James Yoakum

This article from the NYTimes discusses the phenomenon of distressed triple-decker properties in New England (see below for photo) - a form of architecture that I've always found very charming on my trips to Boston and Providence. In Boston they make up 21% of foreclosures even though they're only 14% of the housing stock, and the story is much the same in Worcester, New Bedford, Providence, and other New England cities.

It's easy to see why these properties saw their prices inflated and are now easy victims of abandonment or foreclosure. When times were good they were highly attractive to speculative investors who either lived in one unit while renting out the other two (often highly-leveraged with an FHA loan) or those who built hands-off portfolios of poorly-maintainted triple-deckers that were easy to walk away from as property values fell over the past couple years. Simple three-unit properties like these appealed to investors because they're small enough to manage easily, but big enough to generate consistent cash flows. In many neighborhoods of Philadelphia much the same thing happened with rowhomes although the fact that they appeal as much to average owner-occupants as to investors gives them a bit more cushion from the distress seen with triple-deckers that often traded from one absentee landlord to another and are now up against a wall as investors shy away from the market.

One great thing to come from New Enland's 'Triple-Decker Dilemma' is a realization from the Boston government that the glut of foreclosed and abandoned triple-deckers presents a great opportunity to create a large volume of affordable housing at a relatively low cost. I was especially encouraged by this quote from Evelyn Friedman, director of Boston’s Department of Neighborhood Development, which shows an unusual degree of pragmatism for a local government official: “If we have four three-deckers on 12,000 square feet and could only get two on that amount of land now, we are losing six units. So it’s very important to us to sustain them.” She's referring to the fact that Boston's current zoning laws would never allow new housing to be built as densely as the triple-deckers were, so it's better to renovate them and maintain that density of affordable housing than to build new housing at lower density which would destroy a signifcant portion of the city's highly in-demand affordable housing stock. This pragmatic approach to side-stepping outdated zoning codes is a great example of a city government turning lemons into lemonade and provides a good framework for thinking about new building vs. restoration in many older cities.

This article from Globest.com gives an excellent overview of the challenges faced by retailers expanding into urban settings (as opposed to suburban shopping malls or big-box centers). The article also does a great job of pointing out the many benefits that urban areas can offer to retailers - high population density and diversity, a good supply of potential employees, and higher sales per square foot. For years this last benefit - higher sales in urban locations - was rumoured, and known to be true in New York and L.A., but most retailers were skeptical that their stores would do better inside a city like Cleveland, Milwaukee, or Philadelphia than in the surrounding suburbs or exurbs.

Well, at least for Philadelphia, the jury is in and urban retail is a home run if properly executed. Recent retail openings in Philadelphia that seem to be doing a brisk business even include such high-end offerings as Barney's CoOp. As discussed in the article, there are many hoops to jump through to open an in-city retail location - from permitting, to historic preservation codes, to ever-evolving environmental standards. However, for those who can successfully navigate to a store's opening day, the rewards are well worth the work.

One of the greatest examples of urban retail's unique strength has been Starbucks. They built their empire starting in dense, central cities (Seattle then to every corner in New York) and were able to grow into the world's premier coffee chain mostly in urban locations. Recently Starbucks has been forced to close many underperforming units, but the majority of these have been suburban drive-through or strip-mall locations that started opening to keep unit-growth high as city-markets became saturated. The urban stores are still doing relatively well.

Failed conodminium projects have been a popular target of vulture investors over the past year, starting in overbuilt markets like Miami and Las Vegas and now showing up in more stable cities like Philadelphia, Chicago, and Boston. This article from yesterday's Philadelphia Inquirer gives some nice insight into the human side of failed condo projects, discussing the troubles of the few condo owners who are actually trying to make homes in a largely vacant and un-cared-for condominium building in the Old City area of Philadelphia. The story is a combination of 'buyer-beware' hindsight - why did they buy these condos based on nothing more than sales hype and a model unit - and grassroots responsibility from condo owners who seem to be taking on more than their fair share of ownership responsibility.

In situations like this one it would be great to see the few owners in the property band together to acquire it out of foreclosure and work together to maintain and sell-off the remaining units. This would simultaneously transfer actual ownership to those who are already acting as responsible owners and give them a chance to earn back some of their losses through the sale of the vacant units. Unfortunately the condo-owners are unlikely to have the capital or expertise to acquire the entire property, and even if they did they are likely to be gunshy about throwing good money after bad in a project in which they're already financially and personally invested.

Any vulture investors who pursue failed condo projects like thie one would be wise to at least investigate a team approach to failed-condo turnarounds by working in concert with any existing owners/residents. Owners who personally help to turn around a failing project and receive support from the new investor/owner could turn out to be the best sales team the investor could ask for when it comes time for that big out-sell where all the profits are made.

This article from Realtor.org says that home prices nationally may have overshot on the downside and are now undervalued relative the fundamentals in the economy (things such as rental rates, incomes, population growth, etc.). While this is great news and should spur investment in residential real estate in many markets it's important to remember that each property should be valued on a case-by-case basis, and in any type of housing market you can find undervalued or overvalued properties in any given geographic area.

Additionally, the assessment of real estate as being undervalued is based on current economic fundamentals which can change drastically from week to week. Imagine how quickly home would go back to being overpriced if a major bank suddenly failed as Lehman Brothers did last year. Conversely, every piece of economic news that comes in better than expected makes real estate look like more of a bargain - for example better than expected profits from Lowe's and Home Depot indicate that people are starting to spend on home improvements once again.

Here in Philly there are often over- and under-priced properties on the same block or even right next to each other. That's why it's more important than ever to do your homework in this market, and to make sure that you leave a little margin for error in all of your investments. By following those two rules investors and homebuyers can start to make moves in this market that will pay off in a big way as housing values recover and the market returns to a state of 'normalcy'.

According to data from RealtyTrac, foreclosure filings in the Philadelphia area (including South Jersey & Delaware) decreased by 7.4% from March to April. No matter how you slice it this is good news, as is the fact that Philadelphia continues to beat the national average in terms of foreclosure filings (we have 1 foreclosure for every 827 homes versus 1 in 374 nationally). As I've said before this is largely due to the fact that the Philadelphia market never overextended in the way many others did and therefore doesn't have as far to fall.

Taking a longer view, Philly-area foreclosures in April 2009 were up 7% compared to April 2008, so we're certainly still ramping up the pain to some degree. It could be that the month-to-month fluctuations have more to do with lenders trying to balance their workload than with borrowers' ability to pay their mortgages. Many of the banks that I've dealt with seem to be overwhelmed with REO's, foreclosures, and short sales and they may be delaying filing new foreclosure actions until they can clear their books a bit or hire new staff to deal with the increased volume.

Only in hindsight will we be able to say for certain that foreclosure filings have peaked, but in the meantime there are some excellent deals arising out of all the distress and confusion.