CAA CV LunchPres 1 18 2007 master final

Slide1: 

John Citrigno, CCIM Senior Commercial Broker Multi-Family Group Thursday, January 18, 2007 © John Citrigno 2007

Slide2: 

What are Rents Doing? What about Occupancy? Where ARE my tenants going? What are Prices doing? When did the Market Peak? Should I Hold or should I Sell? Is now a good time to Buy? Here or somewhere else? Today’s Big Questions © John Citrigno 2007

Slide3: 

National Economic Summary

Slide4: 

National Real Estate Highlights

Slide5: 

Rents and Sales

Modesto-Turlock Rental Market Overview: 

Modesto-Turlock Rental Market Overview Source: RealFacts 2007

Modesto Annual Rent Trend 1998-2006: 

Modesto Annual Rent Trend 1998-2006

Turlock Annual Rent Trend 1998-2006: 

Turlock Annual Rent Trend 1998-2006

Modesto Annual Occupancy 1998-2006: 

Modesto Annual Occupancy 1998-2006

Turlock Annual Occupancy 1998-2006: 

Turlock Annual Occupancy 1998-2006

Modesto Multi-Family Sales $2M+ - 2006: 

Modesto Multi-Family Sales $2M+ - 2006 Source: CoStar Comps, 2006

Turlock Multi-Family Sales $2M+ - 2006: 

Turlock Multi-Family Sales $2M+ - 2006

Merced Rental Market Overview: 

Merced Rental Market Overview Source: RealFacts 2007

Merced Annual Rent Trend 1998-2006: 

Merced Annual Rent Trend 1998-2006

Merced Annual Occupancy 1998-2006: 

Merced Annual Occupancy 1998-2006

Merced Multi-Family Sales $2M+ - 2006: 

Merced Multi-Family Sales $2M+ - 2006

Slide17: 

Case Study

Slide18: 

Source: John Citrigno, CCIM 44,000 SF Built 1980 Class C+ Case Study: 65u Oak Terrace, Merced © John Citrigno 2007

Slide19: 

Source: John Citrigno, CCIM Market History Mar-01 Jan-07 Case Study: 65u Oak Terrace, Merced Mar 2001 $1,880,000 (Acquisition) Mar 2005 $4,750,000 (Market Peak) Oct 2005 (Market Shift) Mar 2006 $4,500,000 (Listing Price) Jun 2006 $4,250,000 (1st reduction) Sep 2006 $3,950,000 (2nd reduction) Dec 2006 $3,650,000 (3rd reduction) Jan 2007 In Contract © John Citrigno 2007

Slide20: 

Source: John Citrigno, CCIM Price Appreciation Mar-01 Jan-07 Case Study: 65u Oak Terrace, Merced Mar 2001 $1,880,000 (par) Mar 2005 $4,750,000 (up 153%) Mar 2006 $4,500,000 Jun 2006 $4,250,000 Sep 2006 $3,950,000 Dec 2006 $3,650,000 (- 23%) Jan 2007 IC (up 94% = 16% yr) © John Citrigno 2007

Slide21: 

Mar 2001 $28,923 unit (Acquisition) Mar 2005 $73,077 unit (Market Peak) Mar 2006 $69,230 unit (Listing Price) Jun 2006 $65,385 unit (1st reduction) Sep 2006 $60,769 unit (2nd reduction) Dec 2006 $56,153 unit (3rd reduction) Jan 2007 In Contract Source: John Citrigno, CCIM Price Per Unit Mar-01 Jan-07 Case Study: 65u Oak Terrace, Merced © John Citrigno 2007

Slide22: 

Mar 2001 5.7 GRM 7.6% CAP (Acquisition) Mar 2005 10.1 GRM 3.8% CAP (Market Peak) Mar 2006 9.5 GRM 4.1% CAP (Listing Price) Jun 2006 8.98 GRM 4.4% CAP (1st Reduction) Sep 2006 8.35 GRM 4.8% CAP (2nd Reduction) Dec 2006 7.96 GRM 5.3% CAP (3rd Reduction) Jan 2007 In Contract Source: John Citrigno, CCIM GRM & CAP Mar-01 Jan-07 Case Study: 65u Oak Terrace, Merced © John Citrigno 2007

Slide23: 

Rent Growth Jan-98 Jan-07 Case Study: 65u Oak Terrace, Merced Source: John Citrigno, CCIM © John Citrigno 2007

Slide24: 

Income Growth Mar-01 Dec-O6 Case Study: 65u Oak Terrace, Merced Source: John Citrigno, CCIM © John Citrigno 2007

Slide25: 

Mar 2001 $330K SGI $142K NOI (43% of SGI) Mar 2005 $473K SGI $180K NOI (38% of SGI) Mar 2006 $473K SGI $183K NOI (38% of SGI) Jun 2006 $473K SGI $186K NOI (39% of SGI) Sep 2006 $473K SGI $189K NOI (40% of SGI) Dec 2006 $459K SGI $193K NOI (42% of SGI) Question: Why an increase in NOI as % of SGI? NOI as Percentage of SGI Case Study: 65u Oak Terrace, Merced Source: John Citrigno, CCIM © John Citrigno 2007

Slide26: 

Supply and Demand

California Multi-Family Building Permits: 

California Multi-Family Building Permits

Stanislaus Multi-Family Building Permits: 

Stanislaus Multi-Family Building Permits Source: Construction Industry Research Board

Merced Multi-Family Building Permits: 

Merced Multi-Family Building Permits Source: Construction Industry Research Board

Stanislaus Multi-Family Building Permits: 

Stanislaus Multi-Family Building Permits Source: Construction Industry Research Board

Merced Multi-Family Building Permits: 

Merced Multi-Family Building Permits Source: Construction Industry Research Board

California Single-Family Building Permits: 

California Single-Family Building Permits

Stanislaus Single-Family Building Permits: 

Stanislaus Single-Family Building Permits Source: Construction Industry Research Board

Merced Single-Family Building Permits: 

Merced Single-Family Building Permits Source: Construction Industry Research Board

Historically Unprecedented SFR Competition: 

Historically Unprecedented SFR Competition Record numbers of speculation driven sales 2004-05 significantly expanded supply of SFR rental homes… October 2005 market shift… homes sit vacant for 12-18 months… early 2006 start to see rent reductions… Mid-2006 owners that can’t “get their price” decide to keep… additional flood of SFR onto rental market. Late-2006 BIG rent reductions from competing owners.

Additional Regional Oversupply Factors: 

Additional Regional Oversupply Factors Renovated Former Base Housing in Atwater 1,000 “new” (renovated) units since 2000 240u Castle Vista (55 and over) gated community 308u Castle Garden (conventional) 360u Castlewood (55 and over) Huge 3&4 bedroom duplex units From $750 to $925 Source: David Crumb, CPM, Ray Stone Property Management

Lower SFR Rents Drop Multi-Family Ceiling: 

Typical SFR Rental: 1990’s 3Br/2ba 1350-1500 SF: 1/ 2006: $1,200 to $1,500 75% to 80% occupancy 1/2007: $900 to $1,200 85% to 90% occupancy As SFR rents have dropped 25%, SFR occupancy has increased 50%... at Multi-Family’s expense. Source: Steven Zagaris, Liberty Property Management Lower SFR Rents Drop Multi-Family Ceiling

New Multi-Family Tough to Get Approved: 

211 unit Sierra Oaks, Turlock Hotly contested by neighbors for 3-story height Three council appearances in three months Developer offered to “donate” 2.2 acres in lieu of impact fees of $800,000 value (added cost) School Fees TRIPLED during approval process ($2.00 SF 5/06, $6.00 SF 1/07) Note: 3-story predominant style in Pacific NW Source: Modesto Bee New Multi-Family Tough to Get Approved Source: John Citrigno, CCIM (Interview with developer)

New Multi-Family Focus is On Quality: 

84 unit Tapestry at Silverlake, Turlock Town Home style with 2-car garages 10 units+ per month absorption in 2005-06 Big rents at $1,224 to $1,375 ($1.00 SF) Could not likely build at today’s higher costs: $150,000+ per unit for new multi-family ($20K+ land, $30K+ fees, $100K 1,000 SF) New Multi-Family Focus is On Quality Source: John Citrigno, CCIM (Interview with developer and property manager)

Slide40: 

Now the Good News…

Slide41: 

Source: John Citrigno, CCIM Condo Conversion! Modesto has experienced at least FIVE properties sold and converted to for-sale (and sold) condos 2004-06 representing over 400 units at $200 SF: 122 unit Vintage Grove Estates (2004) 115 unit Valencia Plaza (2005) 77 unit Cambridge Square (2005) 54 unit Normandy Park (2005) 42 unit Villeurbanne (2006)

California Population Projection: 

California Population Projection Source: U.S. Census Bureau, 2000 Census

Central Valley Population Projection: 

Central Valley Population Projection TOTAL: $3,760,000 $4,690,000 $5,250,000 $6,870,000 $7,900,000 $8,960,000 Source: U.S. Census Bureau, 2000 Census

California Unemployment Rate: 

California Unemployment Rate Chart represents changes in California’s unemployment rate over the past twenty years. Source: U.S. Bureau of Labor Statistics

CA Minimum Wage Increase (1968-2008): 

CA Minimum Wage Increase (1968-2008) Source: State of California Department of Industrial Relations

Least Affordable Housing Markets In USA: 

Least Affordable Housing Markets In USA Source: NAHB and Wells Fargo October 2006

Short-Term Interest Rates Are Going Up: 

Short-Term Interest Rates Are Going Up

All Interest Rates Indexes Are Going Up: 

All Interest Rates Indexes Are Going Up

Multifamily Interest Rates Remain LOW: 

Multifamily Interest Rates Remain LOW Source: ARCS Commercial Mortgage Co. L.P. (1/15/2007)

Slide50: 

Super Region

Slide51: 

Source: U.S. Census Bureau, Census 2000 How BIG is Regional? Horizontal Regional Integration Credit: Dr. Robert Fountain, California State University, Sacramento

Slide52: 

Third Largest in USA! Horizontal Regional Integration Credit: Dr. Robert Fountain, California State University, Sacramento Source: U.S. Census Bureau, Census 2000

Slide53: 

Credit: Dr. Robert Fountain, California State University, Sacramento Awareness of Convergence Horizontal Regional Integration The Bay Area and Central Valley are becoming much more strongly interconnected. The region is an integrated system containing housing, transportation, employment, education, culture, and open space no longer independent of each other. Region-wide economies of scale are creating new opportunities, new demographics.

Slide54: 

Today’s Big Questions

Slide55: 

Source: John Citrigno, CCIM Should I Hold, or Should I Sell? Owners that Hold will benefit from perfecting their management team and skills… plan on 5 to 7 years “Asset Management” for income to exceed expenses. Sellers will benefit from continued “Seller’s Market” as buyers continue to outnumber sellers 20 to 1. Today’s low interest rates have stabilized prices. Don’t expect any significant price gains next 2-3 years (or losses). Unless interest rates rise, as Cap Rates may follow. Capital Gains tax rates at historic lows (15%) STILL. © John Citrigno 2007

Slide56: 

Source: John Citrigno, CCIM Is NOW a Great Time to Buy? Buyer’s will continue to buy at marginal “going-in” returns, as there is (and will continued to be) a flood of Baby Boomer “retirement funds” fueling investment. A few “Great Buys” exist here and there for the smart, hard-working, and occasionally lucky investor. Rents have to DOUBLE to support new construction. Existing inventory, particularly well-located Class B is a BARGAIN at today’s 50% to 60% of replacement cost! © John Citrigno 2007

Slide57: 

Source: John Citrigno, CCIM Here or Somewhere Else? The Grass is Always Greener... but for most you can’t beat your own back yard! Exceptions for those who truly wish to diversify. Both geographically, and Multi-Family to NNN. From one property to two or three, or upgrade to a newer and significantly larger property. Out-of-State acquisitions are much more work, and you must love to travel… and travel… and travel. Buy where you have family, want to visit (or retire). © John Citrigno 2007

Slide58: 

Buyer Tips

Buyer Tip: Capitalization Rates: 

Buyer Tip: Capitalization Rates Source: John Citrigno, CCIM Beware! Multi-Family Cap Rates are universally over-reported. True 8 Cap not in 3+ years! Typically based upon pro-forma: next year’s rents, skinny expenses, no reserves. Often no off-site management fees. Deduct 100 basis points to be safe, and 150 basis points to be conservative (7.5% Cap = 6.0% Cap). © John Citrigno 2007

Buyer Tip: Deferred Maintenance: 

Deferred Maintenance (Class B) 5% to 10% of property value: i.e. $200K to $400K on $4,000,000 Deferred Maintenance (Class C) 10% to 15% of property value: i.e. $400K to $600K on $4,000,000 Buyer Tip: Deferred Maintenance Source: John Citrigno, CCIM © John Citrigno 2007

Slide61: 

Thank You!

Special Thanks: 

Special Thanks Stephanie Espinosa, California Apartment Association Dr. Robert Fountain, SRRI, Applied Research Center Ben Bartolotto, Construction Industry Research Board David Crump, CPM, Ray Stone Property Management Gary Hunter, CPM, Woodside Property Management Derek Zemrak, CPM, VandenBerghe Properties Jim Donovan, American Property Development Steven Zagaris, Liberty Property Management Steve Tinetti, Tinetti Property Management O’Donnell/Atkins, Development Brokers Christopher Bates, RealFacts

Slide63: 

www.investmentrealty.net

Slide64: 

Investment Real Estate and 1031 Exchange specialist Extensive knowledge of NorCal and several Western US markets Full-service property valuation and marketing plan for sellers Dedicated to service, attention to detail and results www.investmentrealty.net