Why I’m excited about the Texas Multi-family real estate market: Investment opportunities in the Texas apartment industry A white paper by Keith O. Sanders Keith.SandersTEXAPLEX@gmail.com September 2011 Copyright 2011 by Keith O. Sanders. Smashwords Edition Please send all comments and questions to: Keith.SandersTEXAPLEX@gmail.com Limit of Liability/Disclaimer of Warranty This paper has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation to buy or sell any security or instrument, or to participate in any particular investment transaction. While the author has used his best efforts in preparing this publication, he makes no representations or warranties with respect to the accuracy or completeness of the contents of this publication and specifically disclaims any implied warranties of merchantability or fitness for a particular purpose. The strategies contained herein may not be suitable for your situation. You should consult with a professional. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or any other damages. Overview “It was the best of times, it was the worst of times.” Unemployment is 9.1% GDP growth is anemic, the price of gold soars as fear grips the economy, and yet corporations are sitting on billions in cash, borrowing costs are at historic lows, and we’re in the midst of the greatest real estate buying opportunity that the United States has seen in decades. This paper will highlight several major economic and demographic trends that are impacting real estate markets across the United States and are accelerating the shift from homeownership to renting. By illustrating the interplay between these trends I plan to establish why now is the time to step-up investment in Texas multi-family real estate. The Financial Crash of 2008 The financial crash of 2008 brought the United States to the brink of economic collapse. The market slowdown and credit crunch that followed put extreme downward pressure on all sectors of the economy, particularly real estate. Texas, however, the last state to go into recession was also the first state to come out of it, showing evidence of recovery in early 2010. By then, the seeds had been sown for strong growth in the multi-family real estate industry. U.S. Housing Market Trends Real estate investment models focus on the relationship between housing supply and demand to determine desirability. Below are some of the socioeconomic trends that are impacting U.S. multi-family housing markets. Apartment Supply • Apartment Completions: Per RREEF Research, the U.S. 30-year average for apartment completions is 153,000 units per year. However, completions of apartment units in 2011 and 2012 are forecasted to reach record-low levels in the U.S. with 28,000 units expected to be added in 2011 and 36,000 units in 2012. • The Joint Center for Housing Studies of Harvard University reported that starting with the “Great Recession,” multi-family housing starts plunged below 100,000 a level not seen since record keeping began in 1959. • Local market: David Oelfke, a broker with Apartment Realty Advisors told the Houston Business Journal, “The population of renters has increased over the last three years because it’s more difficult to buy single-family homes. During the same time, not many new Class A apartments have been built because developers could not get financing. [As a result] class A apartment fundamentals are better than they have been in decades.” Apartment Demand • Propensity to shun single-family housing: The second quarter 2011 home ownership rate fell to 65.9% – a drop of 1.0 percentage point year on year – and the lowest rate since 1998. A review of current literature suggests that due to tightening lending standards, and lack of confidence in the housing market, the U.S. is becoming a “nation of renters.” • Echo Boomers: The children of the Baby Boomers, a tribe that is approximately 76 million strong, are entering the work force in increasing numbers. Their age group falls within the population segment that has a growing desire to live in rental housing. • Increasing cultural diversity: Nearly 92% of U.S. population growth over the past decade came from minorities of all types and minorities make up a growing percentage of those living in rental housing. • Population Growth: Total U.S. population is projected to reach 325.5 million by 2015. Immigration and migration trends are expected to push Texas’ population up 8.79% to 27.4 million between 2010 and 2015 compared to 4.61% growth for the United States as a whole. Texas’ strong population growth will continue to fuel demand for apartments. What is the Texaplex? The 2010 census reported that the Texas population has grown to 25.1 million. Texas’ large, diversified economy is dominated by its Metropolitan Statistical Areas (MSAs). Of particular interest to multi-family real estate investors is a group of three MSAs referred to as the “Texaplex.” The Texaplex is the roughly triangular region anchored by Dallas/Fort Worth in the north, Austin/San Antonio in the west, and Houston in the east. Over 60% of all Texans live in the Texaplex. Due to the surge in population and job growth – the main engines of multi- family real estate – the Texaplex is a ripe investment opportunity. Note: The term "Texaplex" was coined by a Dallas real estate broker as part of a marketing campaign to counter the negativity of the recession of 2008. Texas is a great place to do business, and in 2011 is ranked third in the number (51) of Fortune 500 Company headquarters behind New York (57) and California (53). Snapshot of the 2011 Texas Apartment Market Texas regional apartment demand is strong, and rental rates continued to rise through the third quarter [of 2011]. Furthermore, economist Ray Perryman stated in “The Perryman Report & Texas Letter” that Texas’ short-term outlook is encouraging with continued population growth and overall job growth expected in the near future. In conclusion, increased demand and diminishing supply are pushing up Texas’ apartment occupancy rates and rents. Potential Investment Strategies Torto Wheaton Research pointed out that, “Apartment properties vary widely in terms of age, size, quality, and location, creating a broad spectrum of opportunities and possible investment strategies and providing greater liquidity than other sectors.” Below is a summary of strategies that are being deployed to take advantage of the shift in housing market trends in order to capture property appreciation and cash flow. Texaplex Strategy A: Build Purchase raw land, and build new multi-family housing from scratch. Texaplex Strategy B: Buy Acquire Class A apartment buildings. These are newer properties with nice amenities requiring little maintenance. Class A properties are in the greatest demand, and their prices are being bid up by institutional buyers. Consequently, Class A properties that earlier in the year could be acquired at a 20% discount on replacement value are now selling at a 10% discount. Texaplex Strategy C: Renovate Redevelop Class B and C apartment buildings. These properties are often “distressed” due to neglect, over-leveraging, and/or mismanagement, and are prime candidates for renovation and repositioning. There is less competition for these properties (compared to Class A) and, as a result, can often be bought at 40% discount on underlying debt. While this strategy requires more involvement on the part of the investor, it often has the greatest upside potential. The Texas Real Estate Market - beyond 2015 The U.S. Census Bureau projects that the Texas population will grow from the current 25,145,561 to 33,317,744 by the year 2030. Employment and housing demand should grow as well, creating continuing opportunities across all investment strategies for decades to come. Conclusion This paper presented an overview of a number of socioeconomic trends that are sweeping through U.S. society. Population shifts, increasing diversity, reluctance to embrace homeownership, and other factors have created an imbalance between supply and demand in Texas’ apartment markets. “We are in the early days of a beginning boom in apartment construction. The window for rent increases is wide open right now and will remain open until the new communities come online in 18 to 24 months.” Dr. Mark G. Dotzour, Chief Economist, Real Estate Center at Texas A&M University. This is why I’m excited about the Texas multi-family real estate market. Email: Keith.SandersTEXAPLEX@gmail.com About the Author Profile Keith Sanders is an articulate, people-oriented professional who moves effortlessly between cultures and organization levels. He has acquired more than 10 years of international experience, strong oral & written communication, research and interpersonal skills. By creatively managing teams, delivering presentations, and negotiating strategies, he has successfully coordinated projects from conception to completion. Keith co-founded the Foreign Entrepreneur Promotion Committee, a non-profit organization founded by independent businesspeople with the support of local governments, trade organizations and consulates. Its signature events included: • Hospitality program created for the Junior Chamber International World Congress in Japan. The World Congress was a leadership development conference, which brought together over 3,000 business and government leaders from more than 30 countries. “When I arrived in Japan I knew no one, and had nothing but a suitcase, two thousand dollars, and a positive attitude. By the time I left I had made life-long relationships, created a successful business, and co-founded a business-networking group. I am now using my skills and experiences to develop mutually beneficial opportunities in the Texas real estate market.” Keith holds a Bachelor of Business Administration degree from the University of Houston and resides in Houston, Texas where in addition to his full-time job in business development he has rehabbed and manages a small portfolio of single-family homes. Objective Involvement in commercial real estate development projects that would include analysis, due diligence, acquisition, construction, redevelopment and marketing of multi-family properties. Strong interest in repositioning distressed multifamily properties: (1) identify suitable investment targets, (2) renovate and provide other value added improvements as needed, (3) improve the resident profile and/or occupancy, and (4) other tasks as required in order to increase asset value. Email: Keith.SandersTEXAPLEX@gmail.com . at Texas A&M University. This is why I’m excited about the Texas multi-family real estate market. Email: Keith.SandersTEXAPLEX@gmail.com About the. Why I’m excited about the Texas Multi-family real estate market: Investment opportunities in the Texas apartment industry A