Wisconsin Apartment Wisconsin Apartment MarketMarket

Investment and Investment and

Appraisal PerspectiveAppraisal Perspective

OverviewOverview

• Capitalization Rates/Other StatsCapitalization Rates/Other Stats

• Why are Apartments Different?Why are Apartments Different?

• Sales Activity/Marketing Sales Activity/Marketing Times/Liquidation and Disposition Times/Liquidation and Disposition ValuesValues

• What Does the Future Hold?What Does the Future Hold?

• QuestionsQuestions

Apartment InvestmentApartment InvestmentRisk LevelsRisk Levels

• LocationLocation

• Current Management/ConditionCurrent Management/Condition

• Occupancy/Current RentsOccupancy/Current Rents– Two properties can have the same Two properties can have the same

location, but have very different value location, but have very different value indicators as a result of management indicators as a result of management factors – fragile marketfactors – fragile market

Cap Rates – My Most Cap Rates – My Most Common QuestionCommon Question

• Low Risk: 6.50%-7.50%Low Risk: 6.50%-7.50%

• Medium Risk: 7.25%-8.25%Medium Risk: 7.25%-8.25%

• High Risk: 8.25%-9.50%High Risk: 8.25%-9.50%

• Loan Terms Steady for the time Loan Terms Steady for the time being- They are a Big Factor!being- They are a Big Factor!

Vacancy/Collection Loss Vacancy/Collection Loss RatesRates

• Low Risk: 2-3%Low Risk: 2-3%• Medium Risk: 4-5%Medium Risk: 4-5%• High Risk: 6-15%High Risk: 6-15%• What if Actual Vacancy exceeds 15%?What if Actual Vacancy exceeds 15%?

– Higher Risk Factor in Cap RateHigher Risk Factor in Cap Rate– Income Approach vacancy rate- Income Approach vacancy rate-

combination of actual/marketcombination of actual/market– Deduction for Rent LossDeduction for Rent Loss

Rent LevelsRent Levels

• All Over the Place! Many factors…All Over the Place! Many factors…• Size, Amenities, Utility Inclusion and Size, Amenities, Utility Inclusion and

Condition All MatterCondition All Matter• Example: Milwaukee East Side Example: Milwaukee East Side

– Studio: $325-$650Studio: $325-$650– 1 Bedroom: $550-$1,1001 Bedroom: $550-$1,100– 2 Bedrooms: $775-$2,1002 Bedrooms: $775-$2,100– 3 Bedrooms: Even higher3 Bedrooms: Even higher

Expense LevelsExpense Levels

• Considered with Stabilized PropertiesConsidered with Stabilized Properties

• Owner Paid HeatOwner Paid Heat– Low Risk: 42.5%-47.5%Low Risk: 42.5%-47.5%– High Risk: 47.5%-55%High Risk: 47.5%-55%

• Tenant Paid HeatTenant Paid Heat– Low Risk: 37.5%-42.5%Low Risk: 37.5%-42.5%– High Risk: 42.5%-50%High Risk: 42.5%-50%

Why Are Apartments Why Are Apartments Different?Different?

• Vacancy – the Biggest IndicatorVacancy – the Biggest Indicator

• Only Investment where Rent Levels Only Investment where Rent Levels are Increasing Nearly Everywhereare Increasing Nearly Everywhere

• Banks are Lending!Banks are Lending!

Sales Activity/Marketing Times/Sales Activity/Marketing Times/Liquidation ValuesLiquidation Values

• Activity has Increased in 2012, especially Activity has Increased in 2012, especially at Year End – Cap Gains Tax Increase?at Year End – Cap Gains Tax Increase?

• Still Many Deal SeekersStill Many Deal Seekers

• Less Sellers Under DuressLess Sellers Under Duress

• Bank-Owned Properties- Special Bank-Owned Properties- Special FinancingFinancing

• Marketing Times – 6 months to 2 YearsMarketing Times – 6 months to 2 Years– Most Unread Part of an AppraisalMost Unread Part of an Appraisal

Liquidation and Liquidation and Disposition ValuesDisposition Values

• Seller Need for Quicker SaleSeller Need for Quicker Sale• Easy Addition to an AppraisalEasy Addition to an Appraisal• Liquidation ValueLiquidation Value

– 0-90 Days0-90 Days– 20%-30% Value Discount20%-30% Value Discount

• Disposition ValueDisposition Value– 90-180 Days90-180 Days– 10%-20% Value Discount10%-20% Value Discount

What Does the Future Hold?What Does the Future Hold?

• Interest Rate Increases?Interest Rate Increases?

• New Construction:New Construction:– Why it is happening?Why it is happening?– What will be the effect?What will be the effect?

• Oversupply of Apartments?Oversupply of Apartments?– High End UnitsHigh End Units– Low End UnitsLow End Units

Questions?Questions?