Apartment investment lagging bigger regions

Brad Carlson//April 20, 2012

Apartment investment lagging bigger regions

Brad Carlson//April 20, 2012

Apartments are an increasingly sought-after investment, though many owners in the Boise area want to hang onto their properties. Photo by Brad Carlson

Boise has yet to join the apartment-investment surge that’s driving prices up in much of the United States.

Would-be buyers are lining up in southwest Idaho and other regions to take advantage of rising occupancy rates and rents. And they can afford to pay more, thanks to record-low financing rates.

But in the Boise area, sales have been few by comparison.

Occupancy rates are good for the first time in several years, and rent concessions have gone away for the most part, said Moe Therrien of Mountain States Appraisal in Boise.

“Some of the owners are taking a breath and enjoying the better market conditions,” he said.

Low interest rates are available for apartment financing, but there aren’t many owners who must sell now said Therrien, who follows the Boise-area apartment market closely.

“There is high interest in investing in apartments in Ada County, but there hasn’t been a high volume of transactions because of the impasse between the seller’s pricing and the buyer’s investment expectations,” Therrien said.

Apartment loan interest rates offered by government-sponsored enterprises Fannie Mae and Freddie Mac are at historic lows and are lower than rates on other types of commercial investment real estate loans, said Jack Harty, of commercial mortgage brokerage Harty Capital in Boise. These apartment loan interest rates are lower because apartments have been performing better than other property types and because Fannie and Freddie financing carries a lower risk premium, he said.

Low interest rates mean buyers can afford to pay more, and apartment prices are rising to bubble-like proportions in some markets, Harty said. “That’s tending to drive prices up nationally,” he said.

“Some regions are feeling a bubble, and that’s not healthy,” he said. “There are regions where prices are hyper-inflated, and for those properties to be viable in the long term, it will require rents to escalate significantly over a long period of time. If you’re in a region with a limited capacity and can’t pay more and more, there’s going to be a crunch.”

These market dynamics can materialize anywhere, but apartment prices aren’t excessive in Boise compared to many markets, Harty said. Many apartment owners in Boise live in the area, and thus don’t sell as often, he said. Construction has been limited recently, he said.

Apartment complexes change hands frequently in southern California in part because there are so many complexes, said Thornton Oliver Keller’s Mike Keller, who worked in that region. Apartments there are trading at aggressive, low, annual rates of return – as measured by a ratio of income to price – as prices increase, he said.

Harty said high prices elsewhere could encourage more investors to look in the Boise area, but projects here are smaller and thus less attractive to national investors.

Ada County has just five apartment complexes with 300 units or more, Therrien said. Fifteen have at least 200, and 43 have at least 100, he said.

More projects of 100-plus units have been built in the last 20 years in Ada County. The larger complexes also enable the developer to build better amenities and spread their cost across more rent payers, Therrien said.

Clay Anderson of the Colliers International real estate firm recently sold the 91-unit Park River Apartments and is marketing the 117-unit Orchard Place complex. But the market has many more buyers than sellers, he said.

“There’s a reasonable portion of owners who can’t sell because their loan hasn’t matured and their prepayment penalties are too high to sell the property today,” Anderson said. “That’s definitely part of the story as to why more sellers aren’t selling.” Many of these loans were made for 10 years to owners who planned to keep the apartment complexes at least that long, he said.

Many national investment groups won’t buy in Boise because it lacks the bulk total they’re after – 2,000 units, for example, Anderson said. “You would need 10 or more sellers on the same page,” he said.

Buyers also want a higher rate of return in smaller markets, he said. In contrast, larger “core” markets give investors more confidence and have more large investment groups selling holdings in five- to seven-year cycles, he said.

Available inventory of Ada County fourplexes and Canyon County duplexes is at its  lowest level in over four years, Mike Swope of Swope Investment Properties, Boise, said in a report.

Updated to clarify fourplex inventory.