SEPTEMBER 22, 2010
Apartment Deals Jump 32% as New Inventory Hits Market; Distressed Sellers
By DAWN WOTAPKA, Wall Street Journal
Home buyers might be sitting on the sidelines, but multifamily-building sales are on the rise, reversing the slowdown that followed the financial market's collapse two years ago.
Apartment transactions totaled $7.1 billion in the second quarter, up 32% from a year earlier, according to Marcus & Millichap Research Services. Real Capital Analytics reports that closed sales hit $2.6 billion in August, the highest month this year and the most active month since August 2008.
"That's more fuel, basically, for a fire that's going to continue into the fall," says Dan Fasulo, a Real Capital managing director.As sales heat up, plenty of new inventory is hitting the market—listings totaled $3.3 billion in August, on top of July's $3.5 billion.
To be sure, this activity still is well below peak levels: 2006's total topped $120 billion.
At the same time, the pickup in sales volume is pumping up prices from their depressed post-housing-crash levels, increasing the risk for buyers. "We see prices rising rapidly for apartment communities all around the country, even in some of those secondary markets that would make you shake your head," Mr. Fasulo says.
UDR Inc. earlier this month said it paid $455 million for five finished projects and one under development. The Denver-based company says it still got a deal: The price tag was a substantial discount to construction costs.
Looked at another way, buyers of top-quality properties in the best markets generally are getting yields of close to 5%, according to Haendel St. Juste, a real-estate-investment-trust analyst with Keefe, Bruyette & Woods Inc. In other words, an apartment complex that sold for $100 million would generate nearly $5 million in net income. One year ago, investors were getting yields of close to 6%, he says. Recently, Mr. Fasulo says he saw a 3% yield on a San Francisco deal.
The pickup in sales activity comes at a time of uncertainty as the market deals with a prolonged economic slump, and the sector could face pain. As of Aug. 31, 14.5% of multifamily loans held in commercial mortgage-backed securities were delinquent, a spike from 6.7% a year earlier, according to debt-analysis company Trepp LLC. About a quarter of recent transactions have come from distressed sellers, with many others coming from pressured sellers, Mr. Fasulo said.
Buyers maintain the sector is a sound bet, given that most of the current prices remain below construction costs. Apartment operators performed better than expected during the downturn, when some industry watchers feared renters would downgrade or move home in droves. Landlords had to offer rental discounts and other freebies to keep units filled, but most skirted drastic vacancy spikes and plunging rents. In the second quarter, rents climbed 0.6% to $946 a month, up from $940 in the first quarter but down from $959 a year earlier, according to Marcus & Millichap. Rent peaked at $1,000 in 2008's third quarter.
Also, there has been little new development in the past few years, which some industry watchers expect to create a supply shortage in some markets down the road. The vacancy rate, which peaked at 7.4% at the end of last year, is expected to drop to 5.5% by the end of 2011, according to CBRE Econometric Advisors.
Buyers have also been benefiting from government-sponsored enterprises Fannie Mae and Freddie Mac, which, as part of their mission to support housing markets, buy the multifamily loans that others originate and refinance. The process allows purchasing to continue, while refinancing helps owners avoid foreclosure.
As home-purchase-mortgage rates haven fallen, so have those for apartment buildings: Seven-to-10-year mortgages can be had for as little as 4%—at least a 50-year low—while five-year loans are available for less than 4%.
"I've never seen interest rates for multifamily loans this low," said Mike McRoberts, Freddie's vice president of underwriting and credit.
So far this year, Freddie has covered $6.5 billion in multifamily financing. While that is below last year's $8.5 billion, the bulk of this year's activity has come in recent months and the pipeline is picking up, Mr. McRoberts said. Sales remain rocky for office, industrial and shopping REITs, which don't benefit from the government support.
Write to Dawn Wotapka at email@example.com