Real Estate Watch

The catastrophic events of Sept. 11 pulled many Americans together, but left uncertainty about the future. That is also true for many investors when it comes to the potentially damaging effects of a slowing economy. For the most part, the economy has retreated to pre-1999 levels, leaving investors somewhat wary. Investors looking for a safe harbor will want to consider investing in multifamily properties.

Getting Back to the Basics

No matter what happens with the economy, people have to live somewhere. While the residential real estate market should remain sound, the economy may well frighten some potential homebuyers. According to a recent survey by Grubb & Ellis, many first-time homebuyers said they were abandoning thoughts of buying, at least for now. The temporary softening of the local economy might put the affordability of homes for those buyers out of reach. One way investors can get involved in this dynamic multifamily investment market is by purchasing a well-positioned existing property. The Southwest Florida real estate market remains a solid choice for investors all over the world. Some options within Southwest Florida may be more attractive to multifamily investors than others.

In a recent survey of Lee County multifamily housing, properties were divided into different sub-markets and broken down into three categories.

Class A: Top-of-the-line apartment complexes. This generally includes newer properties with high-end amenities, including weight rooms, pools, and access to computers and other office equipment.

Class B: These properties are several years old; some could use a “facelift.” The complexes provide amenities, but the exterior of the buildings have aged and are in need of minor repairs. The interior might need new paint, carpeting or appliances. These properties are often well positioned geographically and are a good option for multifamily investment because values can often increase with some basic renovations and occupancy rates should have stabilized.

Class C: These properties, which include low-income housing, have basic features and few, if any, amenities. Most have several deferred maintenance items.

Potential Return

Another survey of recent multifamily housing sales shows CAP rates ranging from 6.52 percent to more than 11 percent, which could offer a significantly better return than the money market and CD rates offered by local financial institutions.

There is more good news. According to a real estate investor survey by PricewaterhouseCoopers, even though Class A apartments remained a top choice for some buyers during the first quarter of 2001, an increasing number of investors are shifting to slightly older products. One reason for their change of heart may be that during the last development wave too many developers concentrated on a product complete “with all the bells and whistles.” As a result, many of these upper-end properties could be the first to feel the ramifications of a troubled economy. Many investors are seeing how the Class B multifamily product is less affected by economic cycles. In addition, they typically appeal to more long-term renters, thereby lowering an owner’s exposure to vacancy risks.

Why Southwest Florida?

• The fastest growing segment of Lee County’s population from 1980 to 1997 was the 25-44 age group, growing by 119 percent. The 18-24 age group in Lee County is projected to grow 30 percent faster than Florida and 130 percent faster than the national rates.

• Contrary to long-held perceptions of Southwest Florida as a haven for retirees, by 2005, the largest segment of the population in Lee County will be adults aged 45-64. Currently, working-age people (ages 18-64) make up 55 percent of the population.

Other counties in Southwest Florida will work to accommodate the expected population increase as well. The growth of service-related jobs has fueled a demand for affordable multifamily housing in Collier County.

Investors in multifamily property are faced with two choices. They can buy vacant land, build new properties and encounter risks in a competitive market. Or they can purchase an existing property with a stable income stream and a well-defined return. While rents may feel the effects of a sluggish economy, investing in multifamily housing is still one of your best bets.

Jim Garinger is a commercial advisor at Grubb & Ellis|VIP-D’Alessandro, a full service commercial real estate company located in Southwest Florida.