Tag Archives: apartments

What Happened to the Huge Wave of Distressed Apartment Sales?

A year ago, many were predicting that 2009 would be the year when there would be a large rush of apartments coming to market at killer prices. Since that failed to materialize, the question remains: Why?

After all, the financial news was pretty bleak. Banks were closing at a rate of more than two per week. Both rents and occupancy rates fell to record lows. Large numbers of properties were defaulting on their loans. Surely, 2009 would be the best buyers market since the RTC days of the late ’80s.

NEW YORK - DECEMBER 20:  People walk past the ...
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The main reason for the lack of deals is that lenders decided to extend the loans that were coming due on properties that were cash-flowing. Apartments that were put on the market didn’t attract much attention because they weren’t at the distressed pricing buyers had expected. There are a lot of private funds out there representing hundreds of millions of dollars, but it’s been hard to find a deal worth investing in, and those that were properly priced attracted multiple offers.

Still, many experts think that 2010 will be the leading edge of defaults that banks won’t be able to overlook. The years 2005-2007 were when a lot of 5-year mortgages were placed based on overly-rosy projections. Now those are starting to come due, with a huge number right behind them. According to Real Capital Analytics, at the end of 2009 there were almost $31 billion in distressed multifamily properties, compared to just $10 billion at the end of 2008.

Since only a fool will try to time the exact bottom of a market, a lot of those private funds, as well as larger REITs, are expected to start picking up assets this year. Also, many people who previously had invested in office and retail are entering the multifamily arena now, since many of the assets in that class are at least cash-flowing.

As always, some smaller investors will put together groups to buy distressed properties locally that the larger groups wouldn’t touch. They know the submarkets and have the local knowledge and contacts to realize which apartments are salvagable with an infusion of rehab capital and better management. At least that’s one of the strategies we plan to implement this year.

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Multifamily Construction Starting Up Again

REITs and large developers are once again entering the multifamily market in select markets. According to Village Green Cos. CEO and chairman Jonathan Holtzman, “The banks are open for business for the right borrower with the right project in the right submarket.” His group recently broke ground on a 175-unit mixed-use project in Minneapolis. It’s projected to be built and leased up by early 2011.

Apartment Building on Magnolia Avenue, Fort Worth
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“Anyone who has the financial wherewithal to start building today is going to face a great environment when they deliver that asset two or three years down the road,” says Highlands Ranch, Colo.-based UDR chairman and CEO Tom Toomey.

You can find out more about these and other upcoming apartment developments around the country.

Our group is on schedule to begin development of a 144-unit apartment in an emerging market along the North Carolina coast. Coming online in early 2011 seems to put us in the sweet spot.

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Government-Backed Financing Entities Only Players in Multi-Family

According to the latest issue of Multifamily Executive magazine, the multi-family market is being buoyed by loans from Freddie, Fannie, and HUD-backed FHA loans. The bad news is that for buyers or developers unwilling or unable to get financing from these sources, there’s virtually no other alternative right now.

Although rumors are starting to circulate that insurance companies whose investment portfolios have improved recently might re-enter the market, it’s unclear how they would be able to compete with the GSEs. That may change depending on the continued solvency of the GSEs. Right now they have healthy multi-family loan values and their default rate is below 0.5%, in contrast to the 3.13% rate that commercial banks report. However, a recent GAO report indicates “that Fannie and Freddie stand to bleed $400 billion by the time the issue of the conservancy is resolved.” This may make it more difficult for legislators to continue supporting Fannie and Freddie in their current status.

Buy Apartments Now Says Marcus & Millichap Expert

Hessam Nadji, managing director of research at real estate brokerage Marcus & Millichap, believes that now is a great time to invest in apartments, especially older ones. According to Nadji, during a recession people often choose older units with fewer amenities.

The echo boomer generation is just beginning to move out on their own, and they often start out renting in this type of apartment. Even though their unemployment rate is currently high, they should be the first ones hired when the economy starts to recover, says Reis Research Director Victor Calanog.

Nadji urges investors to buy while prices and interest rates are low. “There is a good chance that if an investor waits for a recovery to materialize, they’ll see prices go up again,” Nadji says.

To learn more, see the article at Realtor Interactive Magazine.