Life is good for apartment building owners and investors. Dupre+Scott Apartment Advisors, Inc. have reported this week that the Puget Sound apartment rental market is booking one of its lowest vacancy rates in 27 years. The drop in vacancy, coupled with increases in rents, is partially the result of loss of units to conversion, the continuing mortgage meltdown affecting consumer borrowing, and influx of new residents to the area. With even entry level condominium purchasers starting to have difficulties obtaining purchase loans, and sales slowing, condominium conversion activity has dropped off sharply in the Puget Sound and across the nation. Many projects scheduled for conversion have been cancelled; others recent conversions are being partially or fully converted back to apartments. Low vacancies, however, have not translated into a substantial increase in new project development. The combination of construction cost increases and difficulty in obtaining construction loans have caused many new projects to be cancelled or delayed.

Cap rates on rental buildings should remain constant for the short term while cap rates on commercial buildings and shopping centers nudge up as vacancies increase and loans become harder to qualify for and obtain. While not a glamorous as investing in neighborhood shopping centers and office buildings, investment stability is constant and buyer interest strong.

That said, apartment deals are not easy unless you’re an all cash player. With cap rates on net operating income at or below commercial loan rates, it’s hard, if not impossible, to get a positive return on equity. Therefore investor returns are made up primarily on increases in rents, which over the past 20 years have been minimal if you adjust for inflation, and appreciation. You can’t feed the kids on appreciation. Any drive up in cap rates will negate a certain amount of that appreciation. So while apartment owners are doing well today, it’s fine line between feast and famine, even in this market.

According to the Commerce Department, new home construction starts fell to a seventeen year low in March 2008. Privately owned housing starts were down 11.9% from February’s revised readings. Did you ever wonder about the relationship between reported building permits, housing starts and housing completions? The numbers usually don’t match up. Here’s how it is explained by the US Census Bureau. Clearly the market is still looking for a bottom. Thank goodness we live in Seattle. Although inventory levels here continue to rise as sellers’ continue to hold out for the return of 2006, and buyers’ hold out for the bottom of the market. Maybe this would be a good time to get cracking on building that custom home you’ve been dreaming of. Building material costs are up sharply over the past couple of years, but given the cost of delivery, it’s unlikely they’ll be coming down anytime soon. There are a lot of very good custom home builders who could deliver the goods on a custom design-build product. And, unfortunately, there are also a lot of very talented subcontractors and artisans who are hungry and looking for new projects to feed their families and crews. For those who can secure adequate financing, building site costs are depressed, meaning you can cut a very good deal today on a custom building lot too. If you wait too long, this opportunity may pass. Even if the market continues south for the next 12 to 18 months, residential real estate pros will tell you if you love the home you’re in and plan to stay, you can ignore the short term market conditions. Give the Commerce Department’s industry report, this may very well be a great time to build.

Now may not be the best time to buy that neighborhood shopping center you’ve had your eye on for the past few months. According to a story run in the New York Times and covered by the Seattle Times, lack of consumer spending and tightening credit has resulted in record levels of retail store closures and bankruptcies. The International Council of Shopping Centers (“ICSC”) estimates there will be over 10,000 store closures between 2007 and 2008; with 2008 closures up 25% over 2007.

The ICSC is a shopping center trade organization that is involved with industry related education, networking, deal making, public policy and lobbying efforts. Members include brokers, developers, financiers, property managers and retail tenants. The ICSC Spring Convention is one of the largest trades show gatherings in the world, and second only to COMDEX in attendance. Held in Las Vegas each May, the ICSC Spring Convention fills not only the Las Vegas Convention Center, and adjoining Hilton Hotel Convention facilities, but spills over into tony restaurants and posh suites throughout the city for a week of deal making, networking and education.Not all shopping center owners and developers belong to the ICSC. I have represented a number of very sophisticated commercial real estate owners, developers and managers over the years that do not belong to ICSC. I doubt all these owners’ stores are included in the current estimates. If not, then the actual number of store closures could be far greater. Also, it is possible that current estimates of store closures do not take into account the number of single store and small chain operators, franchisees, restaurateurs, and the like, across the country, that are barely holding on. If you are considering purchasing or exchanging into a commercial building or one of the neighborhood centers that have proliferated around Western Washington, “anchored” by a fast food restaurant, drug store, or video rental shop, you will want to consider the impact this recent wave of store closures and bankruptcies will have not only on the value of your investment, but the viability of your own tenants. Even if the property you are considering has a strong line-up of tenants, inventory financing is getting more difficult and the cost of goods more expensive for these tenants, as it is for consumers at their banks and grocery stores. There are still good deals out there for investors. However, today you will want to be far more careful than in recent years in conducting due diligence on prospective investments. A rising tide lifts all boats. Today’s tide is not rising. When considering hiring outside professional service providers, such as accountants and lawyers, look for credentials that span more than a narrow band of expertise. Consider retaining an attorney that is not only competent in the evaluation, negotiation and drafting of legal documents such as purchase agreements and leases, but also has direct, meaningful experience in real estate development, property management, finance and brokerage. This kind of diversified experience will come in handy when you are trying to understand the psychology of the deal, motivations of the developer, risk factors, costs and market conditions, and not just the legalese of word processed documents. The commercial real estate and shopping center business has been on a role for several decades now. We have all benefited from the strength in the retail market – from convenience of store locations to the diversity of goods and services available to us all. For a while it seemed as though the commercial real estate market would be immune from the turmoil that has besieged the consumer/residential real estate and credit markets. That’s clearly changing now. Buyer beware.

Short Sales are becoming a more common part of the real estate sale landscape during these days. The reason short sales are becoming more common is simple, people have borrowed more than their properties are now worth and are looking to get out from under the debt. In brief, a short sale is an agreement between a real property owner and creditor that allows the owner to sell property for less than what is owed the creditor after closing costs. I didn’t include broker’s commissions, because some short sales are completed on a “for sale by owner” basis.

A short sale will allow the lender to recapture some, but rarely all loan principal. However, it does free up lender capital to be put to more productive use and allows for a sum certain balance sheet write down. For the borrower, it allows the sale of property and avoidance of foreclosure; however, it may result in an adverse impact on the borrower’s credit score. In cases where the seller has some liquidity, they may be required to come out of pocket, if possible, even with the lender taking a short, in order to complete the sale and pay closing costs.

Some real estate agents working with short sale clients agree to reduce their commission in order to facilitate the sale. For example, in a case where a creditor has an agreed upon maximum write down, agents agreeing to a reduced real estate commission may be the only way a sale can close.

In a short sale that I facilitated recently both the buyer’s and seller’s agent gave up a portion of their respective commissions in order to complete the sale. The creditor also comprised their position in order to facilitate the close. In this case, the seller wasn’t able to pay the full commissions, closing costs and loan balance. The only alternative to the short sale was bankruptcy. All parties worked very hard to complete the sale. Cooperation between the brokers, lender, buyer and seller was key to getting the deal done.

The Northwest Multiple Listing Service has also stepped in to help agents and consumers with short sale transactions. This month the NWMLS issued new rule changes and a new Short Sale Addendum to assist licensees and parties in short sale transactions. I think these rule changes will be very beneficial in removing ambiguities and clarifying the roles and obligations of agents and parties to short sale transactions listed with the NWMLS.

NWMLS Rule 11(iii) defines a “Short Sale” as “a sale that does not produce sufficient funds to cover the existing monetary encumbrances against the Property, closing costs, real estate commissions, and other financial requirements of closing.” Other rule changes address listing input and changes in listings from conventional to short sale, “pending” offers subject to lender approval, back-up offers, commissions and other matters of concern to brokers, agents and consumers alike.

NWMLS Form 22SS is the new Short Sale Addendum to Purchase and Sale Agreement. The form has six discrete sections. Section one defines a short sale. Section two contains the short sale contingency, allowing seller time to obtain lender consent. Section three addresses the right of seller to accept offers from other prospective buyers during the pendency of lender approval. Section four allows for a limited right of termination by the buyer. Section five addresses the computation of time and provides that other time periods, such as inspection contingencies, do not begin to run until the buyer has notice of lender approval. Section six is an acknowledgement by the parties that the short sale addendum does not fully explain all implications of a short sale and advises consumers to obtain the advice of third party professionals.

If you are considering buying or selling property that may involve a short sale, I encourage you consider obtaining legal counsel prior to signing anything.