Recent volatility in the stock market and declining savings yields has investors once again examining their portfolios. Investment property owners, such as MONOPOLY, must consider the question, should we “buy, sell or hold.” And which market sector will perform the best going forward? Particularly, what will happen to apartment properties in this kind of market condition?
By investment property type, the multi-family sector will likely be the strongest, fueled by the reversal of four-plus years of what could be termed a “tenant’s market.” This time period saw higher than normal vacancies, no rent increases, and many owner concessions. However, we have since transitioned to a “landlord’s market,” powered by new renters in the form of retiring Baby Boomers, Generation Y, and recent immigrants. These adults, combined with the 20 million pre- and post-college graduates will provide MONOPOLY a burgeoning rental pool in the coming years.
Additionally, there is the much publicized trend in residential mortgages, with delinquencies, defaults and foreclosures which are predicted to accelerate in the months ahead. That is because 2008 and early 2009 will see an upswing in highly leveraged mortgages reaching their 2- or 3-year rate reset point, when their low introductory rates will adjust. Some adjustable mortgages have high caps, so many homeowners face significant jumps in monthly payments. Some will be unable to afford the increases, and may default. Coupling higher rates with changes in lender policies in residential underwriting will make it harder to qualify for new home mortgages. This too will add to the tenant pool.
What about the “shadow rental market”-houses and condominiums initially purchased for re-sale by speculators now caught in the stalled real estate market? Stuck with properties they can’t sell, speculators must offer them as rentals. The question is, can they afford to compete with the apartment property owner? I think not. Individual owners will be confronted with charging enough rent to cover all their own financial obligations. This would include the purchase and/or improvement costs, taxes and assessment costs. There may be other carrying costs as well. All of these put them at a disadvantage to the apartment rental market. Even if owners of this nature can rent on a comparable basis, over time they will be forced to discount their houses or condominiums, take their lumps, and move on. It’s tough to compete with full-time apartment owners and operators in the long term.
Other factors that will bode well for MONOPOLY are the number of apartments which have been pulled from the rental market due to conversion of the properties to condominiums. This process has also reduced the number of available units.
High occupancy and rising rental rates are two good reasons for a bright future for apartment building ownership. But a reasonable question to ask might be, “Is now a good time for MONOPOLY to be buying apartment buildings?” I believe the answer is Yes!
More demand still means higher rents. As long as the tenant pool is growing, we can continue to raise our rents, thereby increasing the value of our properties. Additionally, the cost of borrowing funds is still relatively low. And if rents can be raised without negatively impacting the occupancy rate, we will own assets that have positive cash flow.
As a company that is looking to position ourselves for the long-term, now is a great time for MONOPOLY to implement an investment plan that incorporates owning apartment properties. In purchasing apartments, we are able to take advantage of all the benefits of controlling an apartment property; including leverage, cash flow, tax savings, debt reduction, and long-term appreciation.
William R. Holstine
President/CEO
MONOPOLY I, L.L.C.
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