MARKET SNAPSHOT: Regional Investors Eye Ohio for Cash-on-Cash Returns

Columbus, Ohio—Regional players may be developing more interest in Ohio, according to Mark Rohr, partner in Hendricks & Partners’ Midwest Apartment Group.

“They can raise money as long as they can buy yield and pay out yield; most of them are paying out 7 to 10 percent,” says Rohr. “If you can buy in the 8 to 8.5 cap range and borrow money with a 7 constant, then you can probably get those yields. That’s what’s driving interest in the Ohio market right now.”

Columbus, Ohio, in particular, is seemingly outperforming many of the other cities throughout the state, as it has a more diversified economy. “Columbus is a service industry town,” points out Rohr. ”It reacts a lot faster to the marketplace than Cleveland or Detroit, where you are manufacturing based.”

Columbus rents were up an average of 0.8 percent year-over-year, while average vacancy increased 30 bps, to 8.8 percent, during the same period. Part of this increase, notes Rohr, is due to the ease with which residents were able to purchase a home in the metro.

“Columbus is a big single-family home town. Because it sits in the middle of the state and is surrounded by farm country, it’s really easy to throw up subdivisions, and they have a lot of medium- to lower-priced new homes,” he says. “They competed with Obama’s first-time home buyer credit … so for the first half of the year, the apartment market suffered dramatically.” Because of this, apartments owners were forced to give concessions, which are now beginning to burn off.

On the investment side, most of the deals that traded in 2010 were REO assets in the $10,000-$15,000 per unit range.

In the meantime, average vacancy for Cleveland decreased to around 6.5 percent, reports Rohr. In addition, the city hasn’t had much multifamily construction (only about 57 conventional apartments were delivered last year).

“Cleveland has never been a big development town; it’s really limited to just a few players,” notes Rohr. “I don’t think you’ll see any significant amount of new apartments coming online for the next couple of years, so the good news is that you won’t be adding to the inventory, and hopefully a lot of [the existing stock] will get absorbed.”

On average, metro-wide rents in 2010 were down 0.7 percent from 2009.

While Class C (and older) assets have taken a hit, Class A and B product “has held up pretty well,” Rohr tells MHN. “Occupancies are fairly strong; a lot of people went through foreclosure, lost their houses or walked away from their houses, and they needed a place to live so they are renting A and B-type product.”

Similar to Columbus, the transaction market has primarily consisted of REO deals, most of which is housing stock from the 1950s, which, Rohr notes, is selling between $5,000 and $15,000 per unit.

Meanwhile, any REO deals in the A and B product range hasn’t been put on the market yet. “If there were any REO take-backs, most of that stuff is still with the special servicers,” Rohr says. “Their philosophy has been … to wait until the market turns around.”

In Cincinnati, rents increased almost 1 percent from 2009, while vacancy decreased to 6.9 percent. Absorption in 2009 was 1,460 units in 2009, while only 410 units were absorbed in 2010. Multifamily construction permits were issued for only 245 units for the year, down 374 units from the year previously.

“Cincinnati, even during good times, doesn’t trade much,” Rohr tells MHN. He attributes this to the fact three owners control the majority of the market. “A lot of institutional players have come in and tried to buy deals and establish a portfolio there, but they are unable to do it.”

Overall, Rohr remains optimistic for the state as a whole. “We are starting to see a lot of people looking in the Midwest, especially regional investors, because they feel they can buy a reasonable cap rate right now and get a cash-on-cash return. They need the cash-on-cash return to raise money and invest in the Midwest, versus the institutional players who are still beating their heads against the wall on the East Coast and the West Coast.”

Similar to investors nationwide, the fear in Ohio is increasing interest rates. As a result, notes Rohr, “a lot of people are trying to get deals done right now, while the interest rates are reasonable, and plug in with some long-term debt so that they can hedge against the inflation that everyone thinks is here. If you can go to a good, stable community in Ohio and buy a 9 or 10 percent real-cash return, put some nice, long-term reasonable debt on it with a 7 constant you’re pretty good for the next 10 years.”

One downside to the state, however, is that it is a pre-review state for GSE loans,” Rohr points out. “They only want to lend, for the most part, 65 percent LTV. Columbus is a little more aggressive because they realize it’s not a manufacturing town but any city that is considered a ‘manufacturing’ town, like Cleveland or Toledo, you’re limited to 65 percent LTV. It’s pretty hard to make a deal work with that kind of leverage.”