Behringer Harvard is on a tear again. Between Aug. 3rd and Aug. 5th, the Dallas-based firm behind the Behringer Harvard Multifamily Fund I announced the acquisition of 853 units of core multifamily apartment stock across three assets in San Francisco, Houston, and Chicago. The spree comes as little surprise to market watchers who peg Behringer Harvard among the top apartment acquirers in the first half of 2010, a period which has seen significant growth in the dollar volume of apartment sales.
According to the Apartment Mid Year Review, a report issued in late July by New York-based Real Capital Analytics (RCA), second-quarter sales of apartment properties rose to $5 billion, bringing the total volume of 2010 sales to $9.6 billion, a 69.6 percent increase from the first half of 2009. The report ranks Behringer Harvard second only to New York-based REIT Equity Residential in dollar volume of 2010 acquisitions, and places the firm third behind Standard Portfolios and Rainbow Estates Group in terms of the raw number of deals completed.
View Multifamily Acquistions in the First Half of 2010 in a larger map
With Equity and Phoenix, Ariz.-based Alliance Residential as perhaps the lone standouts, RCA’s list of the top buyers in dollar volume and deal count largely represents a roster of new faces on the multifamily acquisition scene. For example, backed by a Chinese investment group, Standard Portfolios is represented in the United States by Houston-based law firm Pillsbury, and apart from a select group of brokers who maintain client confidentiality, the Brooklyn, N.Y.-based Rainbow Estates Group is extremely successful at flying under the radar. Even Behringer Harvard is largely backed with capital commitments from the Dutch pension fund PGGM.
“There’s no question there is new money, both foreign and domestic,” says Peter Donovan, senior managing director for the multi-housing group for New York-based global real estate brokerage and services firm CB Richard Ellis (CBRE). “Today’s buyers see multi-housing as defensive acquisition: They like the discount-to-replacement cost; they like having a hard asset; they like what they think is going to be a very stable cash flow. So we see some transactions at what appear to be aggressive numbers, but buyers in general are not looking at IRR (internal rates of return).”
Both Donovan and RCA Managing Director and Head of Global Research Dan Fasulo also point to high-net worth individuals as part of the new cast of buyers at the multifamily disposition table. “We have certainly seen the amount of high-net-worth bidders increase significantly,” Fasulo says. “I think that crowd has identified commercial property as a prime investment target versus other investment classes.”
According to the RCA report, distressed asset sales are not on the increase and currently account for just under 30 percent of all apartment sales, either by volume or number in the first half of the year. With distressed assets just as likely to be recapitalized as they are to hit the market, the prospect of opportunity buying in the multifamily asset class continues to dim. Restructurings and resolutions were up significantly, according to RCA, totaling $5.4 billion in the first half of the year, even as the total dollar volume of properties falling into distress saw a 34 percent decrease from the first half of 2009.
Comparatively, transaction activity for core Class A assets continues to remain highly competitive. “Pricing has tightened and most markets are witnessing improvements in occupancies, and I believe this is attracting a lot of credible buyers that may have shied away from the space as the recession gripped the broader economy,” says Behringer Harvard chief administrative officer Jason Mattox. “I believe the reported lower cap rate transactions in many of the major markets are motivating sellers to reconsider placing properties on the market that they may have been hesitant to move on previously. Sellers with and without distress are considering property sales in this more attractive environment, and a substantial increase in transaction volume could put pressure on cap rates, even as fundamentals improve and financing continues to be attractive.”
Still, apartment dispositions have been almost entirely restricted to one-off deals, with little portfolio action either in the market or in the works. Greensboro, N.C.-based Bell Partners, which purchased a $1.7 billion, 86-community portfolio from UDR in 2008, has been content with solo purchases as it deploys capital from its Bell Fund III. On Aug. 3rd, the company announced that it had acquired the 336-unit Brassfield Park Apartments in Greensboro, N.C., for $22.8 million, the fifth apartment acquisition made by the fund, which has capital available for acquiring another $150 million in acquisitions over the next six to nine months.
“The market is very competitive right now, and there are a lot of willing buyers and a shortage of high quality opportunities,” says Bell Partners vice president of investment services Joe Cannon. “A lot of portfolio sales are driven by institutional activity from the REITs and other large programmatic owners, and that is just quiet right now.”
Indeed, portfolio possibilities are likely to be a lagging indicator of multifamily sector and broader economic recovery even as apartment transaction volumes continue to improve. “I don’t think people have been confident in the market yet to bring a big portfolio out,” CBRE's Donovan says. “There are a select group of buyers who are interested, but we haven’t seen any sellers who are confident to bring a portfolio to market. It is still a recovering market. That is the height of confidence, when you bring something out like that, and we’re not there. We’re not there in real estate, we’re certainly not there in multi-housing yet.”
Additional reporting and cartography by Laura McKenzie