater concern, he says, is the existing inventory of unsold single-family housing. “The foreclosure rate, while it might be a record number, is not a large number compared to the overall size of the U.S. renter population,” Obrinsky says. “The bigger deal is that single-family developers seem to have built on spec, and that is an inventory that has to be used up.”
At the very least, the shadow market will moderately impact competition for leases, Ledford explains. A more difficult scenario will be if shadow rentals become a large enough concern to affect the availability of capital. “When lending institutions see the extra overhang,” he warns, “they are going to want to make sure the demand is there to get the building occupied in a reasonable amount of time [and] at a level where you can meet the cash flow, debt service, and other obligations of the loan.”
ENJOY THE RIDE So far, there’s been no sign of that outside of Chicago, where RMK continues to look for development deals. “The lenders are basically all over us right now,” Rossi says. “Since the underwriting is better, they are more anxious to do interest-only deals without amortization, which more than makes up for the blip we’ve had in interest rates. In some markets, we refinanced four years ago, and we’re looking at refinancing again.”
Indeed, multifamily access to capital and financing continues to be a breeze even in previously hot markets that are now heavily impacted by sub-prime foreclosures. “There is so much capital; it is practically a blank check,” says John Condas, a land-use and environmental entitlements lawyer at Irvine, Calif.-based Nossaman, Guthner, Knox & Elliott.
Condas, who does due diligence on property acquisition for clients that include Camden, JPI, and BRE Properties, says the retreat of the condo and single-family markets also means a great buyers market for multifamily builders looking for dirt. “My multifamily apartment clients are finally enjoying their day in the sun. For three or four years, they were getting outbid for every site, and now they are finally getting some land,” he adds.
