blowing bubbles.....Real Estate on the edge....the early 80's carnage in Denver preceded the nationwide market blow out.
rockymountainnews.com
Free rents erode value of area apartments
By John Rebchook, Rocky Mountain News
August 2, 2002
The value of apartments in the Denver area has dropped by an
estimated $1.75 billion because of such concessions to renters as
three months of free rent on a 12-month lease, a top apartment
expert estimated on Thursday.
And that's being conservative - the economic damage could be far
worse, said Grubb & Ellis apartment broker Jeff Hawks, a keynote
speaker at the 2002 Economic Conference.
Gordon Von Stroh, a professor at the University of Denver's
Daniels School of Business, hosted the conference on behalf of
the Apartment Association of Metro Denver. About 150 people in
the apartment business attended the conference at the
DoubleTree Stapleton hotel.
The carnage done to apartment value has exceeded anything
experienced during the real estate depression of the mid-1980s
and the early 1990s, Hawks said.
The discounts also have made many apartment communities
worth less than their underlying mortgages, have made it difficult
for properties to be sold or refinanced at full value, and have
eroded - or eliminated, in some cases - the economic return of the
apartment developments, Hawks said.
The only thing keeping apartment communities out of foreclosure
are the lowest mortgage rates in 40 years, he said. Short-term
floating rates can be found between 4 percent and 5 percent, he
said.
Hawks estimated that the typical apartment unit in the metro area
would be worth $70,000, but the concessions have driven the
value down by an average of 10 percent.
And it could easily be twice that, said Mike Zoellner, a veteran
apartment developer who is principal of Red Peak Properties.
"And while the value of apartments are going down, our
fixed-costs are rising," Zoellner said following the conference.
"We're talking about billions and billions of dollars, as far as the
impact."
Hawks said apartment owners would have been better letting the
overall vacancy rate rise to a record 15 percent, rather than
attracting renters by giving them deals too good to pass up.
Many in the industry hoped that recent concessions, the first in
more than a decade, would be short-lived once new expensive
units were leased.
"Concessions are very easy to offer and very difficult to stop,"
Hawks said. "Who will have the guts to pull their incentives when
a 12-month lease is up, when the guy next to you is still offering
incentives?"
He said many renters are moving into suburban apartments they
never would have considered because they're getting such good
deals. And when the deals are gone, they'll go, too, he predicted.
The less-than-predictable cash flow means that pension company
investors and real estate investment trusts won't buy
apartments, he said.
And it's not just harming new apartments. Tom Shephard, regional
manager of First Pacific Investments Ltd., which owns older
apartments, said he's been forced to drop rents or offer
concessions to compete with the newer, luxury properties offering
deep discounts.
Hawks said he is working with one apartment owner that had
been consistently delivering 18 percent returns to investors. That
fell to 12 percent when the market softened and now is providing
no return because of concessions.
"The point I want to get across is that if all of the owners pulled
the concessions tomorrow, it would be too late," Hawks said after
the conference.
"They've already created expectations for free rent among
renters. It takes a long time for that to go away." |
