Tuesday, July 29, 2008

Flavor of the Moment: Student Housing

One sector of commercial real estate that has been bucking the downturn of late is student housing. The sector is considered largely recession proof for several reasons and investors seem to be noticing as student housing REIT's have been performing well year to date.

Reasons that student housing is considered recession resistant include:

  • Students' parents are often required to cosign on leases. This puts the student and the parents on the hook for the rent, and reduces credit risk compared to traditional multifamily developments.
  • Recessions often increase enrollment at colleges and universities as tighter job markets make going back-to-school more attractive relative to working. This leads to increased demand for the already scarce housing around many campuses.
  • The current downturn happens to coincide with a trend of colleges and universities realizing the benefits of outsourcing the development and management of student housing. Developers seem to be doing a good job so far of delivering housing developments that have amenities that students want and are willing to pay for.
  • Even though the credit markets are frozen it's still easy to get student loans that can help pay for the newest and best in campus living.
Perhaps the biggest reason that so many student housing developments are succeeding in today's environment is that they can be relatively easy to finance. Colleges and universities will often put up some of the equity required for these projects, and, even with its recent troubles, Fannie Mae has been actively lending on student housing ($264MM in the first half of 2008).

Llenrock Group

Monday, July 21, 2008

Foreign Capital Magnet - The New Politics

Always a cheerleader for America, Rudy Giuliani's latest endeavor may even help reinvigorate American commercial real estate markets. His Giuliani Partners business, which up until this point has focused on security and management consulting, will venture into commercial real estate investing backed largely by foreign capital raised through Rudy's extensive network of relationships. It seems like this could be a win-win-win for all involved as much of the U.S. real estate market is in need of eager capital, Giuliani's investors stand to make excellent returns over the long haul, and Giuliani earns another star in his cap for any future political runs (an attempt at the New York governor's office is rumored).

My one concern is that a fund headed by a former New York City mayor will have a strong bias towards investing in NYC - the one market in which foreign capital needs little convincing to invest, as evidenced by the Chrysler Building stake recently purchased by Abu Dhabi. A real boost to the U.S. commercial real estate market would come if the Dubai's and Qatar's of the world started investing their petro-dollars in secondary and tertiary markets. Places like Houston, Charlotte, and Seattle still have healthy economies and never saw the overbuilding experienced by Phoenix, Miami, or Vegas. However a lack of capital is slowing real estate investment nationwide, taking the good down with the bad.

Additionally, a contrarian case could be made for investing in the most beat-up markets while they're down. Any patient capital that can be strategically invested in battered markets like Phoenix or Detroit stands to reap huge benefits as those markets gradually recover (or IF they recover in the case of Detroit).

Maybe other out-of-office politicians will follow Giuliani's lead and use their clout to encourage foreign money to jump into secondary U.S. cities. Imagine what Clinton Capital Partners could do for Little Rock...

Llenrock Group

Friday, July 11, 2008

Uncertainty for Multifamily on the Way?

During the current commercial real estate downturn for-rent multifamily has consistently been considered the best bet among the four major flavors of commercial real estate. Multifamily investors expect improving fundamentals thanks to foreclosure-displaced homeowners becoming renters and would-be buyers continuing to rent while waiting for a turn-around.

Beyond these fundamentals, the biggest driver of the multifamily market's relative strength has been the continued availability of inexpensive debt from Fannie Mae and Freddie Mac while financing for other property types has become increasingly hard to come by. Now as questions about Fannie & Freddie's solvency rise to the surface multifamily investment may be in for a slowdown. Uncertainty about the ability for multifamily buyers and developers to secure debt will cause equity players to be more cautious. Additionally, even if the government bails out Fannie & Freddie the main focus will likely be on maintaining liquidity for the owner-occupied mortgage market, potentially at the expense of commercial lending programs.

The question then becomes which of three scenarios will play out: Will Fannie and Freddie regain their footing, either with or without government help, and continue to provide a backstop for multifamily investment? Will private players such as banks or life insurers step up to fill a void left by the uncertainty at the GSE's? OR Will the trouble at Fannie & Freddie be the straw that breaks the back of multifamily investment, making it just as difficult to finance in today's market as other property types?

Llenrock Group

Wednesday, July 9, 2008

Observations from a long weekend...

Over the Fourth of July weekend I tried to turn my real estate brain off, but I couldn't help noticing a few interesting things:

  • On a Saturday evening at a pizza joint I overheard a casual conversation about buying packages of distressed residential debt from troubled banks. Seems the vultures are coming out to feed on pizza and troubled loans...
  • While on Cape Cod I saw a slew of retail condominium units for sale, always in strips of 3 to 5 units. They seemed to be the local 'flavor of the week' that had been overbuilt but were now sitting empty as retailers avoid buying into unproven locations while consumer confidence is so weak. A microcosm of the larger retail scene perhaps?
  • On the drive home from New England I missed an exit and ended up going through New York City. I don't think I hit my brakes once on a stretch of road that kept me in traffic for hours last winter. Maybe gas prices really are keeping folks off the road...
Check back soon for our take on the rising importance of sovereign wealth funds and whether the real estate markets have hit a point of capitulation.

Llenrock Group