The condo boom? Busted. The credit crisis? Overblown. As real estate markets continue to adjust to recessionary conditions in the for-sale arena, business in multifamily rental properties is finally getting back to normal. Acquiring land is suddenly competitive again; due diligence periods are increasing; cap rate spreads are beginning to decompress across product lines; and buyers, sellers, and lenders alike are exercising more traditional levels of conservative scrutiny and pricing expectations when it comes to closing the deal.

“It's a healthy buying environment right now,” says Mark Wallace, senior vice president of acquisitions and dispositions for Highlands Ranch, Colo.-based UDR, which liquidated 2,710 units in September for $281 million at a blended 4.8 percent cap rate, exiting the Denver and Atlanta markets, where the company felt it had never developed the size necessary to take advantage of economies of scale. “There were a lot of people at the table for that deal,” Wallace says. “We had a double-digit group of people interested in the properties and I would characterize at least half a dozen of those buyers as highly qualified.”

Mill Creek in San Ramon, Calif., is typical of the high-barrier, luxury properties attracting buyers like UDR.
Mill Creek in San Ramon, Calif., is typical of the high-barrier, luxury properties attracting buyers like UDR.

Although multifamily market players are generally quick to characterize the effect of the subprime crash as exaggerated, they also acknowledge that, right now, cash is king, putting most highly leveraged buyers on the sideline. But even without those bidders, both one-off and portfolio sales are sure and steady. “My velocity is excellent,” says Kitty Wallace, senior vice president of Sperry Van Ness, an Irvine, Calif.-based multifamily and commercial real estate broker. “I had 14 deals rolling over the summer, and I only had two kick it.”

SPREADING OUT For Wallace and others actively engaged in the buying and selling of rental properties, the overall volume of deals crossing their desks has not changed much in the past several years. What has changed has been an increase in cap rate spreads—between 25 and 50 basis points across product lines—which offers buyers a discount on B and C class properties and portfolios. “We are still in a relatively slow transaction environment, but cap rate compression is over,” says Scott Derrick, chief investment officer for SCI, a Los Angeles-based fractional-deed and tenant-in-common firm.

“The return of the cap rate spreads—that's just healthy and a good sign that the markets are normalizing,” says Dan Goelz, partner of Capri Capital Partners, which recently closed on a $360 million deal for 2,607 units across 11 properties. The seller, Merrillville, Ind.-based Whiteco Residential, will continue management and leasing. Goelz is bullish on continued cap rate decompression, and says the market is giving Capri an “appetite” for deal making. “Where a B or C product is trading at a 50 basis point discount to A stuff, I think you'll probably see it back to 150 to 200.”

LET'S MAKE A DEAL Stabilization of the multifamily industry is increasingly noticeable in those markets that were the first to accelerate towards—and the first to fall from—the apex of for-sale activity. “For a while, that has been a national news story,” says Jim Silverwood, CEO of San Diego-based Affirmed Housing, an affordable and market rate apartment developer with some 1,500 units under management and another 400 in the pipeline. “But for those of us on the front lines, we've been adjusting to the drop-off in the condo market since the beginning of 2006. That story is a year-and-a-half old.”

For Affirmed, the epilogue to San Diego's condo chronicle has been access to better property deals, including Ten Fifty B, a downtown tower originally tapped by KB Homes as the future site of 184 luxury condos. Silverwood and his team are now turning the tower into 226 workforce apartments. The tower is slated to be the tallest affordable housing building in the state of California. Helping to fund construction is a $34 million loan from San Diego's downtown development agency.

“The lenders and the major financial institutions are clearly focused on multifamily rentals,” says Derrick of real estate's re-ante to the multifamily marketplace. “They think that with the lending slowdown, multifamily will fare better than most of the other asset classes, and I think they are right.”