Family Values

Adjusting Values Say Now is the Time to Buy Multi-Family Properties

Would-be investors wondering whether the time is right to make a move should consider this: Valley apartment community prices have corrected by roughly 45% in the last 2 years. If ever there was an opportune moment to buy — this would be it.

Increasing cap rates, teamed with declining occupancy, growing concessions and lower rents, have conspired to place downward pressure on multi-family property values. While this may not be great news for sellers, well-capitalized private investors on the look-out for bargains consider it a sign that the industry is entering into the best buying opportunity for real estate in decades.

Unlike in other commercial real estate sectors, multi-family sales are being stimulated by buyers’ continued access to available credit through lenders such as Fannie Mae and Freddie Mac. While undeniably slower than in years past — the difference between $312M so far this year compared to $4.3B at the market’s peak in 2006 — these sales provide market watchers with an important barometer against which to measure future transactions.

REITS and advisors looking to shore up balance sheets, developers needing to pay off maturing construction loans and lenders hoping to unload distressed properties make up the bulk of sellers. Experts agree that transaction activity on behalf of these sellers will likely remain soft through the end of this year and into 2010. But, ongoing market adjustments, the continuing need to move assets off balance sheets and concessions from lenders who are willing to modify the capital stack to allow a sale to occur should help fuel the supply chain and enhance the buyers’ ability to makea deal.

Many investors expect the banks to more aggressively address troubled commercial real estate loans in 2010, causing the pace of distressed sales to accelerate at that time.

Despite its recent economic struggles and housing market woes, Phoenix remains at the top of investors’ wish lists — prized for its affordability, infrastructure, standard of living and climate. The fact apartment occupancy has dipped to 87% from its peak of 93% in 2006, and average net rents have fallen to $640 from $736 in 2006, according to Real Data, is considered just a temporary setback by many investors — both large and small.

Institutional investors remain on the sidelines while they manage existing investments. Most are keeping a watchful eye on emerging values and creating funds to buy distressed assets at what they deem the appropriate time. In the meantime, the trick for bargain-hunting private-capital investors will be to walk the fine line between operational recovery and the risk of encountering higher interest rates as the economy rebounds.

Tyler Anderson and Sean Cunningham are multi-family specialists in the Phoenix office of CB Richard Ellis. They can be reached by phone at (602) 735-5555 or via email at tyler.anderson@cbre.com and sean.cunningham@cbre.com.

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