Another Colliers Real Estate Blog - Capital Markets Team

Private Capital Advisors (PCA) started a blog recently and now takes the prestigious prime slot on my link list. They work primarily in the multi-family sector with apartment investors.

The multi-family sector is projected to actually offer better returns for investors in comparison with other property types (retail, office and industrial) because homeowners are switching to renting since home sales are down (in case you haven't heard).

But don't take my word for it, the National Association Of Realtors (NAR) says this about the Multi-Family sector:

The apartment rental market – multifamily housing – is experiencing increased
demand from the slowdown in home sales. With a rising population and a
growing number of households, vacancies are tightening and rents are rising.

In regards to commercial property and the business cycle, it seems to me that the first segment to get during an economic contraction would be retail: people cut back on discretionary spending when times get tough. This leads to less retail demand and the wave of retail vacancies we are seeing now. In addition to the number of retail chains filing for bankruptcy, (Wicks, Linens' n Things, Comps USA, Movie Gallery) a very large number are closing stores (Ann Taylor, Foot Locker, Zale, Sprint Nextel) since they over-expanded when the times were good.

Next, there should be a little blip in industrial. There is a lag time between when goods are produced and when they arrive at the stores. It usually takes awhile for manufactures to become aware of the decrease in demand and goods should start piling up. This means more warehouse space to house these goods. Eventually, manufactures will cut back, companies will go out of business, the warehouses will empty themselves and less industrial space will be demanded. Recent developments in industrial technology have reduced this lag time; just-in-time delivery means less warehouse space.

Office is a little tricky, depending on what spurned the downturn. In this instance it is housing and finance, so we should see reductions in finance, insurance and real estate (FIRE) companies, and fewer expansions and more sublease space in the office market.

Usually what occurs in a business contraction is a huge increase in borrowing costs (the interest rate) as fewer businesses are making money, lenders raise the rates to protect themselves from defaults. This affects homeowners too, so fewer people are buying houses since they cannot get the funding, the so called "credit-crunch".

At the same time, the population is still rising, people are still moving from place to place, fewer homes are being built because home builders cannot get the financing and few buyers can afford the borrowing costs. People substitute out of housing and into apartments.

Thus, the multi-family sector is almost counter-cyclical; they potentially could do more business when times are lean. Again the only problem is going to be the financing. Private capital would be the way to go on that one - when money is scarce, those who have money will have the opportunity to make a lot of it if they place their bets right. Now is a good time to buy if you are in it for the long haul (and you are loaded).