Multifamily investors have yield in the crosshairs.
investors are on the hunt. And they’re moving beyond trophy properties into
unfamiliar territory in hopes of a rare catch.
1H2012, secondary markets posted a 38 percent year-over-year increase in
multifamily transaction volume, followed by tertiary markets at 23 percent,
according to Real Capital Analytics. Major metros saw only a 9 percent increase
during that period.
driving this migration? “It’s primarily a search for yield,” says Ben Thypin,
RCA’s director of market analysis. Private investors, equity funds, and some
institutional investors have tired of the competition driving down multifamily
capitalization rates in core markets.
gotten to the point where inventory and competition is so tight that my San
Francisco buyer is willing to look at higher cap markets such as San Diego and
Fresno,” says Davide F. Pio, CCIM, CRS, LEED-AP, a broker associate with BCRE
in Pinole, Calif.
search for yield among class B and C multifamily properties in these markets is
less common, Thypin says, but it is happening. Just ask the government.
the last two years, I’ve seen taxing authorities become more aggressive in
their valuations of multifamily property,” says Jamie Sieffert, CCIM, director
of Thomson Reuters in Carrollton, Texas. “Last year it primarily affected class
A product, but this year has been pretty much across the board.”
government is following the money. Multifamily cap rates in secondary markets
fell only three basis points YOY in 1H2012, according to RCA, suggesting that
investors are increasingly turning to reposition plays for better yields in
markets like Austin, Denver, and San Diego. Marcus & Millichap notes that
class C multifamily occupancy was up 100 basis points in 1H2012 — the largest
increase among property classes during that period. Plus, class B and C cap
rates were 520 bps higher than the 10-year Treasury rate in 2Q12, compared with
a 400 bps difference between class A and the 10-year Treasury.
is in the crosshairs. But how will demand for lower class multifamily
properties in smaller markets affect the future of investment and development?
multifamily investor is willing to compromise in search of the right deal.
“Buyers are reconsidering their investment parameters to place capital,” says
Aaron Mesmer, of Block Real Estate in Kansas City, Mo. “That includes
considering deals in second-tier submarkets, non-arterial locations, and other
deal-specific complications that would have otherwise caused them to pass only
18 to 24 months ago.”
investor segment mostly includes private money, which comprised 65 percent and
66 percent of buyers in secondary and tertiary markets respectively as of 2Q12,
according to Thypin. “Equity funds represent a bigger percentage in tertiary
markets, and they’re more likely to search among the lower asset classes,” he
McConnell, CCIM, associate director of Marcus & Millichap’s National Multi
Housing Group in Elmwood Park, N.J., recently sold an East Rutherford, N.J.,
apartment property built in 1979. The family owners had not pushed rents or
made basic upgrades in many years. “I sold the complex at a going-in sub 5
percent cap rate to a private syndicate that was able to see the upside,”
McConnell says. “Within six months, the new owners had dramatically improved
occupancy with simple upgrades and a very aggressive, hands-on management
campaign.” The property, which is located in a thriving transit-oriented
community, is now stabilized at a 7.5 percent cap rate, he adds.
investors remain cautious in secondary and tertiary multifamily markets, but
they could begin to target some class B properties as class A opportunities
dwindle. The Portland, Ore., area, for example, saw only five multifamily
transactions greater than $10 million in 1H2012, says Anita D. Risberg, CCIM,
senior broker with HFO Investment Real Estate in Portland. “The slowdown in this
asset class has begun,” she adds.
the meantime, private investors are driven by what Solange Velas, CCIM, of
Southland Realtors in Knoxville, Tenn., describes as a perfect storm: “You have
prices that have returned to levels not seen since the 1990s, historically low
interest rates, and a tightening rental market due to so many displaced
homeowners competing with a steady increase in local population.”
fixed-rate 30-year loans are “fueling the furor” among investors looking for
apartment properties with two to four units in Velas’ market. For
Knoxville-area properties with five-plus units, local banks are offering
five-year fixed loans with 20-year amortizations and 20 percent down
requirements. “I tell my investors that there is a window of opportunity here
that may last 18 to 24 months, or longer. It will be characterized by a firming
of prices — no further decline, but no increases either.” Velas says. “As long
as interest rates stay down, this market will continue to rebound.”
a rebound also means increased competition in secondary and tertiary markets.
T. Sean Lance, CCIM, managing director with NAI Tampa Bay in Seminole, Fla.,
recently represented a lender in the sale of a 600-unit class C multifamily
portfolio in South Florida. His team sent out approximately 200 offering
packages, led dozens of property tours, and ultimately received 17 offers that
were at or above asking price. An all-cash deal was closed in less than 30
days. “Buyers not only have to be aggressive on price, but equally so with
terms,” Lance explains. “There are very few steals in the marketplace and most
bottom feeders are coming up empty in their quest for deals.”
Plight of the Hunter
bottom feeders aren’t the only ones to blame for a slowdown in multifamily
transaction activity in some secondary and tertiary markets. In Albany, N.Y.,
multifamily investors are primarily looking for class B property, or class C in
a class B area, says Robert Giniecki, CCIM, of Foresite Realty Advisors in
Albany. “Our problem is that it’s very difficult to locate owners who are
willing to sell, and, if they are willing to sell, the cap rate may be below
what a buyer is willing to accept,” Giniecki explains.
with a lack of available product, some multifamily investors are considering
alternatives. In Philadelphia, for example, the few companies that control most
of units are reluctant to sell as they can’t replace the returns on their
current holdings with other opportunities in the market, says Adam Gillespie,
CCIM, senior vice president with SSH Real Estate. “One trend that we’ve noticed
is owners buying out their equity partners instead of chasing new product to
purchase in the marketplace,” he adds. “These returns are usually at
substantially higher rates than those achievable by purchasing new properties
through a competitive process.”
multifamily investors are turning to single-family opportunities. “The supply
of single family in Knoxville far exceeds the multifamily supply and there is a
great deal more choice in location and style,” Velas says. A multifamily
investor in her market recently liquidated most of his holdings and began
purchasing single-family foreclosures. “He is the proverbial kid in a candy
store,” Velas says. “He told me recently that he bought a home sight unseen —
unless you count the Internet photo — at auction for $10,000. When he showed it
to a local Realtor, he was told it was worth $30,000 or more.”
is hope, however, that multifamily deals will surge before year-end in these
and other markets. McConnell says that reluctant sellers, who otherwise might
not have considered selling until next year or beyond, could be spurred on by
the potential capital gains tax increase. And some uncertainty remains about
just how long this seller’s market will last.
existing multifamily product might also be motivated by the new supply that’s
poised to come on line during the next few years. New multifamily construction
increased 45 percent YOY in July, according to the Associated General
Contractors of America. In addition, developers acquired more than $2 billion
in multifamily development sites in 1H2012, nearly double the volume for all of
2011, according to RCA. However, much of this activity is still concentrated in
major metros and strong secondary markets such as Seattle and Raleigh, N.C.
firm Axiometrics is tracking 800,000 multifamily units that are still in the
planning stage, but new deliveries are expected to total only 87,000 units and
129,000 units in 2012 and 2013, respectively. What’s the holdup? Part of the
problem is that developers are focused on more-difficult sites.
are seeing more gravitation toward infill sites with much more density than the
typical three-story garden-style walk-ups that peppered suburban markets in the
last 20 years,” Lance explains. “We think this trend will continue as the
demand for infill is strong with prospective tenants, and most equity groups
prefer it over suburban right now.” Lance has participated in the sale of six
South Florida multifamily sites since 2010, and several similar deals are in
are probably wondering: What will happen when these units eventually come on line?
Consider New Jersey, where builders are delivering 2,412 units this year,
according to McConnell, a nearly fivefold increase over 2011. “With the influx
of new starts, investors are keeping a watchful eye on their older, existing
Connell says. “On the flip side, I believe the new developments will cater to
the folks who would have been home buyers a few years ago. The tenant going
into the new product is in a different income bracket than the tenant going
into the older garden community.”
for new properties is also driving multifamily development in Knoxville.
“Though we already have some nice older complexes with typical amenities such
as pools and tennis courts, we are seeing a pent-up demand for upscale,
luxury-laden, well-located projects,” Velas says. “The younger crowd likes the
newer styling that’s hard to replicate in buildings built in the 1960s and
’70s.” The vacancy rate for these new projects is under 5 percent and rents are
approaching $1 psf. “I know this doesn’t sound like much compared to the major
metros, but up to this point, our most expensive rentals in the best locations
topped out at 75 cents psf,” Velas adds.
tenants are looking at the price-to-rent ratio, according to McConnell. And in
some markets, including New Jersey, effective rents are closing in on the max
point. “When the rents max out, the tenants will be redirected back toward
homeownership,” he says.
this scenario is a distant dream for many secondary and tertiary markets, and
developers know it. Still, pursuing multifamily construction projects in
smaller markets requires extra care. “Understanding the pipeline is critical,”
says Drew Dolan, president of Titan Development in Albuquerque, N.M. “In bigger
markets, you might just need a great site.”
Development recently broke ground on the first phase of a multifamily
development project totaling more than 460 units in Albuquerque. The first
phase is being financed by a regional bank that had longstanding relationships
with Titan and its project partner, Alliance Residential Co. And that’s just
the beginning. Titan currently has six more Albuquerque-based multifamily
development projects in the queue.
several years of developers and investors chasing 6 percent cap rates on
multifamily in major markets, Dolan is beginning to see the first signs of
change as those markets become overbuilt. “Dollars here can buy a lot more
return than dollars in bigger markets,” he says. “But by the time investors
recognize the stability of markets like Albuquerque, they’ll be too late.”
Rich Rosfelder is
associate editor of Commercial Investment Real Estate.
The Tenant of the Future
members are ready to leave their parents’ house and find apartments that fit
their needs. What does that mean for owners and investors? CIRE asked Todd
Clarke, CCIM, CEO of NM Apartment Advisors in Albuquerque, N.M., to discuss how
Generation Y is shaping the future of the multifamily market.
Generation Y looking for in an apartment?
they favor smaller, connected spaces in urban locations. Between college and
age 40, this generation will likely hold a dozen different jobs, so they pack
very light. Unlike Baby Boomers, who collect things like baseball cards,
antiques, or jewelry, Generation Y collects digital things. ITunes is a great
example. Plus, a higher percentage is single. They want their smaller personal
space and larger communal space.
are owners taking to attract younger renters?
adding more outlets with built-in USB charger ports in kitchens and bedrooms.
Open storage spaces are also popular because Generation Y likes to see their
stuff. And a Formica countertop in a cool color attracts more attention than a
granite countertop. I recently made some of these changes to an apartment I
renovated to chase Generation Y, which led to a 50 percent rent increase over
the former tenant.
marketing, you can sell experiences. For example, tenants might not cook for
themselves but offering them a map showing hundreds of nearby restaurants helps
them create an urban adventure.
factors will shape the future of the multifamily investment market?
Clarke: The key
demographics are Generation Y and Baby Boomers who choose to cash in houses and
rent. On a micro level, both groups share a desire for urban, walkable
neighborhoods with transportation access. On a macro level, both coasts and
cities near the 30th parallel north are attracting renters. There are
exceptions like Chicago, of course. And some markets, such as Tulsa, Okla., are
adding cool amenities like skate parks in an effort to rebrand and attract
younger residents. Access to airports will also be an important factor.