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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