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Dollars and sense: Apartment markets and lending

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2006 has been a stronger year than projected for apartment lenders with figures similar to 2005's powerful numbers. The downtrend in rates over the last two months combined with the uptick experienced by clients on variable rate loans has resulted in refinancing activity to lock in fixed rates.

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Nationally, the story is one of consolidation of commercial lenders, continuing the trend of the overall banking industry. Local lenders affected by this in San Diego include Washington Mutual, which purchased Commercial Capital Bank, and Wachovia, which purchased World Savings. The growth of WaMu has so far been to the client's benefit, as streamlined process and efficiency of scale have allowed very desirable rates to be placed in the market. A surprise this year was my ability, at times, to quote rates on apartment buildings that were lower than those on home loans.

Values on apartments nationally have dropped about 10 percent from the record highs achieved this spring. In San Diego there has been a more pronounced shift as apartments previously valued as condo conversions revert back to value based on apartment income. Deals that previously could support loan amounts of 50 percent to 65 percent are now qualifying for 65 percent to 77 percent, a direct result of cap rates having increased by 1 to 2 points. Appraisers are challenged as sale transactions are negotiated downward during the course of escrow.

The intrinsic value of ownership looks attractive in San Diego. Vacancy continues to hover around 3.5 percent and very few concessions are being offered. Vacancy nationally is balanced at 5 percent. Rent growth has seemingly not been affected by the "shadow" rentals of condominiums that are not owner occupied. Insurance rates have stabilized, with the exception of specialty coverage such as flood or earthquake. Utility costs have steadied and some owners have chosen to submeter or use RUBS to reduce those costs, and Proposition 13 has controlled taxes.

The areas of largest increases are maintenance and repairs. Curiously, there has been little discussion of this in the marketplace, as rent increases have covered it. Owners have been able to utilize the wide array of loan products to control their debt payments, often their largest expense, and maximize their returns. With virtually no new rental product being built in San Diego and home ownership still relatively unaffordable, rents should continue to keep pace with cost of living increases and provide stable returns to owners.

Submitted by Ann Block, CCIM, for Washington Mutual. Block is a senior loan consultant of 10 years with WaMu Multi-Family.

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