Free rents erode value of area apartments
By John Rebchook, Rocky Mountain News
August 2, 2002
rockymountainnews.com
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."
Copyright 2002, Rocky Mountain News. All Rights Reserved. |
