1. As the Economy Turns
Cyclical behavior is standard fare in any real estate market, but the ongoing issues that arose from The Great Recession of the past two years have been largely unprecedented in many markets across the country. Chief among these challenges are changing resident economics and sky-rocketing vacancies.
Dayton, Ohio-based PepZee Realty purchased multifamily housing in the Dayton metro area back in 2008 expecting double-digit returns and a vacancy rate of 20 percent. Then the bottom fell out of both the job and housing markets.
“Unemployment is playing a huge role,” laments Gary Zaremba, PepZee’s president. One-bedroom units are sitting vacant because many un- or under-employed people can’t afford to live alone. What’s more, unsellable single-family homes are available for roughly the same price as a two- or three-bedroom apartment, which also siphons renters from the apartment market.
“About 25 percent of our portfolio is one-bedroom units, and that’s about 50 percent vacant,” Zaremba adds. The company’s two- and three-bedroom inventory, which comprises nearly two-thirds of its 200 Dayton-area properties, is 18 percent vacant. The low occupancy is due in part to people, not leasing. But each month, more units are put back on the market because of evictions.
Zaremba did not provide figures but acknowledged that a lot of his residents can’t meet their obligations. “Our collection on occupied units has dropped,” he says. Add to that the huge cost of eviction—lost rent, legal fees, etc.—and it’s a drain on the coffers.
Beyond the operational inconsistencies that arise from unemployment issues (for more on the impact of unemployment on the recovery, see “A Timid Take-Off”), there are greater economic issues that can have an unexpected, if not significant, impact on multifamily owners and operators.
Consider inflation. According to the U.S. inflation calculator, a property purchased for an even $10 million in 2006 would cost $10.8 million, thanks to the 8.1 percent inflation experienced in the four years since then. Translation: In a time when asset values in general are declining, sales are not only less than purchase prices but even less than the actual inflation-adjusted value.