While the transaction market is slowly starting to pick up, multifamily financiers continue to struggle to define value and get a handle on the strength of local markets.

Cap rates of recent sales is a key metric in assessing local value, yet that value is tough to come by in the absence of trades. And even when a recent sale results in a given cap rate, that cap rate often can’t be taken at face value, said panelists at the 2010 Apartment Finance Today Conference.

“You’ve got to be more careful in your evaluation because you can’t just divide NOI by sales price anymore; the numbers sometimes don’t make sense” said Brian Salyards, vice president of Boston-based Deutsche Bank Berkshire Mortgage. “There are little to no transactions in certain markets, but you still have to use a standard investment approach and look at price-per-door and replacement costs.”

Debt and equity providers trying to underwrite new deals say that you have to drill down deeper, especially on distress deals where the seller may provide the financing.

“I’ve seen a lot of secondary and tertiary market activity where an institutional investor takes over and sells the property with seller financing, with terms much lower than the terms of cost that you’d find anywhere else, and higher leverage,” said Dave Valger, director for New York City-based RCG Longview. “Therefore the cap rates adjust. So at the end of the day, there’s a story behind it, and it’s not really appropriate to just look at cap rates.”

But a more inscrutable issue is the shadow market of single-family rentals. Many financiers admit that reliable data on this segment is nearly impossible to come by. Yet nearly ever lender is requiring a shadow-market analysis before it gets comfortable with a deal.
“That information is not easy to get your hands on, but you have to look at every bit of evidence you can get,” said John Fenoglio, senior vice president with Charlotte, N.C-based Grandbridge Real Estate Capital. “Sometimes it’s more a perception than reality. It’s not like just ordering a Reis report.”

Often times, it’s a case of looking at single-family market data and extrapolating a range as to the number possibly being rented. “You can look at the trends on how much inventory is in place, how long the stuff has been there, what does that look like compared to last year, and is it getting absorbed?” Fenoglio said.

RCG Longview has come up with a strategy to zero in on the condo market, particularly when trying to underwrite condo deals. “One thing we’ve been successful with is identifying the top six brokers in the market, getting what each and every one of them tells you they think the inventory is, and then trying to use third-party research to the extent it’s available to make certain that you’re keeping trends in check,” Valger said.

For instance, if you were looking at Las Vegas two quarters ago, it might have appeared that transactions were picking up. “But they were short sales, so you have to take out some of those factors,” when assessing the market, Valger said.

This wrangling over value may cause many out-of-market investors to pull their hair out. But it’s given an edge to buyers who drive past that target asset every day. “It probably creates the most opportunity for those looking locally, who know the product, know the fundamentals, and know the local market really well,” said David Rifkind, a principal with Los Angeles-based George Smith Partners.