We’ve been watching “household formation” inch up as people begin to feel more secure in their employment and are able to establish separate residences after moving in with relatives, friends et al.  As vacancy rates decline we can expect effective rents to rise.  This will benefit income investors initially; eventually it will provide a floor for single family home pricing as the benefit increasingly swings back towards ownership.

Derek

From Reuters: U.S. apartment vacancies fall in Q1, rents edge up

Reis Inc’s quarterly report showed the vacancy rate dropped to 6.2 percent in the first three months of the year, down from 6.6 percent in the fourth quarter. It was the steepest fall since the commercial real estate research firm began tracking the market in 1999.

And from Bloomberg: Apartment Vacancies in U.S. Fall to Lowest in Almost Three Years

Apartment owners had a net increase in occupied space of more than 44,000 units, the most for a first quarter since 1999 and almost double the number from a year earlier, Reis said. The first quarter tends to be a slow period for rentals since more leases are signed in the warmer months, the company said.

About 6,000 units came to market during the first quarter, the fewest since Reis began compiling data in 1999.

This is a very large decline from the record vacancy rate set a year ago at 8%. This decline fits with the recent survey from the NMHC that showed lower apartment vacancies. Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere.

A few key points we’ve been discussing:

• Vacancy rates are falling fast (the excess supply is being absorbed). Note: The excess housing supply includes both apartments and single family homes.

• A record low number of multi-family units will be completed this year (2011). Only 6,000 apartments came on the market in Q1 (in the Reis survey area).

• This will push up effective rents. Via Bloomberg:

Effective rents, or what tenants actually pay, increased in 75 of the 82 markets Reis tracks, to an average $991 a month from $967 a year earlier and $986 in the fourth quarter.

However, when I was at the NMHC conference earlier this year, it sounded like rent growth is mostly coming from reductions in concessions and not from the top line (i.e. not from rent increases). (my short notes from conference here and here). Still, any increase in effective rents will push down the price-to-rent ratio for homes.

• Multi-family starts are increasing, and that will help both GDP and employment growth this year. These new starts will not be completed until 2012 at the earliest, so vacancy rates will probably decline all year.

via Calculated Risk: Reis: Apartment Vacancy Rates fell sharply in Q1, Lowest in almost three years.

With rents continuing to rise, the Feds are considering downplaying how much effect they have on our measure of inflation.  Will core inflation eventually mean excluding Food, Energy and Housing?  What’s left to inflate?

If you’re worried about how inflation can impact you, consider one of the most beaten down asset classes, Real Estate.  Whether it be a single-family starter home or a multi-family income property, ask me how you can protect yourself from this risk.

Derek

By KELLY EVANS

Americans love affair with housing is over. But, ironically, deflation of the bubble risks fueling consumer-price inflation.Shelter costs account for 32% of the overall consumer-price index and about 40% of core CPI, which excludes volatile food and energy. The tightening rental market, as fewer Americans opt to buy homes, is a key reason why core inflation stopped declining last year and is moving higher.But there is a debate over how shelter costs are calculated and whether rents carry too much weight. The biggest component of shelter is so-called “owners equivalent rent,” which is an approximation of what homeowners would pay to rent their property. The measure is calculated using rental increases and doesnt factor in changes in house prices or mortgage payments, even though most people in the U.S. own their homes. Europes official inflation measure uses just rents. The U.K.s approach blends rents with other factors such as mortgage rates.Questions are likely to grow as rising rents push up core U.S. inflation this year, adding to pressure on the Federal Reserve to raise interest rates. Barclays Capital expects year-on-year growth in the core CPI will hit 1.8% by December from 1.1% in February. OER is expected to jump to 1.2% year-on-year in December from 0.6% in February, despite a sluggish housing market.Some suggest alternative inflation measures. A “supercore” alternative excludes not just food and energy but shelter, too, to gauge underlying trends. Yet this would hardly sit well with most Americans, who already feel the Fed is ignoring the run-up in food and energy costs and know housing is a huge cost.The Feds own preferred gauge is the price index for personal consumption expenditures, or PCE, which is based on actual monthly outlays instead of the CPIs household survey. The PCE gives a higher weight to medical costs than the CPI and a lower weight to housing—15% of headline PCE and 17.5% of core. It is also why the core PCE, as of February, was up only 0.9% year-on-year.For those who take issue with excluding food and energy, the Cleveland Fed has a “trimmed mean” CPI that strips out the 8% of items with the largest price increases and the 8% with the biggest declines. It rose 1.2% year-on-year in February. There is also a median CPI, showing the price change of the item whose monthly move falls smack in the middle of the pack—up 1% as of February.The boost to inflation this year may be partly due to a quirk of the housing market, but the upward pressure will nevertheless be difficult for the Fed to ignore.

via Housing Bubble Continues to Haunt Fed – WSJ.com.

While many of you are already quite aware that I’m bearish on equities and prefer other asset classes at this point, let me simply log two recent charts to bolster my position.

Producer Price Index – I know that many of the adventures commodities have been on have been due to “one-off” events, e.g. cotton due to drought in China, Arabica coffee due to Kenya, oil because of Libya.  That said, we’ve had enough “one-offs” that eventually margins will be squeezed with little opportunity to pass the costs on to the consumer.  Note the recent rise:

Productivity has been up but new hires can’t be forestalled forever.  As the next chart will show, margins are currently sky-high but the combination of increased inputs plus labor, as well as new entrants into the market will force the margins back to the mean.  At today’s current pricing it means the S&P would have a P/E of 24 times earnings.  Rich by any standards.

Given that equities are currently priced to perfection and corporate bonds can’t withstand a whiff of inflation, it may be time to consider one of the most down-trodden asset classes – real estate.  Please give me a call to discuss what residential income property may be able to provide for you!

Check out the multi-family for sale chart of asking prices for Alameda county, then the article from CNN-Money on future rental rates.  While financing can still be difficult for Multi-Family, this is a very interesting time to be investigating this asset class.

Renew your lease – rents could rise 10%

By Les Christie, staff writerMarch 17, 2011: 11:05 AM ET

NEW YORK (CNNMoney) — Renters beware: Double-digit rent hikes may be coming soon.

Already, rental vacancy rates have dipped below the 10% mark, where they had been lodged for most of the past three years.

“The demand for rental housing has already started to increase,” said Peggy Alford, president of Rent.com. “Young people are starting to get rid of their roommates and move out of their parent’s basements.”

By 2012, she predicts the vacancy rate will hover at a mere 5%. And with fewer units on the market, prices will explode.

Rent hikes have averaged less than 1% a year over the past decade, according to Commerce Department statistics, adjusted for inflation. Now, Alford expects rents to spike 7% or so in each of the next two years — to a national average that will top $800 per month.

In the hottest rental markets, the increases will likely top the 10% mark annually for the next couple of years, according to Lesley Deutch of John Burns Real Estate Consulting. In San Diego, she anticipates rents will rise more than 31% by 2015. In Seattle rents will climb 29% over that period; and in Boston, they may jump between 25% and 30%.

This is a sharp change from the recession, when many Americans couldn’t afford to live on their own. More than 1.2 million young adults moved back in with their parents from 2005 to 2010, said Deutch. Many others doubled up together.

As a result, landlords had to reduce prices and offer big incentives to snag renters.

Now that the recession is easing, many of these young people are ready to find new digs, mostly as renters, not owners. Plus, the foreclosure crisis continues unabated, and the millions losing their homes are looking for new places to live.

Apartment developers many not be able to keep up with this heightened demand, which will force prices upwards, according to Chris Macke, a real estate analyst with CoStar, which tracks multi-family housing trends.

“There will be an envelope of two or three years,” said Macke, “when the rise in demand for rentals will exceed the industry’s ability to meet it.”

Plus, Alford added, “there’s been a shift in the American Dream. We’re learning from our surveys that a huge proportion of people are choosing to rent.”

They’ve experienced the downsides of homeownership — or seen friends and family suffer — and don’t want to take the risks or pay the higher costs of homeownership.

Where homeownership costs are particularly high, there are many more renters than owners. In Manhattan, for example, only about 20% own their homes; in San Francisco, about of third of the population does; in Los Angeles, less than 40%; and in Chicago, about 44%.

There’s one factor that could rein in rent increases: the huge number of foreclosed homes that could hit the market over the next few years.

In many markets, like Phoenix and Las Vegas, there are neighborhoods filled with recently built, single-family homes going for fire-sale prices. When the cost of owning homes falls well below the costs of renting them, more people will buy.

“That’s always been the biggest competition for rentals,” said Deutch.

via Double-digit rent rise is coming to the housing market. – Mar. 15, 2011.

1354 Hearst Avenue, Berkeley

Light-filled 1923 bungalow close to North Berkeley BART and 4th Street shops.  Hardwood floors, formal dining room, fireplace and a grassy backyard make this a three bedroom, one and half bath a wonderful retreat.  Listed at $610k.

587 63rd Street, Oakland

A gleaming, updated Craftsman bungalow in the trendy North Oakland, Berkeley border area.  Three bedrooms, two baths with extra storage, off-street parking, hardwood floors and a private backyard.  Only six blocks from BART!  Very well priced at $519k.

4833 Shafter Avenue

Oakland

A light-filled Temescal bungalow with two bedrooms and one bath.  Plus room and extra storage on lower level behind two-car garage.  Remodeled kitchen and bath, lovely garden and excellent location across from Emerson.  Very well priced at $515k.

2148 Ward Street

Berkeley

A lovely 1907 three bedroom, two bath with original woodwork, coved ceilings and leaded glass windows.  Extra Sun Room, additional storage and a superb yard.  Excellent Berkeley living close to the Bowl listed at $759k.

The end of the 30 Year Mortgage? ARMs do have a bad reputation at this point, but if we are going to be able to extend financing to potential homebuyers without an explicit government guarantee, they may be one of the few options attractive to private investors.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”

via Freddie and Fannie Closing Could Change Face of Housing – NYTimes.com.

If we can start to transmit the energy of uptown into the rest of the downtown Oakland environment we’ll suddenly find ourselves with an incredibly vital city on our hands. -Derek

OAKLAND — A new restaurant is coming to downtown and is slated to open it doors this summer, executives said Wednesday, an arrival that could help revitalize a stretch of Broadway that has been riddled by riots and unrest.

B2, the new restaurant, is going into a century-old building at 1440 Broadway that was originally constructed 100 years ago. A partnership led by developer J.R. “Eddie” Orton bought the building for $3 million in May and has since been working to restore the office and retail high-rise to its former elegance.

“We’re very excited about this restaurant,” said Brionna Garner, general manager of B2. She also manages the Boilerhouse restaurant at Richmond’s Ford Point, a former auto assembly factory that Orton Development renovated.

The revival of the 10-story building also has attracted office tenants.

“The leasing is really starting to pick up,” said Nick Orton, the son of Eddie Orton and project manager for Orton Development. “We are getting a lot of calls from people who want big spaces in the building.”

When Eddie Orton’s group originally bought the 73,000-square-foot building, the office spaces were 40 percent occupied. The building occupancy is currently is about 61 percent and headed higher, said Gary Bettencourt, a broker with Oakland-based realty firm California Capital & Investment Group, which is seeking tenants for the project.

Unite Here, Alegria Community Living and Housing Consortium of the East Bay area are among the office tenants that have recently inked deals, Bettencourt said.

“People are attracted to the historic authenticity of the building,” he said. “You have all the marble and the woodwork throughout.”

An adjacent retail space is also attracting interest in the building, now that the B2 deal is in place. That ground-floor space could host a store or a lounge.

Still, it’s the B2 restaurant that the developers think will help spur a revival in that section of Broadway between 14th and 15th streets. B2 will cater to business people and commuters.

“We want to bring back more businesses into downtown Oakland,” said Ivonne Inurritegui-Folster, a vice president with Orton. “We want corporate meetings and to attract business people back into the downtown.”

B2 will mainly serve breakfast, lunch and early dinner, Garner said. “We will offer primarily soups, salads, sandwiches and a continental breakfast,” she added. The restaurant likely will be open from 7 a.m. to 7 p.m., she said.

“We want to have a restaurant where the busy working professional can come here and grab a quick breakfast or lunch,” Nick Orton said. “Or they could have a drink with a co-worker or business associate.”

B2 will be similar to, although smaller than, the Boilerhouse restaurant in Richmond. The Boilerhouse seats 145; B2 will seat 49, Bettencourt said.

The new restaurant also is poised to provide an upgrade for an area that has been trashed by rioters in recent years.

“B2 will provide workers, commuters and the local comm

via Developer sees new Oakland eatery as key to Broadway building’s renewal – Inside Bay Area.

We’re seeing quite a few condo units being converted to rentals in order to take advantage of a potential upswing in rental rates.  Meanwhile very few new units have been put into construction.  Once current inventory is depleted we’ll have a race for developers with entitled properties to bring them to market.  Financing here will be the key determinant. -Derek

Last year was a dismal period for selling units at the Ellington, a luxury highrise condo building near Oakland’s Jack London Square. But with about a dozen offers coming in during the first month of 2011, this year seems much more promising.

“Prices have adjusted across the board to where they really are making sense, interest rates are super low, and buyers know that the stars are not going to be lined up like this forever,” said Kim Cole, vice president of sales for Pacific Marketing Associates, the firm handling sales at the Ellington.

Oakland and Emeryville had about 360 new condo units on the market in January, a steep drop from 572 during the same month last year, according to Polaris Group, a condo marketing and research group.

The market was flooded with thousands of new condos during the real estate boom that ended in 2008 and thanks to Oakland’s 10K initiative that aimed to bring 10,000 new residents to the city’s core.

That inventory has been slow to evaporate despite falling prices and attractive interest rates. At least 1,100 units built in the past four years were converted from condos to rentals.

Early last year, tax credits prompted many buyers to make deals, but that incentive ended by May and sales once again took a hit, Cole said.

At the Ellington, about half of the building’s 134 units have been sold.

The building is offering one-bedrooms from around $300,000 to $600,000 and two-bedrooms from $600,000. The property also has three of five penthouse units left with prices ranging from $1 million to $1.6 million.

The Ellington, like several other projects, has been on the market for about two years.

Others include Pacific Cannery Lofts, which has about one-third of its 163 units still available. BayRock Residential’s Eight Orchids is down to 22 of 157 units available.

Adeline Place, a 36-unit project developed by Placeworks LLC, is close to selling out with only two units left.

Cole, of PMA, says it seems buyers finally feel now is an opportune time to buy.

Even so, the larger market — still plagued by short sales and foreclosures — is weighing down on the condo market, said Chris Foley, principal of Polaris.

Foley estimates that it will take 18 months for currently selling projects to sell out. The only new product to open this year is the 88-unit Uptown Place, formerly known as Thomas Berkley Square, that was purchased last fall by Canyon Johnson Urban Funds.

“The big picture is you have to put stability in the market place,” Foley said

via Condo sales on the rise in Oakland | San Francisco Business Times.

Anecdotally I’ve been told that they need sales approaching $700 per square foot, similar to San Francisco valuations to make this deal pencil out.  This will get interesting. -Derek

The future of SNK Realty Group’s Arpeggio, a highly anticipated condo building in downtown Berkeley, is beginning to look uncertain.

A website still pitches the project to prospective buyers, but the sales office sits unmanned. Construction on the 143-unit building at 2055 Center St., started in 2008, has yet to wrap up, and recent progress appears slow.

It is unclear what SNK, based in Dallas, plans to do with the $81 million project, but closing the sales office has led to speculation. Calls to SNK were not returned.

In the meantime, prospective investors are lining up to buy the property or the $65 million construction loan, which is held by U.S. Bank.

“There is a lot of discretionary capital out there that could buy it and stabilize it,” said Todd Vitzthum, a broker with CB Richard Ellis, who specializes in multi-family properties. “It’s a high profile property in the Bay Area that many groups would be interested in buying.”

Property records do not indicate the project is in default. U.S. Bank took possession of the note in September after it bought the assets of Pacific National Bank, the original lender on the Arpeggio that was seized by the Federal Deposit Insurance Corp. In January, two mechanic’s liens were filed for the property including one for $43,601.35 from Idaho Pacific Lumber Co. Inc. and one for $39,765 from Paradigm Concrete & Construction Inc. The latter lien was waived Feb. 14.

The nine-story Arpeggio was one of several residential projects that kicked off a building boom in Berkeley a few years ago after the city increased its density and height limits.

Other projects such as Hudson McDonald’s New Californian at 1885 University Ave. and Essex Property Trust’s Fourth and U, near the intersection of University Avenue and Interstate 80, are already completed and leasing up.

The Arpeggio aimed its for-sale units at empty-nesters, college faculty and professionals who wanted to live downtown.

Prices for the units were listed ranging from $425,000 to $764,000 for one- and two-bedrooms. The building will also house 5,000 square feet of retail and 10,000 square feet promised to the Berkeley Repertory Theater.

Many developers who broke ground on condo projects from 2006 to 2008 are finding those buildings underwater now, said Chris Foley, principal of Polaris Group, a condo marketing and research firm. Construction prices were higher then, and now sale prices have taken a dive.

“It’s hard to make a deal like that work,” Foley said.

via Big Berkeley condo project appears stalled | San Francisco Business Times.