With $2 billion added in the second quarter of 2011, new additions to the distressed apartment pools have reached their lowest levels since the second quarter of 2008, according to the “Apartment Mid-Year in Review” report from New York-based research firm Real Capital Analytics (RCA).
As new distress was slowing, workouts continued to rise (nearly doubling the new additions to the distress pool). Overall distress in the apartment sector fell to $35.6 billion, which was down 5 percent from the end of 2010. A year ago, distress was at the peak of $40.1 billion. The sector’s cumulative distress of $68.5 billion is 48 percent worked out, which is a 40 percent increase from the end of last year.
Brokerage firms saw this trend firsthand. “The number of distressed assets is down significantly,” says Debbie Corson, a principal in ARA’s Chicago office. “Our opinions of value, which used to be 80 percent for distressed sales, are now 80 percent for market deals. Special servicers, for the most part, held onto their better assets and market conditions have improved significantly pretty much across the board.”
Formerly decimated Florida markets like Jacksonville, Tampa, and Orlando, were impressive, clearing at least 20 percent of their apartment distress. San Francisco cleared 40 percent of its outstanding distress and now has more than 75 cleared out.
“We’re starting major market trades again,” says Dan Fasulo, RCA's managing director and head of research. “There’s a lot of money in Vegas, Phoenix, and Miami trying to pick up assets now.”
Houston, Miami, and Dallas saw increases in outstanding distress. Fasulo says the largest maturities, by dollar volume, and concentrated in the largest metros. But those areas have had the highest improvement in values, which makes exits from distressed more likely. “With values up, the challenge of refinancing is nowhere near as difficult as 2009 when values were 25 percent or lower,” Fasulo says. “It’s a different conversation. There’s a plethora of options available to troubled owners and lenders versus a couple of years ago because of the increase in values.”
Jubeen Vaghefi, a managing director at Jones Lang LaSalle and leader of the Chicago-based firm's multifamily practice, says that the availability of debt has made things “very liquid” in primary and secondary markets. “There have been fewer defaults and not nearly as much problem assets in situations with monetary defaults and maturities,” he says. “Financial institutions are finding great success in moving the loans.”
With the exception of CMBS, all lender groups also saw their distress decline in the first half of 2011. International banks made the most progress, clearing 78 percent of their apartment distress. But only about 33 percent of CMBS is worked out. In between are the government agencies, which have cleared about 51 percent of distress.
"The [Class] B and C product are still somewhat challenged,” Vaghefi says. “That’s the preponderance of what servicers have.”