Many of the apartment properties were financed with loans that have a 30yr amortization, but a 5-year call. This means they get refinanced every five years. We’re probably getting close to some of those resets, at which time we’re going to see if their increases in net income are sufficient to refinance.
I don’t necessarily see a huge problem right now unless the commercial mortgage interest rates jump up. A borrower whp’s been paying on a loan for 5 years has a little more equity than they started with. Although there have been rent increases, the expenses have been increasing too so net income hasn’t increased that much. Vacancy rates are relatively stable so that isn’t much of a problem right now, unlike what happened during the ’90s.
One of the reasons we had a lot of problems with apartments in the 1990s was because we had a glut of apartments as a result of the number of projects built during the mid 1980s. This time, they added almost no apartment properties on the lower end of the size ranges and relatively few of the large projects. We don’t have 15% vacancy rates this time.
Of the few sales that are closing it is apparent that we still have some investors who have an unrealistic view of where those rents are going. It doesn’t make any sense to buy a rental property with a annual gross income multiplier of 15 (that’s equal to a GRM of 180) and a 35% expense ratio UNLESS you think that either the rents or the value is going to increase significantly in the short term. And I’m not talking about 3% increases here, either.