Last October, Encino, Calif.-based Marcus & Millichap decided to launch Institutional Property Advisors (IPA), a brokerage group for institutional and sophisticated private multifamily investors. A year later, the move looks to be a good one. The multifamily transaction market has picked up in general in 2011, and Hessam Nadji, senior vice president and managing director at IPA, says Marcus & Millichap’s sales volume is up 80 percent with a pipeline going into next year that looks solid.
Nadji took some time to chat with Multifamily Executive senior editor Les Shaver about IPA's debut and what he’s seeing in the market:
MFE: What is IPA?
NADJI: We wanted to take a group of brokers who had experience in understanding how institutions work and really making them a separate brand and having them operate as a team in all of the major markets across the country. Institutions require a multi-market solution. When they think of a service provider, they like to be able to come to you with a broad national set of needs, whether it's information, valuations, portfolio analysis, and, of course, acquisition and dispositions.
So in order for us to send a message that we understand these things and we can distinguish between private clients and the institutional marketplace, we decided it was better to create a new subsidiary and call it something different. That’s where Institutional Property Advisors was born.
MFE: Are you seeing institutions broaden their interest in different markets and asset types?
NADJI: A little over a year ago, my prediction was that, by the middle of 2011, the risk appetite would go up. Instead of looking at [Class] A product in primary markets, institutions would look at stabilized [Class] B product, maybe some secondary markets, and maybe value-add investments. That’s what is happening now. The yields are so compressed in the [Class] A primary market category that when an institition sits down with us now, they’re very much into value-add and definitely looking at secondary markets, where it’s still best-of-class. They’re still staying away from tertiary markets. Tertiary markets are still really lagging.
MFE: What needs to happen for tertiary markets to generate more interest, in general?
NADJI: More risk appetite, but even that is limited. The tertiary markets, from both the lender and major buyer side, is not seeing improvement. We have to have much more robust economic growth for them to want to take a bet on tertiary markets.
MFE: What are you seeing with portfolio trades?
NADJI: Institutions are under a lot of pressure to acquire assets, and it’s a very, very competitive environment. There is a lot of interest in portfolio acquisitions. Some portfolios will be coming to market in the fall and into the fourth quarter. That’s definitely a major trend.
MFE: Are there new investors showing interest in multifamily?
NADJI: We’re definitely seeing the foreign investors show up in multifamily. We’re already beginning to see the trend of major institutional capital that was traditionally in office coming into apartments. If anything, there’s a little pushback on the apartment cap rates or there’s diversion of capital into quality industrial and office just because those cap rates are into the high 6's or low 7’s. The apartment cap rate for comparable product is in the low to mid-4’s.
MFE: What sort of shake-up have you seen as a result of the debt ceiling debate and the U.S. rating downgrade?
NADJI: I was monitoring the deals that we have closed this year. There are all kinds of buyers and sellers and all price traunches. We had very few deals fall out of contract and get delayed. We did have some buyers who decided not to pull the trigger on some large assets and didn’t go under contract right when the crisis happened because they were trying to figure out what it meant. Within the last week or so, they’ve come back around, and they’re executing on transactions. So I think there was a moment of pause in the market where everyone wondered what it meant. But very quickly we saw people get back to business.
MFE: So where does the smaller apartment owner fit in this puzzle? Where is their sweet spot?
NADJI: The private investor with more flexibility can take advantage of going out, not too far, from the core markets, getting a [Class] B or B-minus asset, and upgrading it to a B-plus in a good location without much improvement risk. It’s the best of both worlds. You’re still close to primary market, and you’re not going way out in the risk spectrum, but you can still knock down a pretty good yield and have long-term cash flows because the long-term projections for apartments are very favorable.