As published in Scotsman Guide's Commercial Edition, November 2005.
Is the real estate bubble about to burst? It's a question on the minds of many novice real estate investors -- and they are turning to their mortgage brokers for answers. With so much speculation about the residential market, it's hard to pinpoint the answer for the multifamily market. This makes would-be investors nervous about expanding their real estate portfolios.
By helping investors understand the complex factors involved in determining what defines a "bubble," however, brokers can also help them determine what type of investment is right for them.
Learn market realities
First off, is there a real estate bubble? Rather than a national bubble, it appears that we should really be looking for "bubblettes," according to a recent study by a large commercial lender. These bubblettes are unstable, regional pockets where real estate prices potentially can outpace market values. According to Richard DeKaser, the chief economist involved in this study, we should examine metropolitan statistical areas individually to understand the factors involved within a particular market. In his review of 99 different U.S. metro areas, DeKaser found that many are overvalued, but many are at or even below expected values.
Just as indicators for residential real estate bubblettes exist on a regional level, varying regional influences affect multifamily real estate. In an extreme example, commercial real estate has seen a tremendous upsurge in demand in the undamaged areas around the hurricane-ravaged South and Southeast. The National Association of Realtors (NAR) expects to see tremendous short-term multifamily rent growth in these metro areas as businesses and residents relocate. Cities such as Houston, Dallas, Atlanta, Miami and Tampa, Fla., will likely be affected significantly. Property values in these areas increase tremendously, which could put them into bubblette territory -- even in the short term -- and boosting rents.
Although most contributing factors for the Gulf Coast are more severe than normal, the complexities of supply, demand and pricing appreciation exist in any market. Such complexities could contribute to your investors' reservations. Your best bet for combating their fears is to educate them. Give would-be investors the honest scoop about the opportunities and challenges that await them in the multifamily-property market.
Different borrowers have different goals when it comes to commercial investments. Everyone wants to make a profit, but many people's timelines and profit expectations can be off-kilter. They've seen such dramatic appreciation in the past few years that they now are getting into the market and expecting to become rich overnight. These potential investors might be living in a hot multifamily-property market, but if they think they're going to see the same gains seen recently, they could be in for a rude awakening.
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