Apartment Sales Post Strong Second Quarter

Multifamily Executive
Les Shaver
July 26, 2011
The apartment sales recovery continued into the second quarter, according to New York-based commercial real estate data provider Real Capital Analytics (RCA).

In all, $23 billion in apartment assets traded in the first half of 2011, which marked a $104 million year-over-year improvement from 2010. The $14 billion in volume that traded in the second quarter alone was the most active period since the fourth quarter of 2010, which was a busy quarter thanks to end-of-the-year sales. 2011’s second-quarter tally may have been impressive then with volume surging 132 percent on a year-over-year basis, after the first quarter’s 72 percent increase.

In some brokerage shops, things feel like they did during the boom years of 2006 and 2007. “In the first half of the year, in Las Vegas, Phoenix, Vegas, and Florida, the level of activity was similar to what we saw in 2005, 2006, and the early part of 2007,” says Nick Ingle, director of capital markets at the Phoenix office of Hendricks & Partners. “We knew the activity would be busy, but this has been a surprise.”

Peter Donovan, senior managing director of Los Angeles-based CB Richard Ellis’ Multi-Housing Group, says his company’s sales volume is up about 30 percent this year. “The volume is up a lot,” he says. “It’s broad-based in a number of markets.”

Behind the sales numbers was even more proof of the overall health of the market. RCA characterized pricing as “stable” with per-unit prices averaging about $100,000 in the second quarter. However, there is pricing pressure in the top markets with 10 percent of the properties in those metros going for 4.7 percent or less.

Further showing the health of the market were the offerings from distress. 2011’s second-quarter offerings from distress were $2 billion, which was the smallest since the second quarter of 2008. But not everyone is seeing this. “I think that distress sales activity is increasing, but the number of properties in default is going down,” Ingle says.

Portfolios sales also picked up $3.2 billion in the second quarter, which passed last year’s total. Nineteen individual properties and 10 portfolios traded for $10 million or more in the first half of the year.

Garden apartment sales, which saw volume of about $14.2 billion, were well ahead of high-rises. The quarter saw $24.8 billion of new garden offerings, which was the highest offering in three years. RCA attributes this surge to investors looking for higher yields, which they could find in the garden sector.

Manhattan, Los Angeles, and Washington, D.C., all saw more than $1 billion in volume trade hands in the first quarter, while Atlanta was close behind. San Francisco, Chicago, and Boston moved into the top 10 for volume, while Houston and Orange County saw volume fall off. Smaller markets also gained a foothold. “Tertiary markets as a whole posted better-than-average gains year-over-year, an indication that capital is starting to chase the high yields in these smaller cities,” according to the RCA report.

ULI Report: A New Era for Multi-Family

May 19, 2011
By Allison Landa, News Editor

PHOENIX – Not so long ago, the pinnacle of being an American meant owning one’s own home. But today offers a different story, according to a slate of panelists at the Urban Land Institute’s spring meeting. In a panel entitled “Renting: Living the American Dream,” a slate of industry experts discussed how the recession has turned housing-related fantasies on their collective ear.

“Living in an apartment – there’s no stigma like there was back in 2006 when everyone was buying a home,” Transwestern vice president Jack Hannum noted.

More than simply lacking stigma, apartment living is now widely considered more desirable than homeownership, National Multi-Housing Council president Douglas Bibby said. Bibby believes that today’s market offers an impressive trifecta for those in the multi-family business.

“First is the horror that went on with the single-family side,” he said. “That has had a lingering psychological effect. Second is pent-up demand, and the third is very, very low resident turnover. The back door is basically shut. People just aren’t leaving.”

This is occurring in a strange climate of not-so-rapid recovery. Marcus & Millichap managing director of research services Hessam Nadji, who served as moderator for the panel, characterized today’s economy as in a state of slow but sure healing.

That said, he added, the market is still licking its wounds.

“The long and short of it,” he said, “is while we’re very concerned with some serious issues like the record amount of debt (amongst homeowners) … on the global scale, we have a lot of uncertainty and turmoil. Of course, the Middle East is in the center of it right now with energy prices, which has been sapping our growth over the past few months.”

And in the midst of this turmoil, Nadji said, job growth has made itself evident. He estimated that between 6 and 6.5 million jobs will be created by the end of 2012.

BRE Properties president & CEO Constance Moore asserted, however, that the face of employment – and thus the nature of housing – has shifted.

“I’m not so naïve to think that there will never be another homeowner in this country,” she said, referring to the shift toward renting, “but I do think we shouldn’t underestimate the psychological change that has happened. Work has changed. You used to have a 30-year job, a 30-year mortgage, and if you’re lucky, a 30-year marriage. That has changed.”

Nadji echoed Bibby’s assessment that pent-up demand is fueling the fire behind renting as opposed to owning.

“We had approximately 3 million young adults move in with family between 2005 and 2010,” he said. “As these individuals get more confidence in the economy … they move out into apartments. They are coming back out and forming their own renter household.”

Robin Hughes, president & CEO of affordable-housing firm Adobe Communities, said increased demand has bolstered her work.

“With our tenant population, there’s stability and projected growth in that area,” she said.

But Bibby takes a more cautious approach.

“As soon as home prices start to stabilize, everything will loosen,” he said with regard to the strength of the multi-family market. “I’m not complacent at all.”

Federal Guarantee a Bone of Contention in Housing Finance Debate

Jerry Ascierto

The future of our nation’s housing finance system looms large over the agenda on Capitol Hill.

But the debate over what to do with Fannie Mae and Freddie Mac will begin a little later than anticipated. The Obama administration was expected to roll out its framework proposal by the end of January, but that timeline has been pushed back to mid-February.

“On the hill, hearings have started to be teed up both to go over the administration’s proposal as well as to get input from the stakeholders. Now, that’s been thrown into a bit of confusion,” says Michael Berman, chairman of the Washington, D.C.-based Mortgage Bankers Association (MBA). “We are anxiously awaiting having the train pull out of the station.”

One of the biggest sources of conflict in this debate will be to what degree the federal government should be involved in our nation’s housing finance system. Opinions are sharply divided over the possibility of an explicit federal guarantee around the mortgages issued by the next generation of housing finance entities.

One Set of Plans
In September 2009, the MBA rolled out its proposal for a system of mortgage credit guarantor entities (MCGEs) that would replace Fannie Mae and Freddie Mac. The MCGEs would be privately owned, government-chartered entities that provide loan-level guarantees. Backstopping that would be an explicit federal government guarantee wrap, much like what Ginnie Mae does with FHA loans.

The MBA says that its proposal has gained momentum. “We’ve begun to see a coalescing of opinion over the last months behind the general outline the MBA has developed,” Berman says. “It’s safe to say that the proposal has been well received.”

Yet the proposal certainly has its detractors, many of which are on the Republican side of the aisle. Last week, the American Enterprise Institute, a conservative think tank, issued a white paper titled “Taking the Government Out of Housing Finance.” The white paper argues that the presence of a government guarantee, explicit or implicit, is what got us into our current mess, and that a free-market, entirely private system is preferable.

“We believe that there is a robust alternative to government support of the housing finance system,” the white paper says. “Our alternative approach is to ensure that only prime-quality mortgages, which comprise the vast majority of U.S. mortgages, are allowed into the securitization system.”

Keeping the Balance
Still, the importance of counter-cyclical liquidity—of capital being available though good times and bad—necessitates a role for the federal government, Berman says. “In order to ensure liquidity through times of economic stress, as we’ve just experienced, and to keep down the volatility of the mortgage markets, we do need some sort of government role in the form of the explicit government wrap around mortgage-backed securities,” Berman says.

Berman pointed to the last three years as an example of the danger of a fully private, free market system, saying that single-family and multifamily mortgages would’ve been “nearly impossible to get, and for what was available, the rates would be extraordinarily high.”

The Center for American Progress (CAP), a progressive think tank which has the Obama administration’s ear, issued a report January 27 calling for a system that’s privately capitalized, but with an explicit government guarantee that would be paid for by the next generation of housing finance entities. To CAP, that guarantee takes three forms: direct government support for affordable housing; a government backstop for middle market deals; and for luxury assets, government financial intervention would only occur when the mortgage markets freeze.

In essence, the left and right sides of the aisle agree on one important principle—that taxpayers must be protected. Under the old system, Fannie Mae and Freddie Mac inhabited a unique space in the business world—publicly traded companies that were chartered by, and implicitly backstopped by, the federal government. Under such a system, profits were privatized, but losses, ultimately, were socialized.

Under the MBA’s proposal, a series of taxpayer protections are included, such as an FDIC-type insurance fund, a strong regulator that ensures adequate capitalization of the MCGEs, and a limit on the kinds of mortgages that would be securitized.

While many of the proposals issued from across the ideological spectrum look good on paper, now comes the hard part—forging consensus in a bitterly divided Congress.

Real Money: Freddie Mac Offering New CMBS

Freddie Mac is offering of a new commercial mortgage-backed securities through its Structured Pass-Through Certificates (K Certificates), backed by multifamily properties.

The company expects to offer approximately $1 billion in K Certificates (K-010 Certificates), which were expected to price this week and settle by Feb. 10.

The deal “represents the first of many deals we expect to issue this year as our securitization activity grows,” said David Brickman, vice president of Multifamily CMBS Capital Markets for Freddie Mac. “This offering also includes a new feature – this is the first K-deal in which two rating agencies were engaged to provide conventional public ratings.”

The mortgages consist of 76 fixed-rate mortgage loans, secured by 81 multifamily properties. The mortgages have an initial mortgage pool balance of approximately $1.17 billion as of Feb. 1. All of the mortgages are balloon mortgage loans. Mortgages representing 6.7% of the initial mortgage pool balance do not provide for any amortization prior to the maturity date; and mortgages representing 43.7% of the initial mortgage pool balance provide for an interest-only period of between 12 and 24 months following origination.

The largest loan in the portfolio is for $133.36 million and is backed by the East Coast 6 complex in Long Island City, NY. The complex contains 499 units and the loan interest rate is 5.07% and has an underwritten debt service coverage of 1.25 times.

Obama’s Plan Calls for End to Fannie and Freddie within 10 Years

By Keat Foong, Executive Editor

The Obama Administration issued its proposal for the future of Fannie and Freddie today.

The outline proposes winding down the agencies over a period of 10 years, and it puts forward three options, none of them calling for complete privatization or complete nationalization of Fannie Mae and Freddie Mac. However, all three options arguably take a step to the right—not the left‑of the government-sponsored private enterprise system that exists today: they curtail the government’s involvement in the secondary mortgage markets.  

Under the third option, rigorously regulated private entities would perhaps take over Fannie and Freddie’s role of guaranteeing the mortgages. This seems to be the framework first put forward by the Mortgage Bankers Association (MBA) in September 2009.

“We are gratified to see that one of the concepts they articulate closely tracks MBA’s proposal, released 18 months ago,” says Michael Berman, chairman of the Mortgage Bankers Association in a statement. MBA “continue[s] to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets.”

Will those private entities also have a housing mission—a mission to provide affordable housing‑similar to Fannie and Freddie’s? Perhaps not, if President Obama, the nation and its millionaire TV newscasters are intent on continuing to move the country away from the New Deal framework. Others question whether the proposal gives the huge, coveted, Fannie and Freddie business to the banks.

The National Multi Housing Council (NMHC) also applauds President Obama’s white paper. “We would encourage lawmakers to focus their attention-at least in terms of serving the rental housing industry‑on the third option identified in the Obama plan…” says NMHC President Doug Bibby in a statement.

NMHC favors the “federal guarantee at all times” on the rental housing finance side. It will be interesting to see if in the end, both apartment property owners and homebuyers will obtain the same plan and thereby continue to benefit from lower mortgage rates.

SPECIAL REPORT: MBA Optimistic about Economy at Annual Convention

By Keat Foong, Executive Editor

San Diego–The Mortgage Bankers Association (MBA) issued positive assessments of the economy, job creation and financing activity during the annual MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo this week.

GDP growth for 2010 will be nearly 4 percent, predicts Jay Brinkman, MBA chief economist. Brinkman and other MBA officials were speaking at a press conference that was held during the convention. “Economic growth is looking pretty good,” he says. There is a chance the increase in GDP will be even higher than projected.

Brinkman says all economic indicators appear to be pointing in a positive direction. Consumer spending has picked up, and business spending is also increasing. While construction levels are extremely low, they are bouncing off the bottom. The reduction in the social security payroll tax as well as the extension of the tax cuts may also stimulate the economy.

MBA forecasts that jobs will be created at the rate of about 150,000 per month in 2011. This level is the amount commonly said to be required to match the number of new entrants into the workforce. MBA forecasts that in total more than 1.5 million jobs will be created this year, compared to a projected increase of 1.3 million-plus jobs in 2010.

Hiring in the manufacturing sector has ticked up a little, and the service sector has seen across-the-board increases in employment. Employment in has increased, as the hospitality industry has regained all the jobs it lost, says Brinkman.

Brinkman predicts that interest rates will climb only gradually this year. Interest rates will increase at a faster clip only if there is a perception that U.S. is not that different from Europe in its debt situation, if a booming stock market will lessen investor interest in the fixed-income market, or if circumstances prompt another round of investor flight to quality.

Jamie Woodwell, MBA vice president, commercial real estate research, says that commercial real estate has “clearly” arrived at another real estate cycle. Woodwell says net absorption will exceed completions in many sectors this year, and job growth will begin to reduce excess space. NOI will begin to be impacted as rents are adjusted up.

“We are already seeing that [occur] in sectors with shorter lease terms” such as hotels and apartments, he says.

MBA announces that mortgage bankers originated $110 billion of commercial and multifamily mortgages during 2010‑an increase of 36 percent from 2009‑according to preliminary estimates.

There was a big “ramp up” of financing in the fourth quarter, says Woodwell. Financing increased by 88 percent in the fourth quarter of 2010 compared to the same period a year ago, and by 63 percent compared to the third quarter.

The sharp fourth quarter increase was driven by office and hotel originations, which increased by 170 percent and 169 percent respectively compared to a year ago. Multifamily financing increased in the fourth quarter by 81 percent from a year ago.

Life companies pushed up their originations by a hefty 170 percent in 2010 compared to 2009. Fannie Mae and Freddie Mac originations increased by 65 percent. Loans originated for commercial bank portfolios declined by 25 percent, and CMBS loans increased by 6,000 percent compared to a year ago. CMBS financing is starting to get a little more traction, although the volume remains relatively low, says Woodwell.

Life companies, Fannie Mae and Freddie Mac have seen relatively low loan delinquency rates compared to the 1980s and 1990s, Woodwell notes. Although CMBS delinquencies are on the upswing, there is a balance between properties entering and exiting workouts, says Woodwell.

MBA’s analysis of loan maturities show maturities exceeding $150 billion this year, and falling every year thereafter until 2015 to 2017, when it will increase again to levels of between $150 billion to $200 billion. Higher loan maturities in those three years reflect the boom of financings executed between 2005 and 2007, says Woodwell, as well as loan extensions during these few years.

Brinkman says downside risks to the economy include the budget deficits of state and local governments. He says expirations of the federal stimulus and QE2 this year could possibly present a small, though not serious, negative effect on the economy.

Multifamily Has Rising Demand, Low Supply

By: MultifamilyBiz Staff – 1/14/2011 9:36:56 AM
ORLANDO, FL – New job creation amid a slowly recovering economy is creating increased demand by new renters seeking to move into apartments. However, the lack of credit needed to finance the development of apartments is already causing rents to increase and is likely to lead to a shortage of available apartments in the next few years.”Although we are forecasting construction of 133,000 new multifamily residences in 2011,” said the National Association of Home Builders’ chief economist, David Crowe, “that is far short of the 250,000 to 300,000 units that would be required to keep supply and demand in balance. In addition, we have yet to make up for the insufficient number of new apartments that should have been built over the last two years. The capital needed to finance that construction is just not available to apartment developers.”Multifamily developer Bill McLaughlin, an executive vice president of the Avalon Bay Company, a real estate investment trust headquartered in Washington, D.C., said he sees demand for apartments increasing, but notes that the cutback in multifamily development in 2009 and 2010 has resulted in a “woefully inadequate supply” of new multifamily rentals to meet the rising demand.

Private development firms bore the brunt of the constrained supply of capital. Jay Jacobson, national partner for acquisition and investment for Wood Partners, Boca Raton, Fla., said “The market is telling firms to build and acquire, but capital is still extremely difficult to find.”

Even affordable rental housing is feeling the pressure. Robert Greer is president of Michaels Development Company, Marlton, N.J., a company that develops and manages affordable rental communities throughout the country. According to Greer, “Affordable housing, which is primarily driven by the Low-Income Housing Tax Credit program, is rebounding. Investors are slowing coming back into the market, and deals are getting done…which is good news. But the bad news is that given the depth of the current recession, more people than ever need affordable housing, and the demand far outstrips the supply.”

The National Association of Home Builders is a Washington-based trade association representing more than 160,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction. NAHB is affiliated with 800 state and local home builders associations around the country. NAHB’s builder members will construct about 80 percent of the new housing units projected for this year.
Source: National Association of Home Builders

Market View: Seniors Housing

By Mel Gamzon

While the seniors housing industry certainly has not been recession proof, it has survived the depths of the economic downturn with resilience and a reasonably sound track record of accomplishments by maintaining a healthy level of occupancy, a very low loan default rate and controlled development. As 2011 begins, the industry is being transformed from a 25-year upstart to a full-fledged member of the real estate community.

Investors, both in the United States and abroad, have discovered that this generally need-based product type has measurably outperformed other real estate options. National Council for Real Estate Fiduciaries statistics for 2004-2009 reveal that it has outperformed, on an operating performance and asset valuation basis, all other real estate categories. This is impressive justification that there is logic and not just rhetoric behind industry fundamentals. Overall, industry occupancy levels are approaching 90 percent at a time when office, industrial, retail and hotel assets are all struggling to achieve something comparable.

Investment returns are compelling, and with the development pipeline at a near standstill, the industry is poised for fresh capital to emerge. There are less than 1.5 million investment-grade seniors housing units in the United States today, and by 2015 there will be 22.4 million people over 75. That sets the stage for growth that will only be constrained by the cost and availability of financing. With new construction volume down 66 percent from the industry high of 45,000 units in 1999, there is ample opportunity for the astute investor in both acquisitions and selective new construction.

In light of the federal government’s control over monetary policy, the direction of the economy and most definitely the debate over the government-sponsored enterprises, there is concern for making prudent business decisions across the capital markets. As the year unfolds, it is safe to say that the uncertainty over the future of the GSEs will be a critical factor influencing industry investment growth. Underwriting standards at the GSEs have become more stringent, while the timeline to successfully complete financing transactions with them has lengthened.

Considering that these entities account for nearly 95 percent of the permanent debt in this industry, we are vulnerable to the whims of the political landscape. Will Fannie Mae and Freddie Mac be privatized? Their evolution will likely occur over the next three to five years.

2011 will emerge as a time of transition in the capital markets. We will witness a continued rise of alternative and non-traditional sources of both debt and equity. Recognizing intrinsic industry fundamentals and the likely restructuring of the seniors housing capital stack, national and regional banks have begun to re-enter the bridge loan business, although construction financing remains available only on a limited basis, with full recourse and loan proceeds reaching a maximum of 65 to 75 percent of cost. There will continue to be a need for bridge lending, as many properties purchased between 2005 and 2007 with three- to seven-year term loans will not qualify for GSE takeouts, and that should provide opportunity for insurance firms and banks to lock in above-market rates.

That paves the way for investment by REITs, private equity players and foreign investors that have strategically accelerated their involvement with the industry. When the economy started to deteriorate in late 2007, the REITs began to shore up their balance sheets and liquidity while reducing leverage in anticipation of better days to come for investments in this space. They amassed a war chest of capital to fuel the acquisition market and replace traditional lenders.

Healthcare and seniors housing REITs have recently begun utilizing the taxable REIT subsidiary structure to supplement their traditional sale-leaseback models by providing non-customary services, such as management, to tenants. The TRS allows REITs to be more flexible in structuring deals and better compete for the full value of a property. Instead of recognizing only the capitalized value of the lease income, REITs can now see the value of the operating income after the lease payment to the extent they serve as managers.

For the seniors housing owner/operator, the acquisition market has improved dramatically from pre-2010 levels. Opportunities to monetize their investment positions through financial leveraging with new partnership structures and REIT deals will intensify as the year progresses. Likewise, the emergence of foreign capital into the U.S. seniors housing business is taking hold, with several portfolio transactions scheduled to close within the next few months. Offshore investors with longer-term investment horizons appear to be considering more defensive U.S. real estate platforms such as seniors housing, with investment returns consistent with more conservative underwriting criteria. As the global population ages, acquiring the knowledge base of U.S. companies will potentially represent a huge advantage for these foreign investors in their own countries.

The fact that in the second half of 2010 more than $6 billion worth of non-skilled nursing facility portfolio transactions were either announced or actually closed at reasonably aggressive pricing bodes well for a good start to 2011. Now may be the time for newcomers to enter the seniors housing market or for current participants to deploy new capital—while the investment environment is fertile, with reasonable cap rates and historically low interest rates. The demographics will continue to drive growth. This will create opportunities in seniors housing during 2011 and for years to come.

—Mel Gamzon is a principal & senior managing director of Senior Housing Investment Advisors and a member of the CPE editorial advisory board and the executive board of The American Seniors Housing Association. He produces a quarterly seniors housing report on CPE TV and MHN TV and can be reached at mgamzon@snrhousing.com.

Multifamily Fundamentals Better than Other Property Types

Dec 29, 2010  

By Dees Stribling, Contributing Editor

Washington, DC–The Mortgage Bankers Association has released its Commercial Real Estate/Multifamily Finance Quarterly Data Book for the third quarter of 2010, and the organization posits that the real estate cycle is beginning to once again exert itself in commercial and multifamily property markets, and that, on the whole, multifamily is benefiting most from the recovery. “During the third quarter, the economy began to show (modest) growth and absorption picked up in the face of little new space coming on line,” the report says. “The result has been marginal declines in vacancy rates and a firming of asking rents.”

Multifamily fundamentals in particular have improved, though not quite back to where they were during the more flush days of the mid-2000s. During 3Q10, average apartment vacancies nationwide were 7.7 percent, compared with 5.8 percent during 3Q07. Yet among property types, apartments are the healthiest in terms of 3Q10 vacancies: Average industrial vacancies for the quarter were 13.1 percent, and retail and office vacancies were both stuck at 18.8 percent.

Investors are interested in multifamily rentals properties, too—more so than most other property types. Year-to-date as of the end of 3Q10, the sales volume of apartment properties was 97 percent higher than the same period in 2009. Only office properties piqued investor interest more; office sales were up 122 percent during the first nine months of 2010, compared with the same period in 2009. During the third quarter of 2010, prices per square foot were up for apartments and cap rates were down, though not by much. During 3Q09, apartment cap rates averaged 7.1 percent; a year later, they were 6.7 percent.

For commercial and multifamily properties both, lending trended downward during the quarter, driven mainly by banks’ reluctance to make construction loans. “A full $22.5 billion of the drop in banks’ holdings was construction loans, compared to a $7.5 billion decline in loans backed by existing commercial and multifamily properties,” says the report.

This construction loan dearth is showing itself clearly in multifamily starts, which continued to sputter. “The recession’s shadow continues to hang over new construction activity,” the report explains. “Multifamily building permits in November fell to 94,000 on a seasonally adjusted annual rate, the lowest level in the past 12 months. Starts fell to 72,000, and completions fell to a rate of 73,000. The lack of new construction is a clear–and expected response to the stress the recession has brought to the market.”

The performance of commercial/multifamily mortgages was mixed in the quarter, and clearly differentiated by investor group, according to MBA. The 30-plus day (including REO) delinquency rate on loans held in CMBS continued to increase during the quarter, hitting 8.58 percent, a new high for the series. The 90-plus delinquency rate for commercial and multifamily mortgages held by banks and thrifts rose slightly to 4.41 percent, a high for the Great Recession but lower than the levels seen in the early-1990s.