Like virtually every multifamily REIT and well-heeled institutional apartment operator that has made its way through the recession, Houston-based Camden Property Trust began stacking capital in anticipation of an RTC-esque multifamily asset sell-off. Camden alone has an institutional acquisition fund of approximately $1 billion—capital bolstered further by the REIT’s ability to issue equity and tap into credit lines, including a $420 million secured, interest-only Fannie Mae facility fixed for 10 years at 5.12 percent. It’s an impressive acquisition war chest not unlike many amassed by the REIT's institutional peers.

Camden hasn’t spent a dime of it yet.

“We all raised equity and got dry powder and were well-positioned to take advantage of the carnage,” Camden CEO Ric Campo says. “Well guess what? There was no carnage. There are none of these incredible opportunities that we thought were going to merge, and it’s primarily because banks are not pressing their borrowers to pay.”

That’s not to say that deals aren’t available in today’s apartment disposition market. While cap-rate centric institutional buyers mindful of market fundamentals are balking at cap rate compression, opportunistic private investors and opportunity funds with aggressive yield expectations and the underwriting to match are standing 20 and 30 bidders deep to pay what the market demands on a price-per-unit and price-per-square-foot basis. 

“Today’s buyer feels comfortable where the pricing is per-unit and is willing to buy on the prospect of upside with market recovery,” explains Cindy Cook, senior vice president in the Phoenix office of apartment brokerage firm Colliers International, which recently brokered the sale of two 300-unit, Class B multifamily properties for $61.23 and $67.02 per square foot. “That’s why cap rates have been sidelined. It’s not a stable market, so it doesn’t make sense to value properties strictly on cap rates today. Today’s winning bidder is typically a guy that can walk in and pay all cash without a loan contingency. They’re not looking for a discount; they are looking to pay market price, and they have the cash to pick it up, and we are seeing it particularly with private guys, family trusts, and the opportunity funds that were set up over the past couple of years.”

Like other distressed markets around the country, Phoenix apartment rents have fallen between 20 percent and 30 percent, Cook says, and market fundamental deterioration of that severity blocks buyers concerned with cap rates. “You can’t buy on cap rates in this market,” agrees David Baird, a managing director in the Southwest region and the national director of multifamily for Irvine, Calif.-based brokerage firm Sperry Van Ness Commercial Real Estate Advisors. “You can’t buy on pro forma alone in a Las Vegas or Phoenix or Orlando, the cities that were overbuilt and still have rents dropping and a substantial shadow market competing for residents.” 

Market deterioriation opens the door for private, opportunistic buyers paying for apartments by the pound, Baird says, noting that since 2007, he has seen a complete reversal in the typical multifamily asset purchaser, adding that it's been “a 180-degree shift with the institutions at the bottom and the private investors at the top.”

Campo, for one, doesn’t begrudge opportunistic buyers, even as Camden acquisition cash remains on the sidelines, particularly after two months of less-than-stellar economic growth. “I was always nervous about getting into the fray with all of this hot money and then all of the sudden the economy slows down and you don’t have the rent growth that some of the cap rates and some of the underwriting calculations that you needed to make deals work today come to fruition,” Campo says.

While an unraveling of CMBS distress over the next three years has buyers, brokers, and market watchers alike anticipating an increase in transaction volumes, the glimmer of a buyer's market for multifamily real estate remains a long-term eventuality. “There are still $1.7 trillion of loans in default or going into default over the next three years, and there’s no hoping that it simply goes away,” Baird says. “But we thought for some time we’d see an elephant through the snake scenario, and we worked that angle, but it just hasn’t happened, and it’s not going to happen, in my opinion.”

Recent acquisitions of special servicers, including the sale of CWCaptial to New York City-based Fortress Investment Group, are signs that the institutional investment community is growing weary of bank reticence to make a call on defaulted loans, and could represent an unlocking of apartment assets that could further improve transaction flow and allow for a broader demographic of purchasers. “CMBS in 2006 and 2007 crowded out the agencies with much higher leverage and abysmal underwriting standards,” Campo says. “There is a lot of junk in there and a lot of loans that have to be reworked on the multifamily side. I do think the takeovers of those stressed entities with fresh capital allow those deals to move further out toward the marketplace.”

Campo also notes that some $3 billion in multifamily lending is coming due between now and 2013, which portends for improved deal flow in the favor of institutional buyers. “I think that the transaction market will build momentum over the next couple of years in the sense that you’ll see more people who have to sell,” he says. “When people have to sell, you’ll see the pricing scenarios change a little bit and you’ll have a broader volume of properties come out.”

Until then, private price-per-pound buyers will rule the day. “Most of the institutional guys are still looking for a 6 percent cap, even if the seller is trying to sell on a price-per-unit basis,” Cook says. “Despite the prospect of improving fundamentals, there has been an underwriting line drawn in the sand on the cap rates by institutional guys, regardless of asset quality.”

Check out the other segments in this series below.
Part 1: Multifamily Acquisition Market Heats Up as Cap Rates Fall by Jerry Ascierto
Part 2: Smaller REITs See Transactions Pick Up by Les Shaver