We Are Projecting Zero to Negative Rent Growth

As Chief Executive Officer of the Western National Group, Michael K. Hayde (pictured) is responsible for the operations and organization of the company. Hayde joined the firm in 1971 and became president of Western National Properties, the development arm of WNG in 1981. He has been the CEO since 1994 and has been involved in the development and construction of over 25,000 multifamily units since joining WNG. Hayde is former chair of the California Housing Council, member of the Urban Land Institute, and member of the Board of Directors for the National Multifamily Housing Council. He talks to MHN Online News Editor Anuradha Kher about vacancies and rent decreases across WNG’s portfolio, the financing problem and the biggest challenge the company is facing in this economy.MHN: What trends are you seeing with regards to concessions in rental properties? Hayde: Concessions across the board are up, including Western National Group’s concessions being offered to the residents at our properties. On a portfolio of $15 million of monthly rental collections, we were offering approximately $100,000 a month in concessions in January of 2009. In the current market, our firm is giving $800,000 to residents in the month of June.  We are finding that in most markets, simply having the lowest rent is not enough. Residents demand concessions in addition to lower rents as everyone is looking for the best deal.MHN: The starts figures for June were released this week and they are down again. What can this drop be attributed to?Hayde: There is not a substantial amount of capital available and the capital that is out there is more thoughtful today than any time in the last 10 years. Since there is a track record on purchasing existing properties, these projects are easier to finance. When dealing with ground-up development projects, the debt becomes harder to deal with. There is very little construction financing available given the economic difficulties today.MHN: What kind of vacancies are you seeing across Western National’s properties? Hayde: Obviously, Western National Group is always working to make certain our projects do not have vacancies. We currently are half-a-percent to 7/10-of-a-percent less occupied week over week compared to a year ago. MHN: On average, how much has rent decreased across the company’s portfolio? Hayde: Between January and June, our firm has collected 4 percent less rent and has been providing increased concessions. Rent has decreased between 3-to-5 percent, depending on submarket. This will continue for at least the balance of this year. The market will worsen in the second half of the year, and our firm will continue offering our existing residents the deals they are looking for to meet what the rest of the market is offering in order to retain our residents. Western National Group’s Net Operating Income (NOI) for the first six months of this year is only 2 percent less than last year. The question is how long this market will last.MHN: How does Western National evaluate rent changes across its portfolio? Hayde: At all of our properties, we are looking at rents weekly, and managing each property to occupancy. We do not want to go below a certain credit score and continue to seek out qualified residents. Every area manager at Western National Property Management is looking at their portfolio on a weekly basis and can talk to regional vice presidents to adjust rents if necessary.MHN: Are you seeing anything new with regards to financing for multifamily? Hayde: The financing climate is tougher than anything we have previously seen. Western National Group just secured a new loan on a property in Anaheim from Fannie Mae. Three years ago, a lender would have picked the spread and added 80 basis points, but they are currently adding 280 basis points, making the interest rates two percent higher. Previously, the loan would have been written at a 1.1 debt service coverage, but today they are 1.20 or 1.25 debt service coverage.  The underwriting criteria are stricter and if a community had a bad month in last three months, the lenders are using that as your average. Also, finding construction financing is nearly impossible right now.MHN: What is the biggest challenge facing Western National in this economy and how does the company plan to deal with it?     Hayde: The biggest challenge is forecasting when the market will turn around, since this recession is deeper and longer than we have experienced in the past. The issue is how long can anyone play in this market. Our portfolio is an average of 55 percent loan-to-values, and even if NOI goes down, we will not be in peril of not making debt payment. Some players in the market are highly leveraged and if the market does not turn, there will be some serious consequences. There are no options for getting rent growth when there is a 12 percent unemployment rate in California.Since every downturn is different, you cannot be in this business without being optimistic. That being said, you also cannot let your optimism cloud the clear signs in the market. We are projecting zero to negative rent growth. And companies need to be able to change with the market and not make any mistakes during these trying times. If you come in every day and work really hard, you will be successful.