From his Memphis, Tenn., office, Simon Wadsworth conjures the Oracle of Omaha when assessing the current environment.“Warren Buffet once said, ”˜Try to be fearful when others are greedy and greedy when others are fearful,'” says Wadsworth, CFO of Mid-America Apartment Communities. “That's the principle we're trying to follow.”

While the recession has pummeled many developers, it has also opened up expansion possibilities for some firms. Acquiring distressed sites is the most enticing opportunity—a new opportunity fund seems to close every day—but companies are also growing their property management divisions, and even pitching rehab services for bank-foreclosed properties.

“For smaller companies, there are going to be good chances to take your company to the next level,” says Wadsworth, who will step into retirement on Jan. 1, 2010, after deftly helping Mid-America retain steady metrics despite the current turmoil. Albert Campbell III, treasurer and executive vice president, will be taking over as CFO.

For many firms, the current environment bears parallels to the days of the Resolution Trust Corp. (RTC), the federal program that disposed of assets for failed Savings & Loan institutions nearly 20 years ago. But unlike the orderly RTC disposition pipeline, lenders are now amending and extending as much as they can, keeping the level of distressed assets on the block to a minimum. Those extensions will eventually run out, and firms eye the upcoming wave of distress as a once-in-a-generation chance to expand their portfolios at deep discounts.

“We're still a couple of quarters away before we really start to see distressed assets,” says Dennis Steen, CFO of Houston-based Camden Property Trust. “Right now, the banks are waiting for their balance sheets to recover before they go through their next round of write-offs.”

Like many multifamily players, Atlantabased Lane Co. is shifting resources into its acquisition division, recently luring industry vet Bill Stahlke out of retirement to serve as president of Lane Strategic Investment. The firm boasts a $250 million allocation of an opportunity fund backed by Philadelphiabased Lubert-Adler Partners—although only a few acquisition opportunities have presented themselves thus far.

“Nobody wants to pull the trigger. The bid/ask spread is still a bit wide,” says Derek Kahn, Lane's CFO. “As soon as the banks start foreclosing, you'll see more activity, but the opportunity funds don't want to take out the current equity players; they want to dig deeper into the capital stack.”

All told, however, these CFOs are confident that there are opportunities to be found, despite the recession. Here are three ways to find those silver linings.


In early 2008, Alliance Residential Co. began looking for distressed opportunities, mainly working their lender relationships to help find the best deals. Since then, the company has underwritten $3.4 billion worth of transactions but has only closed on two deals totaling $50 million.

On one failed, partially-constructed condo deal, Alliance bought the note at a discount from a senior lender, foreclosed on the property, and completed the remainder of the build. The deal, a 93-unit development called Broadstone Domain in Seattle, was closed in late May. “It was a result of our lending relationships,” says Jay Hiemenz, CFO of Phoenix-based Alliance. “They wanted the surety of close and to get it off their balance sheet.”

Beyond lender relationships, local developers can also identify some great deals by talking to the guys in the trenches. “Your subcontractors know the projects that are stressed,” Hiemenz says. “We've sourced a lot of opportunities talking to subs. They know the jobs that are stopped and that some of them may not have been paid on.”

Likewise, Mid-America is poised to play offense through the downturn. The firm recently established a $250 million acquisition fund, a joint venture with an affiliate of Thackeray Partners, which it expects to deploy over the next 18 months. The fund will target value-added deals on properties in the Sun Belt region, with expected returns of about 14 percent.

In late June, Mid-America bought the 232-unit Skyview Ranch in Gilbert, Ariz., near Phoenix, for about $75,000 per unit—a deep discount from the estimated value of $110,000 per unit. The complex, which came online in '07, was only 76 percent occupied. The seller, Fairfield Residential, approached Mid-America first, saying it would agree to the low price if the deal could close by the end of the second quarter. “The lender wanted his money back, and the owner was tired of feeding the property,” Wadsworth says. “[They] came to us knowing there wouldn't be a financing contingency, [and] we can move fast.”

Mid-America also flexed its balance sheet last fall when it purchased Village Oaks, a fractured condo deal in Tampa, Fla., for about $98,000 a unit. Only 19 of the deal's 235 units had been sold, and 17 of those had headed into default or were returned to the lender. The firm is in the process of buying the rest of the units back. “Those two deals are examples of the type of deals that we think are going to be coming,” Wadsworth says. “There's going to be much less competition when others are fearful or unable to get the financing.”

AvalonBay Communities also opened an opportunity fund in the second quarter and then purchased the Verona Apartments in Bellevue, Wash., in May. The $33.1 million deal represented a steep discount—45 percent below the company's estimated replacement cost of the community.

AvalonBay has looked at a few failed condo deals, but nothing had materialized as of late July. “There are so many people bidding on those opportunities, that they've become challenging,” says Thomas Sargeant, CFO of the Alexandria, Va.-based firm. “There's a lot of capital chasing the few opportunities that come to market.”


Still, for large REITs such as Mid- America and AvalonBay, their large balance sheets afford them the ability to seize such opportunities during the downturn. Smaller companies relying on Fannie Mae and Freddie Mac to provide critical liquidity may not be as lucky: The government-sponsored enterprises (GSEs) tend to shy away from fi- nancing transitional properties or stabilized properties in troubled markets.

As a result, many multifamily firms— without funds and with greatly reduced pipelines—are choosing to beef up other divisions to help drive revenue. The lowesthanging fruit seems to be found in property management. As lenders find their level of real estate owned (REO) expanding, and as owners focus on squeezing every last dime out of their existing portfolios, the property management divisions of most multifamily firms are solidly in demand.

Take Mark-Taylor Residential. After selling a large portfolio in June 2006, the Scottsdale, Ariz.-based firm held about 5,300 units. But when the capital markets slowed in '07, it shifted gears, concentrating instead on growing its operations business. Since then, Mark-Taylor has nearly doubled its portfolio, adding 5,000 units. “It's always been our M.O.—until the last year or so—to build and add value that way,” says Clay DeMara, Mark-Taylor's CFO. “But we can't make sense out of developing right now.”

All of the 10,300 units the company manages are in the Phoenix metro. And the company's ability to keep occupancies up in such a hard-hit market has opened up expansion opportunities. In July, one of Mark-Taylor's Phoenix clients approached the company and asked it to take over a portfolio in Portland, Ore. It did, opening an office and expanding its property management portfolio into the Pacific Northwest.

Mark-Taylor is also working its lender network to find management opportunities for REOs from regional banks, “where we can step in, add some value, and help the lender in the disposition,” DeMara says.

Other firms are doing the same. Take Atlanta-based Gables Residential, which manages 40,000 units, half for third-party owners. The firm's property management business has grown about 15 percent, or by 3,000 units, in the past year. Meanwhile, at Lane, its property management business is up 20 percent in the past year. At the height of the boom, that division accounted for half of Lane's revenue; today, it's 80 percent. “Next year, we're huddling around the property management company and anticipate growth there,” Kahn adds.


Gables also offers third-party construction services to select clients, which generates revenue and helps the firm retain talent in the slowdown, says Dawn Severt, Gables' CFO. Interestingly, that's a growing practice among many multifamily firms. Every multifamily company interviewed for this story had seen massive layoffs in their development divisions, but many are now selling their construction services.

At the height of the market in '05 and '06, Lane chose not to build for others. But its attitude has since changed. “Now, we're going out and pitching development and construction services,” Kahn says, adding that Lane sees particular opportunity in selling its services to lenders struggling with REO. “The banks don't want to be owners; they want someone to come in and help them understand what's going on.”

Alliance has been able to pick up some fee opportunities as well, by advising institutions on project feasibility and finding general contracting work. The company is also exploring providing services for the government's green initiatives. “It's being doled out pretty slowly, but we've picked up some work with municipalities,” Hiemenz says. “You've got to be responsive to where you see the [potential] opportunities.”

The Upside

CFOs say these distressed markets offer big opportunities.

Atlanta: 24%

South Florida: 23%

Southern California: 16%

Phoenix: 15%

Las Vegas: 6%

Ins and Outs

While 65% of firms stayed put in '09, a third changed their market holdings.

27% Entered markets in 2009 VS.

7% Exited markets in 2009

Editor's note: The charts in this special report show the results of an exclusive survey of AFT readers conducted in August 2009.

New Avenues

Alternative ways to help generate ancillary income in a tough economy.

MULTIFAMILY COMPANIES are getting creative in their drive to boost NOI.

One strategy employed today is the decision to pass utility costs on to residents or to resell cable. Over the past two years, Houston-based Camden Property Trust, for one, has rolled out Camden TV across its portfolio. The initiative resells bulk cable to its residents for big profits. “That's probably about $6 million annually,” says Dennis Steen, Camden's CFO.

Memphis, Tenn.-based Mid-America Apartment Communities has found ancillary revenue by installing cell phone towers on some of its high-rises. “If it can be tucked away in a corner, it's OK,” says Simon Wadsworth, the REIT's CFO. He estimates the towers bring in about $1,000 per month per property.

Additionally, both Camden and Mid-America have also sold gas rights at some of their Texas sites, allowing horizontal drilling from rigs invisible to the community. Leasing undeveloped land to be used as parking lots can also be a good source of revenue, helping to offset the carrying cost of land that would otherwise sit idle.

Since capital preservation is the name of the game these days, firms would do best to focus on playing defense first. “You've got to plan out your cash needs in advance, even if it costs you money,” Wadsworth says. “Once you've got the defense in line, set yourself up to play offense.”