Over the past six months, it has been hard enough for brokers to find a buyer and seller willing to agree on a sales price for an apartment property. But in this uncertain economy, even after they lock in the buyer and the price, things are far from closed. Brokers claim that skiddish lenders and uncertain fundamentals have doomed a number of deals as they near the finish line. Debbie Corson, a principal at Atlanta-based Apartment Realty Advisors says she’s also seen seasonal occupancy fluctuations and management changes spook lenders.
Mainly, however, the issue is declining fundamentals. “The lender will make a loan based on X amount of net rental income coming into the property,” Corson says. “Because the economy may be going one way, you may see sliding rents and sliding occupancies, and you’ve got these deals under contract, and the numbers are sliding. Lenders are saying, ‘I’m not going to loan what I’ve loaned in the first place,' while buyers are saying, ‘I can’t close because that requires more equity, and now my deal doesn’t work.’”
And with no hope for more equity and sellers holding the line on prices, that’s killed a lot of deals. In fact, sometimes, these changes can happen over the course of a single weekend.
“As the market deteriorates, it can deteriorate rather rapidly,” says Linwood Thompson, managing director of Marcus & Millichap's National Multi Housing Group. “How quickly can a one-month concession get into a submarket?”
Nick Ingle, director of capital markets for Phoenix, Ariz.-based Hendricks & Partners, has seen cap rates move very quickly. So quick, in fact, that a seller might not even know how bad things are. "In the first quarter and second quarter of this year, apartment operations were falling dramatically," he says. "Through a combination of concessions, rent reductions, and increasing vacancies, many deals were difficult to close. In fact, some buyers may have entered into a contract only to see the effective cap rate move up 200 basis points by closing due to this erosion of income."
But some deals have made it through this obstacle course. Corson recently closed a deal in Northern Kentucky where sudden concessions forced a dip in net rental income. It took a concerted effort to nurse that floundering deal over the finish line in May. “We were looking at rent rolls daily and managing move-ins and move-outs to see where we were going to be on the loan,” she says. “That’s not something we’ve had to deal with in the past.”
And both the buyer and seller have to be committed to making the deal work. “The two groups worked together to get the thing to closing,” she says. “You really have to have both a willing seller and a willing buyer. Both parties have to know about the conditions and be willing to work to with each other.”