“The financial services firms are actually expecting a large growth in interactions that we know do not meet our customer needs,” said Bruce Temkin, vice president and practice director of financial services at Forrester Research, Inc., Cambridge, Mass., speaking at a Web seminar titled “The Ideal Online Experience: Customer Acquisition, Retention and Revenue,” presented by Digital Insight Corp., Calabasas, Calif.

“I hope you are scared because this is a very troubling view of the future,” Temkin told the online audience, made up of 50 percent banks.

Temkin presented data from Forrester’s Consumer Technographics that showed 80 percent of financial institutions expect customer interactions to involve the Internet in the next two years. But the Internet almost always met customer needs for only 20 percent of financial institutions, according to a survey by Forrester in the fourth quarter of 2004. Meanwhile, 94 percent of financial firms said improving customer experience is either very important or critical. “We know there is a problem with our online channel,” he said.

Improving usability was seen as the most effective tactic for shifting customers to the Internet. “We do not help our end users choose their products very well. We don’t provide them with solutions to help focus them on the need they have at that time…presuming we have that tool out there, we don’t integrate the data well about that customer. Furthermore, navigation is quite difficult, ” said Katherine Jansen, senior vice president of strategy and business development at Digital Insight Corp.

The problem lies with Internet products reinforcing financial services silos, Jansen noted. “The Internet grew up around our back-end,” she said. “Internet banking and bill paying grew on top of that and online lending grew on to of the desire to push loans into that core loan system. Cash management grew out of our desire to offer an online interface to end users that would interface to the back end and then Web sites sprung up independently of any system.”

But the Internet can also provide greater identification and compliance security. Sanjeev Dheer, CEO of CashEdge, Inc., New York, said the online automated application provides a much more powerful tool for the financial institution in ID verification and compliance with “Know Your Customer (KYC)” rules and the Patriot Act.

“The application is hooked into credit and debit bureaus, and proprietary databases, that financial institutions track,” Dheer said. “It does a fact check against government lists for verification. Everything is in real time with tools and techniques available to ask interactive questions not available to someone who steals credentials of the applicant. The application provides a comprehensive audit trail of application information and it results in checks for monitoring and fine tuning rules and parameters.”

Online credit card applications rose by 14 percent in 2004 from 2003 for "Generation Y" users (ages 18 to 28), and Generation X  (ages 28-40) applications rose from 36 percent in 2003 to 42 percent last year. “[Financial products] are all very similar in terms of growth patterns,” Temkin said.

Web site design should allow a user to easily find information and financial institutions need to base financial advice and product solution on customer advocacy principles rather than marketing principles. As with retail Web sites, such as Amazon.com, Jansen said once end users make a decision to purchase, the financial institution needs to make it easy and encourage or reinforce the Web for self service.

“A fully integrated, quality online customer experience is no longer optional for financial institutions. It is essential,” Jansen said. “By strategically developing the online channel, financial institutions can increase customer satisfaction and market share while driving down acquisition and servicing cost.”

Preston Thornton, assistant vice president of Internet sales & development at Union Federal Bank of Indianapolis, said Union Federal’s Website redesign was completed in 12 months with the bulk of time in planning. He noted that the Internet brought 4 percent adoption during its first week at Union Federal and it saved in printing and mailing costs. “We are reducing the amount of paper we are pushing back and forth,” Thornton said.

"It's not about marketing to them or pushing them in the direction we want," Temkin said. "We want to first start by solving their goals, by answering the things that they need to have done."
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U.S. workers confidence rose by 3 points in June from 99.9 to 103. June marked the highest rating since January's 107 score, but was below the level of 107.5 during the same period one year ago, the report said. Improved perceptions of personal finances and a decline in the number of workers concerned about job loss contributed to the rise in the Index.

After four months of steady decline, 42 percent of workers said their finances are getting better, up from 39 percent a month ago, the report said. However, the percent of respondents reporting that their situation was getting worse fell three points to 39 percent. Additionally, 45 percent of workers rate their personal finances as good or excellent, up from 43 percent the previous month.

Workers also expressed an improved sense of confidence in their companies' hiring plans. Respondents who said their companies are hiring held steady at 31 percent, but the number reporting organization lay-offs fell from 19 percent to 17 percent. Also, fewer U.S. workers are concerned about personal job loss, as that figure dropped one point to 21 percent, Hudson said.

"The rebound in worker confidence we saw this month has more to do with workers' self-interests than with companies' overall hiring plans," said Jeff Anderson, senior vice president, Hudson, North America. "Even as employees are feeling more secure in their jobs and finances, employers are still facing the prospect of the summer lull in business activity."

Managers, who typically have been more optimistic regarding hiring plans than the national average, fell more in line with the overall workforce this month. In June, the number of managers expecting their companies to hire declined to 32 percent, compared to 35 percent in May.

The worker confidence index below appears to be inline with the two main measures of consumers' attitudes: The Conference Board Consumer Confidence Index and the University of Michigan Consumer Sentiment Index, said Orawin Velz, director of economic forecasting with the  Mortgage Bankers Association.

“The worker confidence rebounded in June to the highest reading since January,” Velz added. “It is consistent with the other two measures mentioned. The Conference Board Consumer Confidence surged by 2.7 points to the highest level since June 2002, while the University of Michigan Consumer Sentiment increased for the first time this year and to the highest reading this year.”

The Conference Board’s Consumer Confidence Index rose in June to 105.8, up from 103.1 in May. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. London-based TNS NFO conducts the monthly survey for The Conference Board.

“This month’s gain in Consumer Confidence has propelled the Index to a three-year high,” said Lynn Franco, director of The Conference Board’s Consumer Research Center. “The improvement in consumers’ mood suggests that business activity and labor market activity will continue to pick up over the next several months. And, with consumers in better spirits, and job concerns remaining relatively steady, there is little reason to expect a dramatic shift in consumers’ spending.”

Consumers said jobs that are “hard to get” decreased to 22.6 percent from 24.1 percent, but those claiming jobs are “plentiful” was virtually unchanged at 22.6 percent, the Conference Board said, the first time in nearly three years, the percentage of consumers saying jobs are “hard to get” does not exceed the percentage saying jobs are “plentiful.”

However, the outlook for the labor market remained the same as in May. Consumers expecting more jobs to become available in the coming months remained at 15.2 percent, while those expecting fewer jobs edged up to 16.5 percent. The proportion of consumers anticipating their incomes to increase in the months ahead jumped to 19.4 percent from 17.8 percent last month.

“Labor market condition was one of the important factors that affect consumers' attitudes,” Velz said. “Others that affect consumers' personal finance such as energy prices (inflation) and stock markets also impact consumers' view.”

“For the Conference Board Consumer Confidence in particular, labor market conditions have a significant weight in the index, Velz said. “The Conference Board Index focuses on job questions, while the University of Michigan Consumer Sentiment Index focuses more broadly on consumer finances. Thus, the worker confidence index and the consumer confidence index should be closely related. In June, for example, consumers' perception of the labor market is visibly improved in the Conference Board's Index. For the first time since late 2001, the number of respondents saying that jobs are plentiful equaled the number saying they are hard to get. The worker confidence index also showed similar improvement in labor market's perceptions.”

The U.S. Labor Department will release the latest unemployment figures this Friday, July 8.
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The newly revisions also includes "low-path" vectors that simulate an economic environment in which interest rates initially fall and then rise to a lower peak than that of the standard interest rate vectors. The new standard one-month LIBOR, six-month LIBOR, prime, one-year constant maturity treasury, moving treasury average, and cost of funds index vectors will be effective for all RMBS deals using excess interest as credit enhancement with a first payment date in September. They are based on the rates of the above-mentioned indices as of the close of business June 30.

"In order to 'pass' Standard & Poor's stress tests, a structure must be able to withstand both sets of interest rate stresses," said credit analyst Terry Osterweil, a director in Standard & Poor's Structured Finance Ratings group. "The low-path vectors are intended to apply a greater stress to inverse interest-only certificates as well as to some interest rate derivatives."
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Kim Fernandez, a freelance writer in Bethesda, Md., discusses these issues in “Slow Recovery” of the July issue of Mortgage Banking magazine, available now. To find out more what is happening in the Commercial/Multifamily market visit www.mortgagebankingmagazine.com.
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The financing is for the $43 million purchase of The Royal Equestrian Apartments in Burbank, Calif. CMC funded the $26.3 million loan on The Royal Equestrian Apartments with Fannie Mae's Delegated Underwriting and Servicing (DUS) loan product. The loan has a 4.93 percent interest rate. CMC said it turned the deal around, from application to closing, in roughly two weeks. The loan was originated by Dori Castagno, vice president in CMC’s Chicago office, and Fritz Grim, vice president in CMC's Irvine office.

The 270-unit property is 12 miles from downtown Los Angeles. The Los Angeles apartment market is seeing occupancy rates hovering around 97 percent, and it ranks as one of the top five apartment markets in the nation for investment and overall activity, according to a Marcus & Millichap report.

“In Burbank, in particular, rental housing demand is far outpacing supply this year as construction is limited and the improving job market is drawing more and more households to the area,” Castagno said. “The Burbank apartment market has only seven other multifamily projects comparable to The Royal Equestrian Apartments and there are currently no new similar apartment developments underway.”

CMC analysts expect job growth in the area to continue its upward trend, as the Los Angeles County population already tops that of any other county in the nation with more than 10 million people. CMC forecasts that roughly 50,000 households will enter Los Angeles County in 2005, and that the majority of those households will need to go into the rental market. Housing affordability in the market is at 15 percent.

CMC said the upswing in condo construction, with unattainable price tags above $500,000, brings developers into the condo construction business as they leave apartment construction. The move is creating even more pressure on the already tight supply apartments for rent and, in-turn, leaving room for rent increases. Analysts expect more than a 4 percent rise in rents this year. 

“Multifamily investors that are willing to put money into properties to maintain or upgrade their attractiveness to tenants, as is the case with our borrower in this transaction, will be very successful at keeping their properties at or near full occupancy,” Grim said..

The Royal Equestrian Apartments consists of six, three-story garden apartment buildings containing a mix of studio and one-bedroom units, as well as a clubhouse building. The property was constructed in 1965, and part of the acquisition plan is to reposition the property as a Class-A complex through extensive renovations to include a complete upgrade of the common area amenities and the building exteriors, the addition of more covered parking for residents, and designer upgrades of the apartment interiors.

Unit amenities at The Royal Equestrian Apartments include full appliance packages with garbage disposals, ceiling fans, wall-to-wall carpeting in the living areas, Internet access and patios or balconies. The property features an on-site management office, underground parking, stable facility, gated building access, and multiple laundry facilities, as well as the clubhouse which includes a kitchen and wet bar, fitness center, spa, men’s and women’s saunas, swimming pool, BBQ area, storage facilities, recreation room and business center. 

The apartment complex is adjacent to Burbank Equestrian Center, a facility for the training, showing, boarding, and riding of horses. The Equestrian Center also offers public horse-back riding lessons. The existing stable facilities were an “amenity” for residents and non-residents when the apartment property was originally built. The facilities were near the Equestrian Center and trails of Griffith Park.

The Royal Equestrian Apartments is within two miles of the Media District in Burbank, which includes NBC Studios, The Walt Disney Studios, and Warner Bros. Studios, Disney’s Grand Central Creative Campus, ABC’s local affiliate television station and DreamWorks SKG’s Animation Campus. Universal City is southwest of the property.
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(Jon Southard is senior vice president, director of debt management and valuation at Torto Wheaton Research, Boston, an independent business unit of CB Richard Ellis).

First of all, while we often compare cap rates to a stock market P/E (price-earnings) ratio, the closer analogy is actually the dividend yield in the stock market. In real estate, because capital expenditures and TI’s (tenant improvements) are usually not taken out of NOI (net operating income), the actual yield winds up being one to two percentage points below the cap rate number.

As cap rates have continued to decline, two years after practitioners first started worrying that they were too low already, income returns have been on a similar trajectory. Looking at data derived from NCREIF (the National Council of Real Estate Investment Fiduciaries) for the different property types, the expected “dividend yield” for real estate is in the range of four percent to six percent. As a result, the premium demanded over Treasury bonds has shrunk to a minimum.

Cap Rates by Property Type
Since real estate is a riskier asset than a government bond, this premium needs to be restored in some way. In normal periods, real estate would expect to garner a portion of its total return from appreciation—the growth in the value of the asset between when the investor buys and sells. Unfortunately, here is where the cap rate math works against investors. Assuming a property with no change in income over time, a change in the cap rate would be the sole driver of a change in value for the property.

Sample Back of Envelope Math on Cap Rate Effect
This math reminds me of two misconceptions that I have heard from otherwise sage industry leaders on panels and at conferences. The first is that NOI growth will offset any cap rate increases. On its face, this is an honest statement. Going back to the math, let’s say that 0.6 percentage point increase in the cap rate happens over three years. To offset the fall in value due to the cap rate increase, NOI would need to grow by roughly 10 percent, or about 3.3 percent per year. This is not much faster than average.

The objection to the analysis, however, is that it is usually implied that the 3.3 percent growth keeps the return rate whole, when all the NOI growth does is keep values from declining. Finishing up the math, this offsetting of the cap increase with NOI growth merely gets you back to the income returns we have just summarized as being four percent to six percent. It seems doubtful that this is sufficient compensation for the additional risk a real estate investor is accepting when one can earn four percent on a Treasury held to maturity.

The second misconception is when leverage is added to the return math. Here, the emphasis tends to be on how adding a loan, so that your equity is only a percentage of the total value of the building, can boost that weak four percent to six percent income return to much higher results, implying that this would make up for any decrease in value due to cap rates. However, this math ignores the entire side of the return equation that stems from value change. Instead of making up for value change, leverage places even higher stakes on either cap rates staying low, or on NOI growth outpacing the rising cap rate effect. The reason is that leverage puts a multiple on any change in value because such change is an even larger percentage of the investors’ equity.

Torto Wheaton Research forecasts of returns views the record low cap rates of today not so much as a bubble that will burst spectacularly, but as a headwind blowing against investors. Given the likelihood of rising long-term interest rates, we forecast future real estate returns to be not much different from the low yields we are seeing today. This is basically a case of “what the NOI growth giveth, the cap rate increase taketh away” as values stay mostly flat depending on the market and property type. Once this process begins, return disappointments will insure that cap rates continue to rise as some investors move to greener pastures.

(The opinions expressed in this article do not necessarily express the policies and viewpoints of the Mortgage Bankers Association.)
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