A keeper,
FORECLOSURES ARE NOT LIKELY TO BE IN OUR FUTURE
August 16th 2002
realfacts.com
One of our readers wrote to inquire when we can expect the inevitable wave of foreclosures on apartment buildings. After all, rents in many markets have declined, and occupancy rates have followed suit. With income down, won't owners soon be strapped for cash? It happened in the recession of 1992, so when will it happen this time around?
The answer is that it won't happen. Most owners of apartment complexes bought them years ago, and their cash flow projections were based on rents and occupancy levels at the time of purchase. Even in the hardest hit markets, rent levels have only rolled back to the levels of 1999, and that still means a positive cash flow. Some expenses have certainly gone up, but interest rates have gone down, allowing owners to refinance at lower rates and pay less every month to carry their mortgage. So net operating income is still positive.
What the owners have lost is the windfall profits they enjoyed between 1998 and 2000. Those days of double-digit annual rent increases, and waiting lists for vacant units, were sweet, and of course investors hate to give them up. But even without them, the balance sheet still looks good. There may have been a few people in the market who didn't recognize these windfall profits for what they were, and injudiciously leveraged their investment during those balmy days, and there may be a few recent purchasers who have bought at the top of the market and are still waiting and hoping for the increase in rents that were the basis of their willingness to pay that price. But the vast majority of investors in large apartment complexes are still smiling.
Caroline S Latham
CEO
RealFacts |
