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| 7/6/2010 |
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Source: CoStar Group
Author: Randyl Drummer
Title: Investors Snap Up High-Quality Multifamily Properties as Rents, Occupancy Improve
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With apartment vacancies appearing to have peaked, and U.S. rents even starting to edge up slightly, offerings of quality multifamily assets have attracted multiple bidders and secured premium prices in the first half of 2010, with investors having an especially keen appetite for institutional-grade assets in attractive coastal markets.
However, as with most asset classes in the current commercial real estate market, multifamily sales are largely divided between the asset haves and have-nots. With few high-quality performing apartment assets for sale and an abundance of pent-up capital seeking to invest, some properties have drawn multiple, even dozens, of bids.
Recovery and transaction activity in the broader investment market for apartments and condominiums has not been nearly as swift or as strong as some experts predicted at the beginning of the year, despite modestly improving occupancies and rents, according to CoStar Group Real Estate Economist Mark Hickey.
Through the first six months of 2010, $11.6 billion in multifamily property traded hands, up from $7.7 billion in the first half of last year, according to preliminary 2010 CoStar first-half sales statistics. The first half total is expected to increase as CoStar continues to tabulate market transactions that closed in the second quarter. Despite a flurry that brought $19.9 billion in activity at the end of last year, the prorated dollar volume for all of 2010 still pencils out to $23.3 billion, or a 17% increase over 2009, Hickey said. Although this year’s projected volume would still be a 44% drop from the bubble-driven sales level in 2008 and a 74% drop from 2007, he said.
CoStar real estate economist Katie Pelczar memorably likened the scramble for the highest grade Class A assets seen on both coasts to old wartime photos where "hundreds of people are pushing and shoving to get their hands on a single loaf of pumpernickel." Deals for those coveted morsels, in this case well-occupied and higher priced properties in core markets like Washington, D.C. or New York, have thus far accounted for much of the sales activity this year.
Buyers in general are assuming they’re going to see hefty rent increases and continued demand recovery due to the shutdown of the supply pipeline and the improving economy, said CoStar Global Strategist Michael B. Cohen.
“The flip side to that is people are looking at the velocity of transactions and beginning to feel like the market is getting a little frothy,” Cohen said. “We’re generally seeing cap rate compression in those high-quality assets in coastal markets that people are paying high prices for. The returns are not the type of opportunistic returns investors thought they would see a year ago. Instead of a heavy distress play, we’ve seen a heavy core play.”
Meanwhile, supply is tightening, home ownership remains soft and vacancies appear to have topped out, even declining in some markets. While asking rents are trending flat, the market is seeing some positive growth in effective rents as concessions burn off in such markets as Phoenix. Landlords are starting to feel the balance of power shift in their favor, Cohen said.
The appetite of investors for the prime markets, however, has largely driven the increase in dollar volume, while the number of trades has flattened. The weighted average price per unit, which was about $28,000 in the first half of 2009, is an estimated $40,400 in first-half 2010, according to available data.
REITs and other investors flush with equity are the most active players in the apartment sales arena, with financing challenges still playing out across the market.
"Gap financing continues to be an issue for buyers that need some amount of leverage before an asset stabilizes," noted a participant in the second-quarter PricewaterhouseCoopers Korpacz Real Estate Investor Survey. The bid-ask gap has narrowed, mostly because sellers have acknowledged current market conditions. Betraying continued uncertainty, Korpacz survey participants offered mixed views on asset values, with some foreseeing increases of as much as 15% and others expecting continued declines of as much as 25%.
Investor interest isn’t relegated solely to Class A properties, and pockets of strength have turned up in some interesting markets, notably Phoenix, hard hit by the single-family housing crisis and shadow supply of homes and condominiums.
"There’s more of an investor appetite for Class A properties, but at the same time, you’ve seen more price declines and fundamentals declines on the lower properties. There’s a large number of groups that want distressed assets, B-minus and under," said Jack Hannum, vice president with Transwestern. Hannum and Vice President Bret Zinn are co-leaders of Transwestern’s multifamily team in Phoenix. "There’s just a tremendous appetite for all multifamily product here. If a deal goes to market, there’s high demand for it."
On the financing side, government-sponsored entities Fannie Mae and Freddie Mac have long been the dominant providers of debt capital in multifamily, a trend expected to continue despite the political and market challenges the agencies face. However, one increasing trend since the beginning of the year is the growing participation of life insurance companies, noted Jeff Majewski, executive managing director, capital markets, for Grubb & Ellis. For most of 2008 and 2009, the insurers were out of that market and effectively ceded that business to the GSE agencies, but they’re back strongly this year.
"The life companies have come into the space and they are aggressively competing with the agencies -- and in many instances winning many of the top-tier Class A projects -- primarily because they’re willing to take on a little bit more lease-up risk," Majewski said. "We think that’s going to continue through 2010. We don’t see any slowdown in their appetite for multifamily." |
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