{"id":1004092934,"date":"2014-03-19T09:24:30","date_gmt":"2014-03-19T17:24:30","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004092934"},"modified":"2022-12-07T06:02:51","modified_gmt":"2022-12-07T14:02:51","slug":"leverage-in-m-f-world-of-business","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/leverage-in-m-f-world-of-business\/","title":{"rendered":"Leverage in M-F World of Business"},"content":{"rendered":"<p><em>By Ella Shaw Neyland, President, Steadfast Income REIT<\/em><\/p>\n<p><a href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/03\/Ella-option2.jpg\"><img loading=\"lazy\" decoding=\"async\" data-attachment-id=\"1004092968\" data-permalink=\"https:\/\/www.commercialsearch.com\/news\/leverage-in-m-f-world-of-business\/ella-option2\/\" data-orig-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/03\/Ella-option2.jpg\" data-orig-size=\"448,248\" data-comments-opened=\"1\" data-image-meta=\"{&quot;aperture&quot;:&quot;5.6&quot;,&quot;credit&quot;:&quot;&quot;,&quot;camera&quot;:&quot;Canon EOS REBEL T1i&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;1374531309&quot;,&quot;copyright&quot;:&quot;&quot;,&quot;focal_length&quot;:&quot;25&quot;,&quot;iso&quot;:&quot;500&quot;,&quot;shutter_speed&quot;:&quot;0.033333333333333&quot;,&quot;title&quot;:&quot;&quot;}\" data-image-title=\"Ella option2\" data-image-description=\"\" data-image-caption=\"\" data-large-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/03\/Ella-option2.jpg?w=448\" class=\"alignleft size-thumbnail wp-image-1004092968\" alt=\"Ella option2\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/03\/Ella-option2.jpg\" width=\"150\" height=\"150\" \/><\/a><\/p>\n<p>In spite of what you may have read in the paper, debt is not a four-letter word.\u00a0\u00a0 In fact, structured prudently, it can be viewed more as an asset instead of a liability.\u00a0 This is particularly true in the world of multi-family REITs.\u00a0 This space has historically tolerated higher leverage than other commercial real estate product types for several good reasons. As a result, leveraged apartments have traditionally delivered above-average returns to investors.\u00a0 In fact, as measured by NCREIF over the last several decades, even on an <i>unlevered <\/i>basis, multi-family properties have generated the highest returns followed by industrial, retail and office.\u00a0 Consistently higher returns is indicative of a product that can handle higher leverage.<\/p>\n<p>So, what is it about apartments that generates these strong risk-adjusted returns? First, housing is a basic human need. You may choose to telecommute, you may buy your goods online, and you may not stay in hotels\u2014but there is no such thing as a \u201cvirtual home\u201d.\u00a0 Historically, one out of every three Americans picks apartment living for their housing choice, and demographic shifts, economic challenges, and changing consumer preferences continue to support and grow that choice.\u00a0 The Millennials and the Baby Boomers are the two largest renting cohorts and will continue to fuel this demand.\u00a0 Plus, there is incredible pent-up demand since the Great Recession derailed the creation of approximately 2.3 million households.\u00a0 As the job market recovers, and these people leave home or move out of a roommate situation, there will be hyper demand for apartments. So while apartments are not immune to declines during recessionary times, the elasticity of demand is not nearly as significant as other product types.\u00a0 And the moderate income price range for apartments in high job growth, non-coastal markets are great examples of this demand.<\/p>\n<p>Second, apartments are viewed by the capital markets as lower risk.\u00a0 They have shown lower volatility during economic cycles.\u00a0 One of those reasons is the diversification of lease risk.\u00a0 Unlike retail and office that rely heavily upon the ability of a few tenants to make the lease payments, an apartment community can have hundreds of leases and the lack of payment of one resident does not jeopardize the ability to make debt service.\u00a0 Adding to that picture is the fact that average apartment occupancy over the last two decades has averaged 95 percent.\u00a0 Typically, an occupancy level below 65 percent is the critical threshold for debt service risk.<\/p>\n<p>Third, apartments have a unique access to capital with government sponsored enterprises. Although there is news that a bill will be moving through Congress with regard to these groups, it is firmly believed that financing to the apartment industry will remain an attractive way to support any financing for single-family residential business.\u00a0 The financial crisis of Fannie and Freddie related directly to single- family residential lending and in fact, the GSEs national multi-family default rate is approximately one third of 1 percent. So any solution to save financing for long-term home mortgages (which is critical to the health of the single-family home business) will depend upon the continuity of capital available to multi-family properties.<\/p>\n<p>So in closing, it is always important to recognize that successful companies can use both the right side and the left side of the balance sheet to deliver predictable, consistent value to REIT shareholders.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Ella Shaw Neyland, President, Steadfast Income REIT: In spite of what you may have read in the paper, debt is not a four-letter word. <\/p>\n","protected":false},"author":1471,"featured_media":1004092968,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1004092934","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v28.0 (Yoast SEO v28.0) - 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