Whether you run an apartment firm, develop condos, or manage apartments, it's impossible to ignore the latest for-sale housing foreclosure numbers. Florida alone reported 19,144 households in a state of foreclosure in February, up 63 percent from January, according to RealtyTrac. What's behind this foreclosure surge? Buyers with shaky credit scores who obtained sub-prime loans during the housing boom are now defaulting on their mortgages in record numbers because they can't keep up with their mortgage payments.
The news is certainly bleak, but every dark cloud offers a silver lining for someone—and right now, that's apartment executives.
“The sub-prime phenomenon, which is unfortunate for people caught up in it, does bode well for rental housing,” admits David Picerne, CEO of Picerne Real Estate Group. Not only will these former homeowners need a place to live, but he suggests that their housing woes will have lasting impression on family friends. “Psychologically it's a little like the dot-com [bust] where people are once burned, twice shy,” he says. “So younger people will see that a family member or friend got stuck with a house and wasn't able to sell it, and it's going to make people a little bit more leery of jumping back into that.”
The sub-prime fallout is just one way that the 50 largest managers, owners, and developers across the country are making the most of the multifamily opportunities presented by the faltering for-sale market. Apartment firms—at long last—finally have been able to acquire more land for development due to drastically less competition from condo builders. Big multifamily companies are maintaining high occupancies as more renters decide it's either undesirable or financially unfeasible to purchase a home.
Just look at these numbers: At the peak of the for-sale boom in the beginning of '05, about 24 percent of Camden Property Trust's residents moved out to purchase homes. But in the last quarter of '06, only 19 percent left to buy a home. “That's a big drop,” says Ric Campo, chairman and CEO of Houston-based Camden. “We have 70,000 units roughly, so that's 3,500 fewer leases that we have to replace annually.” Looks like there are plenty of multifamily opportunities to go around.
SUB-PRIME TIME As anyone in real estate knows, the sub-prime mortgage industry has found itself in serious trouble as worry grows about the number of homeowners facing foreclosure. To many in the apartment world, such a development is the sad, but inevitable, outcome of the housing boom's loosened mortgage lending standards. “Lenders were making loans to renters who before never had the credit ratings to qualify to buy,” says Jack McCabe, CEO of Deerfield Beach, Fla.-based McCabe Research and Consulting. “But all of a sudden anybody who could fog a mirror could buy.”
As a result, the delinquency rate for mortgage loans on one- to four-unit residential properties, driven primarily by sub-prime and FHA loans, represented 4.95 per-of all loans outstanding in the fourth quarter of 2006 on a seasonally adjusted basis, up 25 basis points from one year ago, according to the Mortgage Banker Association's National Delinquency Survey. In response to these market conditions, one of the biggest sub-prime lenders in the nation, New Century Financial Corp., filed for bankruptcy, and Freddie Mac has said it would stop buying certain types of sub-prime loans.
The multifamily sector is keeping a close eye on the plagued mortgage industry—and its effect on the rental market. “It's going to be quite a mess, and you're talking literally tens of thousands of people losing their homes, having foreclosure in their credit history, and having to move out of their homes,” says Stan Harrelson, president and CEO of Pinnacle, an American Management Services company. “I think the positive is that the multifamily business should be the recipient of a lot of people coming back to that type of housing.”
Apartment firms are already preparing for this influx of renters, which is predicted to be particularly strong in the Nevada, Texas, and Florida markets. These states registered the highest foreclosure rates in February, according to RealtyTrac, which publishes a national database of pre-foreclosure and foreclosure properties. The biggest challenge, of course, will be determining the credit risk of these potential residents. Picerne, which has a large presence in Las Vegas with 4,203 units either available or expected to open later this year and an additional 992 scheduled to break ground soon, is already working with its resident screening vendor on ways to handle applicants with poor credit.
If a recent foreclosure is the only blemish on the applicant's credit record, perhaps Picerne can throw in an extra deposit so the company can provide people with a place to live, says Rondetta Troutman, senior vice president of Picerne. Harrelson agrees. It's important to realize that many of these people don't pose credit risks, but were rather victims of ill-advised home buying decisions, the Pinnacle exec adds.
