Mall Vacancies Grow as Retailers Pack Up Shop

Shopping Venues See Uninhabited Rate Reach 8%, But Not All Is Bad in Commercial Sector as Apartment Rents Rise

Vacancy rates at U.S. malls and shopping centers continued their steep rise in the third quarter as slumping sales forced retailers to close stores.

Malls are seeing their highest vacancy rate since 2001, according to data released by real-estate-research firm Reis Inc. For shopping centers, the rate is the highest since 1994.

In contrast, the apartment market, particularly Philadelphia apartments, remained one of the most healthy real-estate markets in the third quarter, benefiting from the struggling home-sales market. Many would-be buyers, unable to get mortgages or worried about the darkening economy, are renting apartments instead.

In the top 79 U.S. markets, apartments posted a slight increase in the vacancy rate to 6.1%, up from 6% from the previous quarter, and a rise in rents of roughly half a percentage point, according to Reis.

Shopping centers and apartment buildings fall in the category of commercial real estate, which has fared better in the credit crisis than residential. Until recently, most commercial landlords had struggled with the financing drought, but the so-called "fundamentals" of their properties -- vacancy rate, rent and expenses -- remained healthy.

Now that is changing. In the retail sector, vacancy rates have climbed and rent increases have slowed for the past year. The vacancy rate at malls in the top 76 U.S. markets rose to 6.6% in the third quarter, up from 6.3% in the previous quarter, to its highest level since late 2001, according to Reis.

For strip centers and other open-air shopping venues, the vacancy rate climbed to 8.4% in the third quarter from 8.1% in the second quarter. That marks the highest rate since 1994, according to Reis. Meanwhile, retailers' closures outpaced new leases by 2.8 million square feet in U.S. strip centers in the third quarter, the third consecutive quarterly net decline. It is the first nine-month period of so-called negative net absorption since Reis started tracking the data in 1980.

The combined vacancy rate for malls and strip centers in the third quarter was 8%, up from 7.8% in the second quarter. Vacancy tends to be higher in strip centers during economic slowdowns because they have more independent, local tenants, which are more vulnerable to drops in sales than are the national retailers found in malls.

Still, the economic slump has taken its toll on national retailers. Among those that have closed stores in recent months are Starbucks Corp., Dillard's Inc. and Linens 'n Things Inc. More closures likely are on tap, as retailers such as Circuit City Stores Inc. struggle with dwindling sales.

"Almost every retailer has slowed their expansion by 50% to 70% for 2008," said David Brinbrey, chairman and chief executive of the Shopping Center Group, an Atlanta retail brokerage.

Retail landlords are hurt directly by slumping sales because many of them have leases that, in addition to base rent, give them a small portion of payments based on the tenant's sales growth. And retailers feeling the pinch from the shopping slowdown increasingly are asking for rent concessions.

Landlords have little choice but to give breaks to solid tenants. "Chances are, if they're a good merchant, we're going to work with them to get them through this bad time. There's no reason to have an empty space," said Rick Caruso, chief executive of Caruso Affiliated, which owns 10 high-end shopping centers in Southern California.

Sam Chandan, Reis's chief economist, noted that the growing weakness of retailers can be seen in the decline of retail jobs, which have fallen by more than 250,000 nationally in the past year. "Apart from declines in automobile dealers and parts sellers, the last month's declines are broad-based, including department stores, food and beverage retailers, furniture, and electronic and appliance stores," Mr. Chandan said.In the apartment sector, the vacancy increase has been more gradual. But the scarcity of job opportunities for recent college graduates has sapped a primary customer base for apartments, analysts say. And some people who are losing their jobs are moving in with family and friends.

Some foresee rent increases stalling or declining in the coming months as other economic indicators sour. "As unemployment rises, it will be harder for these [apartment] companies to push rent in terms of renewals and new leases," said Michelle Ko, an analyst with UBS Securities LLC.

Analysts report strong apartment occupancy and rent growth in markets including San Francisco, Boston, San Diego and the Pacific Northwest. Rents and occupancy have suffered in boom-bust markets such as Phoenix and Orlando, Fla. But some previously strong apartment markets, namely New York and Charlotte, N.C., might suffer from the loss of financial jobs amid the banking shakeout.

By: Kris Hudson
Wall Street Journal; October 6, 2008

Philadelphia's Commercial and Apartment Rental Markets Red Hot

The Lofts at Logan View pictured to the left. One of Center City Philadelphia's most popular residential addresses.

Philadelphia's commercial real-estate and apartment leasing market is holding steady in the midst of the growing economic carnage. Philadelphia's office market, more than the suburbs', has benefited from a steady growth mixed with very little supply.
Historic Landmarks reports that their Philadelphia Apartments have one of the lowest vacancy rates in years. Apartment, retail and warehouse vacancies are at or below averages for the 54 major metro areas as recently audited and surveyed by Real Capital Analytics, a New York-based research firm.
To be sure, the geographic proximity of the region to the crisis on Wall Street -- with Philadelphia about two hours south of Manhattan, give or take -- is a concern among some Philly area's real-estate professionals. As with most markets globally, sales of retail and apartment buildings have slowed since the credit crunch began in the summer of 2007, however the market for Philadelphia apartments remains red hot.

The Philadelphia metro area, home to about 5.1 million people, saw continued growth in its education and health-services sector. And so far overall job growth has remained in the positive territory as of July compared with the year-earlier period, albeit just barely at 0.1%, according to the Bureau of Labor Statistics.

For now, the new luxury lofts and urban condo style apartments offered by Historic Landmarks are at or near capacity with many waiting lists forming. Historic Landmarks has medical student apartments and grad student apartments in some of Philadelphia's most in-demand neighborhoods. Historic offers lofts and Center City apartments, Parkway apartments, University City apartments and Old City apartments.


Many Philadelphia apartment brokers have been asking for rents in the Manhattan-esque $40-per-square-foot range which still seems a little too rich for the City of Brotherly Love.
Historic landmarks apartment buildings and historic building renovation and preservation projects remain true to the city's past architectural leanings and Philadelphia's great historical past. Demand is high for urban living in luxury lofts and upscale Philadelphia apartments.


To Tour any of our Philadelphia apartments and historic buildings in downtown Philadelphia call: 877-563-6754.

City's Property Market, at Least, Defies Curse

Some sports fans in Philadelphia feel their teams are victim of a real-estate curse.

That is because none of the city's major professional teams -- the Phillies, Flyers, Eagles and 76ers -- have won a championship since before 1987, when Malvern, Pa.-based Liberty Property Trust's One Liberty Place rose above a statue of William Penn that tops City Hall. Mr. Penn's hat previously set the bar for the city's skyline.

The American Commerce Center, shown in renderings, would change the look of Philadelphia's skyline.

Fortunately, Mr. Penn doesn't seem to have focused his chagrin on the real-estate market.

So far the Philadelphia area's commercial real-estate leasing market has held steady in the midst of the growing economic carnage. The city's office market, more than the suburbs', has benefited from "steady, unspectacular growth married with little supply," says John Gattuso, senior vice president and regional director of Liberty's urban development group.

While the metropolitan area's office vacancies rose to 14.5% in the second quarter (and rents are expected to decline slightly in the second half of the year), they are still below the national average of 15.6%, according to Boston-based Property & Portfolio Research, a real-estate research firm. Apartment, retail and warehouse vacancies rose in the second quarter but held at or below averages for the 54 major metro areas surveyed by PPR, while rents were still rising in all but the retail sector.

To be sure, the geographic proximity of the region to the crisis on Wall Street -- with Philadelphia about two hours south of Manhattan, give or take -- is a concern among the area's real-estate professionals. As with most markets globally, sales of office, retail and apartment buildings have slowed since the credit crunch began in the summer of 2007, although sales of office buildings valued at $5 million or more this year through August fell just 14% compared with last year's period. That is better than a 77% drop nationwide over the period, according to Real Capital Analytics, a New York-based research firm.

The Philadelphia metro area, home to about 5.1 million people, saw continued growth in its education and health-services sector. And so far overall job growth has remained in the positive territory as of July compared with the year-earlier period, albeit just barely at 0.1%, according to the Bureau of Labor Statistics.

For now, the new 975-foot-tall glass-encased Comcast Center tower that officially opened this year seems to reflect the market's strengths. Designed by Robert A.M. Stern Architects, the building has created a buzz with a 25-foot tall high-definition video screen in its lobby.

The building also has leased all of its roughly 1.2 million square feet of office space, much of it as the new headquarters of cable giant Comcast Corp., says Liberty Property's Mr. Gattuso. It has also done so despite skepticism early on from some brokers who said asking rents in the $40-per-square-foot range were too rich for the City of Brotherly Love, Mr. Gattuso said.

That success may be encouraging other developers. One project planned near the Comcast Center is the American Commerce Center. If built, it would rise about 1,500 feet high and include office, hotel and retail space, according to Peter Kelsen, an attorney for Philadelphia-based Hill International Real Estate Partners LP, which is developing the project.

Citing Hill's joint-venture relationship with a large pension fund, Mr. Kelsen said he's confident the group will have the financing. Developers also need some preleasing commitments and for the city to remove a height limit on the property, he says.

The scale is just one of the project's striking elements. New York firm Kohn Pedersen Fox Associates' design includes a glass facade and futuristic-looking cutouts as well as a lower section that abuts a higher tower that together look something like a chair. "It's not going to be very colonial," Mr. Kelsen says, referencing the city's past architectural leanings.

There's even hope that the tall-building curse may soon vanish. The new Comcast Center gave a nod to Mr. Penn by welding a small statue of the city's founder to one of its beams.

By: Maura Webber Sadovi
Wall Street Journal; September 24, 2008

Renting Makes More Financial Sense Than Homeownership

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.

Stocks vs. Houses: Returns

Shares of businesses return 7% a year over long time periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation or "real" returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book, "Stocks for the Long Term," he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long time periods might surprise you. It's zero.

Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year. House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase at the rate of inflation over long time periods for a real return of zero.

Robert Shiller, a Yale economist and author of "Irrational Exuberance," which predicted the stock price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004 he finds that real house returns would've been zero if not for two brief periods: one immediately following World War II and another since about 2000. (More on them in a moment.) Even if we include these periods houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the drain." If they do look at returns they focus on recent ones. Those tell a different story.

Between World War II and 2000 house prices beat inflation by about two percentage points a year. (Stocks during that time beat inflation by their usual seven percentage points a year.) Since 2000 houses have outpaced inflation by six percentage points a year. (Stocks have merely matched inflation.)

Stocks vs. Houses: Valuations

But while stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price/earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so, the ratio of house prices to rents. In 1940 the median single-family house price was $2,938, according to the U.S. Census, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000 the ratio had swelled to 17. In 2005 it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney.com's home town of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Prior to the creation of the Federal Housing Authority in 1934 house buyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that house buyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.

That means more Americans can win loans for homes, and they can win them for far more expensive (larger) homes than their incomes previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by the summer of 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

Stocks vs. Houses: Conclusion

For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963 they've done so in only two years, vs. 18 for stocks. That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in the summer of 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975 to 2000 average.

So to sum up why I rent: Shares right now cost 16 times earnings and over long time periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long time periods return zero after inflation. And they look likely to return less than that for a while.

On the following page I've tried to anticipate and address questions and objections.


Questions/Objections
"You can't live in your stocks" or "Renters throw money down the drain."

Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price/rent ratio of 19. House incidentals often cost around 2%. If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)

Note that houses and shares have transaction costs, too. Home buyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.

"House buyers get tax breaks."

So do share buyers, but both are a bad deal. The interest on loans for houses (mortgages) and shares (margin balances) is tax-deductible. But the rates are almost always too high. A big house loan presently costs 6.1% interest while a big stock loan costs about 9%. For the returns, we can forget about inflation because it helps debtors while hurting investors, making it a wash for those who borrow to invest. Still, nominal returns of 3% for houses and 10% for stocks aren't high enough to justify those rates. The tax breaks aren't really breaks at all. Moreover, a majority of homeowners don't claim them. Their incomes are low enough to make the standard deduction a better deal.

"What about the pride of home ownership?"

It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. House owners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden of poor returns and maintenance to someone else.

"You seem to knock government housing subsidies, but they've helped many Americans afford homes."

My inner socialist agrees. My other inner socialist worries that the government has effectively raised prices to the point where the middle class can't afford houses, or buries itself in debt to own them. My inner capitalist is too busy watching shares to care about house prices. My inner conspiracy theorist notes that while politicians tout the social benefits of homeownership none mentions its tax benefits to the government. I pay no taxes on the overall value of my stock portfolio, just on my cashed-in gains and collected dividends. But Americans pay taxes on the full $11 trillion worth of housing they own plus the $10 trillion worth of it they're still paying off.

"Houses are bigger than apartments."

True, and both can be rented. A third of renters live in single-family houses. I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and (this is unique to New Yorkers) not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen. I'm not especially frugal; I spend a teacher's salary each year on restaurants and travel. But I guess I'm too busy or lazy right now to bother with a big house and its innards.

"Are you saying I should sell my big house and rent an apartment instead?"

No, unless you have more space than you need and moving wouldn't be disruptive to your family, and you want to cash in on recent housing gains, make more money over the next couple of decades, use less energy while simplifying your life, and you don't mind seeming odd to friends. In which case, yes. But really, I'm not trying to win anyone over. Strong demand for houses keeps my rent cheap.

"Renting is for poor people."

True. But it's for rich people, too. The average renter makes about $34,000 a year, but while the percentage of renters declines after incomes exceed $20,000 and rents exceed $600 a month, it jumps again once incomes top $150,000 and rents top $1,200 a month. In other words, poor people rent modest apartments for lack of choice. Middle-income people buy houses. High-income people, presumably with a dose of financial savvy, often rent nice apartments instead of buying.

"You say houses return zero. But I've made a fortune on my house in recent years."

I'm referring to inflation-adjusted returns over long time periods, absent external boosts to demand. You're referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates. Over the next 20 years I believe houses will return zero or slightly less after inflation and that stocks will return 7%.

"So you're never going to buy a house? What about raising a family?"

I might buy one eventually, but the longer I can put it off the more I'll get out of the shares I'll have to sell to afford it. I'm 34 now with a fiancée and a fish. I'm going to try to rent for at least 10 more years. If I have kids I'll probably move into a big apartment or a house once they reach running-around age. I'll rent, most likely.

By: Jack Hough
Yahoo! Real Estate; September 26th, 2008

City's Property Market, at Least, Defies Curse

Some sports fans in Philadelphia feel their teams are victim of a real-estate curse.

That is because none of the city's major professional teams -- the Phillies, Flyers, Eagles and 76ers -- have won a championship since before 1987, when Malvern, Pa.-based Liberty Property Trust's One Liberty Place rose above a statue of William Penn that tops City Hall. Mr. Penn's hat previously set the bar for the city's skyline.

The American Commerce Center, shown in renderings, would change the look of Philadelphia's skyline.

Fortunately, Mr. Penn doesn't seem to have focused his chagrin on the real-estate market.

So far the Philadelphia area's commercial real-estate leasing market, particularly Center City Philadelphia apartments, have held steady in the midst of the growing economic carnage. The city's office market, more than the suburbs', has benefited from "steady, unspectacular growth married with little supply," says John Gattuso, senior vice president and regional director of Liberty's urban development group.

While the metropolitan area's office vacancies rose to 14.5% in the second quarter (and rents are expected to decline slightly in the second half of the year), they are still below the national average of 15.6%, according to Boston-based Property & Portfolio Research, a real-estate research firm. University City Apartments, retail and warehouse vacancies rose in the second quarter but held at or below averages for the 54 major metro areas surveyed by PPR, while rents were still rising in all but the retail sector.

To be sure, the geographic proximity of the region to the crisis on Wall Street -- with Philadelphia about two hours south of Manhattan, give or take -- is a concern among the area's real-estate professionals. As with most markets globally, sales of office, retail and apartment buildings have slowed since the credit crunch began in the summer of 2007, although sales of office buildings valued at $5 million or more this year through August fell just 14% compared with last year's period. That is better than a 77% drop nationwide over the period, according to Real Capital Analytics, a New York-based research firm.

The Philadelphia metro area, home to about 5.1 million people, saw continued growth in its education and health-services sector. And so far overall job growth has remained in the positive territory as of July compared with the year-earlier period, albeit just barely at 0.1%, according to the Bureau of Labor Statistics.

For now, the new 975-foot-tall glass-encased Comcast Center tower that officially opened this year seems to reflect the market's strengths. Designed by Robert A.M. Stern Architects, the building has created a buzz with a 25-foot tall high-definition video screen in its lobby.

The building also has leased all of its roughly 1.2 million square feet of office space, much of it as the new headquarters of cable giant Comcast Corp., says Liberty Property's Mr. Gattuso. It has also done so despite skepticism early on from some brokers who said asking rents in the $40-per-square-foot range were too rich for the City of Brotherly Love, Mr. Gattuso said.

That success may be encouraging other developers. One project planned near the Comcast Center is the American Commerce Center. If built, it would rise about 1,500 feet high and include office, hotel and retail space, according to Peter Kelsen, an attorney for Philadelphia-based Hill International Real Estate Partners LP, which is developing the project.

Citing Hill's joint-venture relationship with a large pension fund, Mr. Kelsen said he's confident the group will have the financing. Developers also need some preleasing commitments and for the city to remove a height limit on the property, he says.

The scale is just one of the project's striking elements. New York firm Kohn Pedersen Fox Associates' design includes a glass facade and futuristic-looking cutouts as well as a lower section that abuts a higher tower that together look something like a chair. "It's not going to be very colonial," Mr. Kelsen says, referencing the city's past architectural leanings.

There's even hope that the tall-building curse may soon vanish. The new Comcast Center gave a nod to Mr. Penn by welding a small statue of the city's founder to one of its beams.

By: Maura Webber Sadovi
Wall Street Journal; September 24, 2008

Converting Instead of Constructing

Condo conversions take a slower pace today, but the trend still exhibits reasonable revenue potential.

Condo conversions make economic sense in expensive housing markets like Washington, D.C., Philadelphia and Miami, among others where converted rentals remain the best option for entry-level buyers. Companies like Apartment Investment and Management Co. (AIMCO), CityView and J.A. Reinhold Residential look to capitalize on the for-sale trend.

Jeffrey Reinhold expects the conversion trend to stay hot for a long time to come. The CEO of Philadelphia-based Historic Landmarks for Living even formed a separate company to focus just on this niche. J.A. Reinhold Residential aims to solely turn multi-family rentals into condos for sale. The new firm’s initial purchase included five apartments in the area for about $88 million, two of which are being converted into a $55 million to $60 million process. Reinhold’s 110 unit Locust Point will see $9 million in upgrades or approximately $100,000/unit, which would sell from the mid-$200,000’s to mid $400,000’s. The 108 unit Lofts at Logan View will get $7 million in renovations. A one-bedroom could sell for more than $270,000, while the two bedroom could fetch $450,000 or more. Reinhold believes his affordable luxury product will appeal to first-time homebuyers who wish to live in the city but cannot afford the high home prices. The strategy works well for the company since it bypasses land and construction costs to build in such a central location. Another bonus; no oversupply worries because the area isn’t overbuilt and enjoys a robust economy.

Historic Landmarks for Living owns and operates nearly 2,000 apartments in urban areas and is able to provide Baltimore Apartments, St. Paul Apartments, Minneapolis Apartments, Chicago Apartments and Philadelphia Apartments. As a private company it doesn’t look for a fixed IRR. Reinhold remains on the search for suitable investment opportunities to purchase an asset. He keeps his options open to convert the company’s existing portfolio as favorable market conditions dictate.

As the CEO of Historic Landmarks for Living, the company responsible for rehabbing and managing some of Philadelphia’s most interesting rental properties, Jeff Reinhold knew there was an abundance of historic buildings in Philadelphia that could be converted into sophisticated luxury homes.

Yet in the current housing market in Philadelphia, many condominiums are geared toward a wealthier demographic, leaving little choice for young professional homebuyers who want to stay in Center City. For Reinhold, the lack of affordable condominiums presented a new opportunity.

“As the market was starting to appreciate in price, we were starting to see homes and condos inching up towards the $700,000 to $1 million range — prices the -first-time homebuyer really couldn’t afford,” says Reinhold. “In front of me was this great niche waiting to be created.”

Last year, Reinhold launched a new residential real estate company called J.A. Reinhold Residential. The concept was simple: Take well located multi-family properties and turn them into for-sale condominiums. Because the units would be conversions and not new construction, Reinhold could offer the properties at a lower price point, making them accessible to the first-time homebuyer. The first two properties J.A. Reinhold Residential has converted are the Lofts at Logan View at 17th and Callowhill streets and Locust Point at 25th and Locust streets on the Schuylkill River in desirable Fitler Square and adjacent to Schuylkill River Park. Both buildings are conveniently located, with the Lofts at Logan View situated by the Parkway’s museums and minutes away from the Center City business district, and Locust Point set equidistant to both Center City and University City. The sales of offices at both properties are now open with fully furnished models. The properties are being renovated inside and out. Locust Point and Lofts at Logan View are beautiful examples post-industrial architecture, with features like 13- to 17-foot timbered ceilings, exposed brick walls and dramatically tall windows showcasing striking views of the city. The units themselves have been renovated with the high-end details common to luxury condominiums, such as granite countertops, Decora cabinets and hardwood flooring. Pricing at Locust Point, which also boasts 70 parking spots, begins in the high $200,000s for a one-bedroom condo.

“At that price points you would generally have to look for something south of South Street or in Northern Liberties— it would be difficult to find a condominium within walking distance of Center City,” says Reinhold.

A longtime Center City resident himself, Reinhold found his work extremely satisfying, and particularly enjoys the creativity that goes into re-imagining existing architecture. Reinhold eventually hopes to expand the company to other cities, and believes that his conversion model is fulfilling an unmet need in the real estate market. “I know that people really appreciate living in historically significant properties,” Reinhold says. “With our company we’re taking what are already tremendous buildings and doing something truly different — restoring them at a luxury level that is still affordable.”

Apartment Buildings Affected By Declines in Housing Market

Job-Loss Worries Pressure the Sector; Rent Rates Decline

For the past year, apartment buildings have been one of the few bright spots in the real-estate industry as people forced out of the home-buying market by foreclosures or the credit crunch have turned to renting.

But now the specter of job losses is beginning to spread the gloom into that sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates are beginning to fall in many cities. Some cities, however, have not been affected nearly as much. For instance, the rental markets for Philadelphia apartments and Minneapolis apartments remain strong.

"In many markets, our new prospects are beginning to resist the current and increasing levels of market rents we've enjoyed over the past quarter," David Neithercut, chief executive of Equity Residential, told investors during this month's earnings call. While the Chicago-based apartment owner, one of the largest in the U.S., reported an increase in funds from operations of 1.5% last quarter, it lowered its estimates for comparable-property revenue growth.

'Shadow Market' Competition

Investors have been buoyed by the thousands of Philadelphia apartment rentals that have entered the market in the past year, including buyers locked out of the for-sale housing market and those who defaulted on their mortgages. The one downside of the housing crisis for apartment owners has been the "shadow market," made up of unsold homes that owners have put on the rental market.

But that competition isn't nearly as big a problem as job-loss trends. "A lot of folks think it's the shadow market that's softening rents. It's really a jobs issue," says Richard Campo, chief executive of Camden Property Trust. The Houston-based REIT saw rents fall 1.4% last quarter from a year earlier in Phoenix. Arizona shed some 87,000 jobs in June and July. Meanwhile, rents are up in cities such as Houston, where job growth remains strong and where Camden saw 4% rent growth last quarter. Nationally, the apartment owner expects to see rental growth of 2.5% this year, compared with 4.1% growth in 2007 and 7.4% in 2006.

The biggest impact from job losses could be seen in cities such as Charlotte, N.C., and Atlanta, which haven't seen large shadow markets develop. "That group in the middle is starting to show signs of slowing," says Haendel St. Juste, an analyst at Green Street Advisors Inc. "When you look at the markets that are starting to slow, it's spreading beyond the markets that were burdened by housing."

That led to disappointing second-quarter results at Mid-America Apartment Communities Inc., a Memphis, Tenn., REIT with 42,000 rental units. The company reduced its 2008 revenue forecast by 1% and saw year-over-year revenue growth for the second quarter fall to 2.6% from 3.8% last year. The results surprised some investors because Mid-America has long been considered to have one of the least-volatile portfolios. Analysts blamed the declines, in part, on a weakening economy across the Southeast.

Atlanta-based Post Properties Inc., meanwhile, announced that it canceled its planned 300-unit apartment building in Charlotte and delayed three Florida projects.

Cap-Rate Problems

For investors, concerns about falling rents and rising vacancy has resulted in a decline in prices for apartment buildings. The "capitalization rate," which measures the relationship between the price and cash flow of properties, dropped one-quarter of one percent from the second quarter of 2007 to second quarter of this year, according to Real Capital Analytics Inc., a real-estate research firm. The cap rates are now at levels last seen at the end of 2004, the firm says.

The decline in prices has led to a pickup in sales activity. Real Capital Analytics reported last month that sales in June were "well above" recent months' figures, with $5.5 billion already having closed or in contract in the third quarter compared with $8.7 billion in sales in the second quarter.

Apartment-building sales already were far outpacing deals involving other commercial property, such as office buildings and strip malls. The availability of credit from government-sponsored Fannie Mae and Freddie Mac has buoyed values and fueled new deals. Turbulence at the mortgage titans, which together with Ginnie Mae hold 35% of the mortgage debt on multifamily housing, riled apartment owners last month as investors worried about the fate of Fannie and Freddie. But those worries dissipated as the housing bill signed into law last month made the government's implied guarantee of Fannie and Freddie's $5.2 trillion in mortgage securities more explicit.

"There is seemingly no limitation to how much production we can sell to them," says Peter Donovan, who heads up CB Richard Ellis's multihousing group. "I think the market is maybe a little surprised by that."

Indeed, Fannie Mae announced last month that it would increase its commitment to buy loans on multifamily housing of up to $5 million to provide additional liquidity for rental housing. Fannie said it invested $20 billion in multifamily housing in the first half of the year. While that is down 25% from $27 billion in the first half of 2007, the number of total deals has fallen by 45%. Multifamily also remains a safe investment so far this year: Delinquencies on Fannie- and Freddie-backed multifamily loans in the first quarter were just .09% and .04%, respectively.

By: Nick Timiraos
Wall Street Journal; August 20, 2008