2009 - Where will the opportunities be?
Today's e-letter is a long one. Before I dive into it I would like to thank all of you for your business and your support. 2008 has been a tough year; I am certainly looking forward to 2009. There will be many opportunities in Real Estate in 2009; and 2008 has been a transitional year to say the least.
According to the Chinese Zodiac, 2009 will be the year of the OX - symbolizing prosperity through fortitude and hard work. I am sure you already know what hard work is. I know I do. Fortitude is the strength of mind that enables us to work hard through danger or pain. I am no stranger to all three of these concepts - prosperity (I nearly had it once ), hard work (actually, since I love what I do, so I never really consider it work), and fortitude (although for me there is a slim difference between courage and blind determination!).
What are these opportunities that fortitude and hard work will bring us? Well, in hopes of giving you a summary of where I will be spending my time working for my clients, I will, in no particular order, comment on some of these opportunities - good, bad, or indifferent. I probably will pen one one e-letter this year. Gail and I wish you all the best for the coming year! Gregg
Single Family Homes
Yesterday I had two clients tell me to start buying single family homes - one wants to flip them, the other wants to build a rental inventory. I believe the first quarter of 2009 will see a great deal of the single family home inventory in Cape Coral move to the end user or to a rental pool. Prices have reached, if not bottom, so close to it that the bottom can be negotiated from where the pricing is now. Sellers of single family homes, whether they are the residents or the bank, are getting realistic with their pricing and will move houses. Those sellers that do not get realistic, will not: pretty simple.
In November over 600 homes were sold in Lee County through the MLS, this compared to 365 homes, same month last year. Many of the homes that are for sale below $100,000 happen outside the MLS.
If you are going to buy, purchase a home way below replacement cost. Replacement cost now is $75 to $100 per square foot plus land and soft costs. Buy location first, always buy location first, then look for price. For example don't tell me to look for homes under a certain price, and then pick the location. One reason for this is that the ask prices are often way above the selling price. Pick the location and then look for the best pricing.
I see opportunities in rentals of Single Family Homes - rents in the market are $.50 to $.70 per square foot per month. There are opportunities for cash buyers to buy and repair and hold or buy repair and rent. I see opportunities in buying and selling with lease options to buyers with credit that has been damaged by the recent financial debacle.
High end residential homes are selling - but at reduced prices. We like riverfront single family homes and specialize in their marketing. Buyers at this end have not seen these prices in years. While the waterfront did not drop like the low priced homes, they are still a bargain.
The economy in Europe is suffering a similar fate to ours, but we still have Europeans coming here to buy their vacation homes because of our great prices. Indeed the world is flat today. International marketing is important and any seller that is not marketing globally is missing about 2o% of the buyers.
I often say know what will, happen, I just don't know WHEN it will happen - and timing is everything, isn't it? Inventory of available homes will shrink to the point that the builders will build again. Prices will then come back up to reflect the current building cost. It has to. Stabilization will come to the market, stabilization of price as well as inventory. Buyers now will profit by the low entry price today. Remember, you make your money when you buy, not when you sell.
An underperforming asset is an income property that is vacant or partially so, or has rents that are measurably below prevailing rates. A good example of an underperforming asset is an industrial building that has a 50% vacancy factor. The incoming rents are not paying the outgoing mortgage payments, much less providing any excess cash flow. The current owner can't keep the property because of the negative cash flow and a traditional buyer will not buy it because the income does not justify the prices. Furthermore, a lender will not lend on a building today unless it has a long term lease with a credit worthy tenant.
Is this a big problem or big opportunity?
It depends. For the patient cash investor he can purchase underperforming assets at bargain prices and the opportunities are wonderful. The asset is underperforming for the current owner at current market rates. For the new owner his long term strategy is to hold and fill the building at lower than market rates (because he purchased at such a low price). The new owner can be the low cost supplier in the marketplace. He may even be able to take tenants from other more expensive and newer buildings that need to get higher rents. For this to be an opportunity for our buyer he has to have cash or the financial backing already in hand and he must be able to take the risk that he can fill the building.
I am seeing new money coming into the real estate market that left Wall Street. Buying these underperforming assets is a sound strategy for the long term investor. Investing in these assets are a big change for the Wall Street investor, and the biggest change is that there is an underlying value to these investments: they are all backed by real estate. CLICK HERE and CLICK HERE for underperforming assets that are examples.
Buying land now is out of favor with general investors. This is exactly why this spells opportunity for us in 2009. The holders of land were more patient than the bricks and mortar buyers. Most were in it for a longer hold. But the pressure is on them as the calendar marches forward, the loans are up for renewal and banks are not lending or are requiring more cash equity.
These investors have other real estate to cover and need to sell the land to help make their cash shortfalls. These same investors perspective on what was once long term is changing; they perhaps paid way too much for the land to begin with, and they see no short term hope of getting out of the property with any margins. During 2008 they were waiting to see how far the market will go - and I believe they now realize how severe and long the recession will be and they will unload.
What do we buy?; location of course. There are some waterfront and marina properties that will be good in a long term portfolio. Also infill projects close to urban centers. Go to the core basics of sound real estate investing. Look at demographics, traffic patterns, and short term growth areas. Where is the infrastructure already in place?
Look for projects that were entitled and perhaps even have some of the project infrastructure completed. Expect unreasonable asking prices but buy at a discount rate that will allow land load prices that will enable a developer to build profitably in five to seven years.
On the side bar here you will see an infill parcel in Cape Coral; an excellent buy at the offering price. This project was presented to us three years ago at three times the price - but was not entitled yet. Today it is entitled and offered at under $9.00/sf. I believe this low enough to hold for four years .
There was a big rush to convert apartment projects to condos four years ago. Many of these offerings are now back in the hands of the banks, or screwed up because some units are sold, some are vacant, some refurbished and some not - and all in the same complex. Rents back then were approaching $1.00 per square foot per month. Now rents are $.85/sf and many of these condo projects are going back to being apartments.
The opportunity exists in 2009 to buy apartment or condo projects at a low enough price that the investor can capitalize on his cost basis in order to compete in the $.85 market. I know of a few projects that recently sold in Tampa at $30,000 and $40,000 per door. The thing you need to know is that the sale prices were sometimes as much as 30% below the ask! This fact bears repeating: Ask prices are not at the bottom but sell prices are.
Many home owners that are losing their homes will become renters and I expect that the rental prices will recover rapidly because of this influx of demand.
But financing is tough to find for apartments and investors must have deep pockets (because of low LTV ratios being considered by the banks that WILL loan). The good news is that many of the institutional owners need to sell their apartment projects to cover other loses. All of this spells opportunity.
The hospitality business is taking it on the chin. ( Article here) Average Daily Room rates are down and average revenue per available room (revPAR) is down over 14% over last year, and when gas prices shot up, lenders in the hospitality business started closing their wallets. We have one hotel listed in Banner Elk - a resort hotel, that was being offered at over a 12% Cap rate. (Click here for discussion on CAP rates)
I have already seen activity in this sector heating up - but only over the last few months as offering prices drop and the opportunist arrive with their funds. These real estate opportunity funds are looking for hotels. Let's face it, when everyone is selling there are bargains out there and some of the big hotel guys are getting rid of their underperforming assets. This market will recover, and hotels properly selected in limited competition areas (Like Banner Elk) will recover sooner. There are other hotels in major metropolitan markets that can be repositioned and renovated to improve revPAR.
The hotel business is not for the novice however, CAP rates are more attractive in this sector for a very good reason. I had one client tell me that hotels are not used, they are abused. It is one of the areas of real estate that the depreciation numbers are more than just a paper entry.
I need to talk a bit about the various funds that are popping up recently. Obviously there is new money coming into real estate. This is perhaps Wall Street money that likes the solid base of real estate as an investment but did not invest in real estate before. They got into cash as the stock market plummeted. They smell blood in the water in Florida. Some like the comfort of professional money managers and area investing in opportunity funds. I am now involved in two funds - one as a consultant and one as one of the management team. We have also performed due diligence on portfolios on a fee basis for some fund buyers and asset managers.
The opportunity exists as an investor in these funds or as a seller to them. If you have an interest in learning more about this you need to contact me directly. There are restrictions that are rigid and rules that must be followed for qualified investors.
I do expect to sell notes, REO portfolios, and stressed assets to some of these funds.
Last week I talked about Downtown Fort Myers being on sale. (Click here for the article). Prices are down, and way below replacement cost. To me this is a strong buy signal. Individual owners that were priced out of the market can now afford to own in Florida. Furthermore, the patient investors can buy at these depressed prices, use for a few years and then hope to flip, although it may take more than five years for this to be profitable. Becoming a landlord in the condo arena does not work. There is no way market rents will allow you to break even on rentals.
Bulk buyers are picking up distressed projects. There are opportunities to convert condo projects into apartments, but these are generally large projects that are riddled with complicated problems like multiple liens, successor developer issues, and other challenges that only an experiences developer should undertake.
When looking at buying condos at fire sale prices beware of how many developer owned units there are, how the common fees are being funded, and if banks will even loan on the project. Local agents may have the inside scoop, but it may be best to do some investigation on your own. If possible, find out what owners are on the board of the condo association and have a chat with a couple of them. In all cases I suggest using an agent that is not directly involved with the project so you have someone representing your interests.
Stumble Started Projects
I get a call almost every week from some broker or fund manager looking for projects that are partially complete. In our area I just do not see that many of them. The banks are not yet prepared to accept the prices that speculators are willing to pay. In most cases the numbers just do not work with the price the banks want. I expect the banks expectations to change once the TARP money is gone, however, and once the new year is upon us.
Many of you know that I sold Brixton in August of 2005 and then the Island Pines project failed. This is just one example of a project that languishes on the market, but it is not atypical. There are complicated lawsuits, liens and lenders all to be dealt with. I know of three other projects in Lee County that are in various stages of completion and all have their own sets of problems to iron out.
Where is the opportunity? For the buyer that is prepared to deal with the liens, settle the lawsuits, and get all parties to the table, good deals can be made. The good news with most all of these projects is that the individual buyers are not in the picture.
The exit strategy will be to convert to apartments or to sell at greatly reduced prices. I would love to get involved on one of the projects with my team. Hopefully in 2009.
Rescuing the Baby from the Bathwater
Surprisingly enough there are good, solid investment deals on the market - put there by real estate investors that need to sell all their properties or by banks that need to sell all their notes of a certain class. In a tight lending market some of the good deals get put on the market with the bad - the baby gets put out with the bath the water, so to speak.
If you were to call me and ask me to find you a solid 7% cap rate NNN investment - I could do it today. This was not possible a few years back. Here again the "asks" are not the same as the closing prices. So you need to be tenacious in your search. A 7/11 that was overlooked by the aggressive investors a few years ago because the CAP rates were low is now an attractive buy.
Banks also are selling portfolios of notes to restructure their exposure and have performing notes available for those that know where to look.
I subscribe to a few services that make these notes available. Many are auctioned off in a bid process that requires cash and in depth due diligence, but they are available. The funds we work with are capitalizing on these opportunities.
Now more than ever before, cash is king. There are of course many ways to make money is in today's market. I have not reviewed buying lots, becoming a landlord, buying notes, short sales, foreclosures, and a host of others. My friend Dennis and I once sat down and listed all the ways it was possible to be make money is real estate; I think we ran out of ideas after about a list of about 50.
I know 2008 was a tough year, but it was a transitional year. 2009 will start out rather rocky, but I believe will settle down and afford some profitable opportunities.
I would like to work with you to help make 2009 a good year. If I can be of service to you as a broker or representative, you need only call.
Gregg Gregg.Fous@engelvoelkers.com 8004391580 extension 1