Multifamily real estate in secondary markets in upstate New York posed to do particularly well

Fueled by lucrative loan origination fees and the fees associated with the securitization of such debt, poor lending practices in the subprime mortgage industry have had widespread disastrous effects for most sectors of the economy. There is, however, one industry that is arguably benefiting from all the turmoil. Integra Realty Sources, in its IRR Viewpoint 2008 notes that suburban and urban multifamily is the sector that will be the "sole beneficiary of the subprime meltdown." Multifamily real estate in secondary markets such as upstate New York are posed to do particularly well. Especially when you consider the market attributes which distinguish them from those markets which are most keenly feeling the backlash from the subprime mortgage industry. As a result, upstate markets will start to gain notice by investors hindered with tightened lending standards. As Apartment Finance Today recently noted, the best opportunities in 2008 may very well be in class C and class B properties in secondary markets. With housing prices that were well below the national averages during the housing bubble, homes in upstate New York were more moderately priced and appreciated modestly in contrast to the astronomical gains made in high-barrier-to-entry markets. As such, borrowers accumulated less debt when they purchased homes and have been better able to continue to meet their financial obligations in the aftermath of the subprime debacle. The Rochester Business Journal recently reported that only 0.73% of the area's housing mortgages in 2006 were originated as subprime loans in contrast to the national mean of 2.77% for the largest 100 metropolitan areas. From 2004 to 2006, Rochester placed 99th amongst the nation's 100 largest metro areas in subprime originations as a share of housing stock with Syracuse ranking 98th and Buffalo 100th. While home values in many parts of the country continue to depreciate, homes continue to appreciate in upstate New York. As a result, upstate New York has not seen an emergence of a shadow market, nor will people be as likely to walk away from their homes in the face of rising mortgage payments, given that they have not developed negative home equity. Additionally, tightened lending standards and stable property values have discouraged many renters from venturing into home ownership, creating a healthy and sustained demand for apartments. Instead of paying upwards of $150,000 per unit to acquire property in a high-barrier-to-entry market, smart investors are recognizing the opportunity to add properties to their investment portfolios at r a fraction of the cost. Multifamily properties in upstate New York often range in value from $30,000 to $70,000 per unit for class B and class C properties. Investors in this market are rewarded with property values that will appreciate steadily while cap rates are favorable for investment in comparison to many other markets. Many multifamily assets in upstate New York are being acquired at capitalization rates (a cap rate is a property's income relative to the property's value expressed as a percentage) in the 7-8% range versus 4-6% range in primary markets. Investors who do not have the financial resources of large institutional investors are able to acquire multifamily assets that would be beyond their means in the high-barrier-to-entry markets. In such circumstances, the investor is additionally rewarded by enjoying better economies of scale. Many experts are conjecturing that current wage and immigration trends will create the strongest demand for B and C quality apartments. In secondary and tertiary markets such as upstate N.Y., B and C quality apartments constructed in the late 60s and early 70s often comprise the greatest percentage of the market share. Properties managed by The Cabot Group, experienced an average occupancy of better than 95% last year and an average increase in net operating income (property revenue minus operating expenses) of approximately 9% in 2007. Given that the upstate market has favorable investment characteristics in the face of economic recessions, it stands to reason that upstate New York will catch the eyes of investors from across the country and perhaps around the world. Managing agents should help their clients create value by focusing on net operating income during a favorable economic climate for multifamily. Brokers can help their clients by pointing them in the right direction, upstate New York. Jordan Debes, CPM, is director, multifamily management division, The Cabot Group, Rochester, N.Y.