Summary
The Wall Street Journal report, by Maura Webber Sadovi, published on September 30, 2009 highlights what has become an increasingly common occurrence, the decline in property values over the past several years. The example used, a 438 unit deal in North Hollywood was almost sold for more than $140 million. Most recently, the same deal was sold for $96 million, a precipitous decline in value to say the least, and the carnage probably isn't over.
Analysis
The perception that there is a lot of opportunity in multifamily is fueled, in large measure I think, by the desire to acquire investment quality assets at a time when many owners seemingly cannot re-set their loans, against a backdrop of declining net operating income and greatly reduce renter traffic and demand. There have been, to be sure, some situations where well financed buyers have been able to acquire properties at very favorable prices, but the effective fall-out from this has been understated.
Declining values, and changes in underwriting criteria, crossed against a vastly more realistic set of expectations for returns and future values have driven the transaction volumes to very low levels and continue to beg the question - why? Where is the game?
Fundamentals suggest to me that we're not looking at a repeat of the last cycle with a huge run up in values and motivated, impractical buyers standing in line to buy assets for the cover of their annual fund report. What we're facing is the very real need to accept lower returns and longer hold periods in order to allow the market to recover from its present malaise. Behringer Harvard is quoted in the article as raising about $250 million from a September 8th public offering and $200 million from a private offering with a pension fund. Behringer has purchased about 1,700 units in 5 deals since the beginning of 2009. I am guessing that the imputed valuation of these deals would show a 7.25 cap, but that's just an opinion without any data to back it up. It would be a typical deal at that level.
The new reality of owning units is that pricing power is still in the hands of the renters and this Behringer play has to be a longer term hold. I think they're going to discover that when rents go back up and competition returns with great site traffic, the real rent gains (actual rent increases above the rate of housing inflation) are going to be a disappointment. (GLG clients, please contact me if you want more on this.)
The properties that are being sold, especially those institutionally that are cashed out to pay for those pesky redemptions, are still offered at prices high enough that we're a long way from fire sale pricing and distressed benefits. I'm fond of telling clients, now is a good time to buy, but what you buy is going to make all the difference.
Jack Kern consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
