While we offer our investors, owners and clients turnkey commercial real estate services from design and build to valuation and management, we believe that arming them with our knowledge helps instill confidence in investing and also allows partners within the industry to share best practices. Therefore, we will periodically use this e-newsletter to help you understand our thoughts on the commercial real estate market today, where it is heading, and how that will shape our investment strategy, which is designed to mitigate risk and enhance growth.

National Economy

The enduring low-gear real estate recovery should advance further into 2013-2014.  Modest gains in leasing, rents, and pricing should extend across U.S. markets from coast to coast and improve prospects for all property sectors.  It is our opinion that Investors discouraged about stratospherically priced core properties in gateway markets inevitably will chase yield and step up activity in secondary markets.  We have already begun to see this happening in Alabama.

The real estate capital markets maintain a turtle’s pace for resolving legacy-loan problems as the wave of maturing commercial mortgages gains force over the next three years. Low interest rates have bailed out lenders and underwater borrowers, but it is our opinion that investors should prepare for eventual rate increases which may create another wave of foreclosures.

Equity pipelines from well-positioned, cash-rich REITS, yield-hungry pension funds and foreign players parking money in safe North American havens will need to remain disciplined and sidestep the risk of the overpriced major metropolitan markets and partner with local operators who have an edge in ferreting out the best deals in the secondary markets.  It is our opinion this will drive up prices in these secondary markets leading to further capital appreciation in addition to the already positive cash flows.  At the Redmont Group, we believe we are well positioned to take advantage of this uptick due to our 20+ years of experience working in and studying the southeastern market.

Multi-Family Market

The multi-family bandwagon rolls on.  Positive demographics, the bulge of young adult renters and downsizing baby boomers, supplemented by home-ownership displacement from the housing bust create significant demand drivers. Population shifts into infill areas and urbanizing suburbs, especially locations near mass transit stops, favor multi-family, too.  More people willingly forsake space and yards for greater convenience and avoiding car dependency. The Birmingham Business Journal recently quoted, “The continued pattern is that people want to move – and are moving – downtown”.  In light of this trend, The Redmont Group will focus its investment efforts on multi-family projects located in dense urban areas within strong walkable communities.

At this point in the multi-family cycle, sellers under pressure and some banks shedding assets will settle for the most dependable buyer, not necessarily the biggest offer. Even though a lot of capital has been headed into urban infill, renter demand will be there to support future appreciation.  Value-add plays in multi-family are still very attractive; however, we will concentrate on buying good assets in solid markets, then drive yields by providing modest capital for improvements and instilling capable property managers to lease up vacancies.

Potential Problems in Multi-Family

It is our opinion that institutions chasing the sub-6 cap rate deals on existing properties in the major markets will see major trouble in the coming years as interest rates rise.  They will begin to see rising capitalization rates due to the necessity to keep sustainable debt coverage ratios.  This could cause catastrophic problems for those investors purchasing in the sub-6 capitalization rate deals.

While we will steer clear of the overpriced assets only chasing capital appreciation, we will look to avoid garden apartments in suburban areas where new development can spring up easily and soften returns on older product.  It is our opinion that some of these low-barrier-entry places could suffer from oversupply by 2014 or 2015.  Additionally, we will look to avoid high-foreclosure markets where speculators will turn single-family homes into rentals and compete directly against our projects for tenants.

While the overall rah-rah multifamily story seems a little long in the tooth and will eventually lose some steam as housing continues its rebound, we are still expecting a run of increasing rents and values to continue in most secondary markets.  While most investors in the coastal cities will be chasing capital appreciation, we will be seeing strong cash-on-cash returns from the overall operations, as well as a slight bump in capital appreciation as the national shift in chasing yields lead institutional investors into the southeastern secondary market.

We encourage you to react to our assessment, and direct any questions or comments to Phillip Hasha, our chief operating officer at Phillip@redmontgroup.com. Again, we hope to use this opportunity to foster a dialogue with interested investors, and our current owners.