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Multi-family real estate sector holds steady.

All one has to focus on is the European Construction stocks to get a perspective on what this author believes the trend of the New York real estate market is.

Since the beginning of 2004 the Dows' Stoxx's construction index, used to measure the European construction industry, has risen 11.7%, paying no heed to the pundits claim that a housing bubble and rising interest rates have impacted sales of either commercial or residential properties in Europe.

Similarly, in the United States multifamily REIT stocks have gained 2.9% through the first quarter of 2004. On a macro basis real estate pricing is indeed stretched, as most professionals would agree, with the average implied cap rate, for example, on six key REIT apartment companies, and their asset base valuation being an average sub 7%--historically at minimum 100-150 basis points less than where they should be or were but a short 14 months ago.

Multifamily, as a real estate category, is perhaps more sensitive to interest rates; has traditionally been one of the sectors of the real estate market that has emerged quickly in a recovery, and offers protection, unlike other sectors of the real estate market, in its potential for diversification when it comes to the tenant mix.

We as an industry are facing a challenge of sustaining net rental income and understanding the future multiple and cap rate based on the stream of revenue of income from a property. Investors need to focus on what yields they potentially see going forward, as opposed to making purchases at the present yield.

Colleagues of mine have remained disciplined by not buying in "this market", however this market of low inventory and high pricing has been upon us for almost 18 months now, with historically low cap rates and few truly outstanding performing properties on the market.

Higher levels of employment growth and mixed indicators such as retail sales and manufacturing growth have indeed offered some murky waters for making decisions. These uncertain times make it difficult to rationalize whether it makes sense to jump into the real estate marketplace. Consumer confidence edged lower in September, based on the soft labor market conditions.

Unfortunately, with the disconnect in the equity markets over the past several years the flow of funds into real estate and REIT stocks has indeed exasperated an economic basis for decision making when analyzing real estate. Real estate mutual funds have had a whopping 17% gain in the past 5 years; (real estate mutual funds invest in a portfolio of REITS). So far this year ending August 2004, real estate funds are up 12%. In the first seven months of the year, closed-end real estate funds surged to more than $11.7 billion, from $7.7 billion from last calendar year.

The present administration in Washington is trying to obfuscate what has been happening in the labor market. They have publicized an expected bounce in employment numbers, however in August 144,000 jobs were added--about 50% less than what the Bush administration had promised. Job growth is still tenuous. In the NYC region the labor markets seem to be improving, but with the financial markets not necessarily coming back with the strength many expected.

On a macro basis, as of Friday September 17, 2004, 541 companies publicly listed in the US have made negative pre-announcements for the third quarter while only 280 gave investors positive pronouncements by raising their forecasts, according to Thomson First Call data. This data further clouds the ability for business decision makers to understand where exactly we are in the business cycle- whether in a positive or negative environment.

US retail sales fell in August, confirming that the pace of consumer spending slowed in the third quarter. However, housing construction went up in the month of August to an annum rate of two million, the highest level in five months; at the same time, the rate for overnight loans between banks now stands at 1.75.

The headwinds of low interest rates have created for a strong housing demand.

As of the week ending October 8, the number of applications to buy or refinance a dwelling in aggregate "held" from the high levels of 2003.

The nascent economic recovery was again pointed out to the real estate industry with construction permits, a sign of future economic activity, dropping 5.5 percent nationally on an annualized basis. Interestingly enough, however, housing starts in the Northeast were up 6.5 % to 196,000, the highest level since February 1990. On the development front the appetite for development deals in the New York Region, on the capital side, for these hard to duplicate infill sites, has been good, as has the acquisition of multi family.

In this region, according to McGraw Hill residential construction, when compared to calendar year 2003, 2004 is up by 28%; construction dollars are up an aggregate $2.1 billion.

The past three quarters have been a busy one for Trout brook, a full service real estate firm based in Manhattan, with offices in Downtown Brooklyn. As our company continues to grow we are pleased to welcome Harry Kim as a construction project manager.

Harry previously worked for RC Dolner, having led the ground up development of the Kimmel Center for NYU and the retro fit of the NY Hilton, among other projects.

Troutbrook anticipates bringing to the marketplace approximately $17.8 million worth of portfolio real estate for sale in the first quarter of 2005. Troutbrook also anticipates announcing a 65,000 square foot development in Williamsburg, Brooklyn, upon the new rezoning being completed first quarter 2005, and hopefully a favorable re-set in the contract price.

We look forward to soon having the presidential elections behind us, yielding perhaps clearer signals of the macro economy, as the fourth quarter comes to a close.

MARC J. FREUD PRINCIPAL, TROUTBROOK COMPANY
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Author:Freud, Marc J.
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Oct 27, 2004
Words:977
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