Optimism is making a comeback at the National Multi Housing Council’s Apartment Strategies Conference and Annual Meeting this week. For most owner/operators and investors in attendance, 2010 will likely still be a challenge. However, this year is also expected my many to be the bottom of the recession—a year to look ahead, renew your investment strategy (if you can), and prepare for a recovery that is expected to turn fundamentals around as early as 2011.
Although attendance figures for the annual event were not immediately available, NMHC reports that figures were “slightly ahead” of 2009 attendance, which topped out at 950 people.
At the end of the day, the investment outlook for 2010 and beyond was top of mind. Here’s a look at three key sentiments that dominated that conversation.
1. Prepare for renewed investment activity in coming years.
After a 2009 that saw little activity, particularly in the distress sector, where the lending sector’s extend-and-pretend policies usurped the flood of assets that many experts had predicted for the year. As a result, most firms are well-positioned, both operationally and from a capital perspective, to make 2010 a strong acquisition period.
Most lenders are requiring buyers to have significant skin in the game—not a problem considering the capital that was raised, yet not deployed, last year. “There is capital out there that proven investors, with access to investment opportunities, can attract,” says Eric Bolton, CEO of Memphis, Tenn.-based REIT Mid-America Apartment Communities. “But to access that capital and demonstrate the ability to capture new investment opportunities, you need to demonstrate an ability to underwrite and close quickly, without financing contingencies or other similar risks for the seller.”
Mark Alfieri, chief operating officer for multifamily at Behringer Harvard, agrees, and is also taking this year to further review his firm’s underwriting policies. “Have we underwritten too far? Today, with all the LRO pricing, you have to be careful,” Alfieri says. “Have you written the asset down accurately? Is the underwriting where it needs to be?”
Bolton will also be keeping a close watch on real estate taxes in the coming year. “In this difficult economic environment, a lot of municipalities are under pressure from declining tax revenues,” he says. “Projecting future real estate tax expense trends will be challenging, and we are spending a lot more time analyzing this particular line item in our underwriting and projections.”
2. Be realistic about the outlook for those investments.
In 2009, apartment investment markets bottomed out—and fundamentals significantly declined. But looking forward to 2010, investors are still searching for opportunities. Why? There is competition out there for REO deals and well-priced assets, particularly as the declining value of the U.S. dollar attracts foreign money.
At the Annual Meeting, Marcus & Millichap reported the results of its seventh annual Investor Sentiment Survey of nearly 1,500 investors. The majority of respondents indicated that they do not expect a recovery until 2011.
Despite this, the outlook for the apartment sector specifically is surprisingly positive. A quarter of respondents (24 percent) believe rents will rise in the apartment sector in the coming year. What’s more, they expect vacancy levels to decline in 2010 (the only product type where a decline is expected). And the predicted decline in effective rents of 1.4 percent in multifamily is significantly less of a decline than the 5-plus percent declines anticipated in retail, office, and other commercial spaces.
“We asked where investors would become aggressive buyers, and they said at an 8.25 percent cap rate on average for apartments. And that’s so far from where the market is treading now that it’s no wonder there are no transactions,” says Hessam Nadji, managing director of research services for Marcus & Millichap. “The volume of distressed properties is increasing fast, and everyone wants to buy distress, but they can’t due to lenders’ preference to extend and modify loans except for assets that have serious cash flow short-falls, busted conversions, and condo projects.”
And taking the time to make sure you have all of your fundamentals in order is the right thing to do, especially this year. “In the second half of 2010, the weight of the capital will really come through, but in the first half, it will be about treading water,” Nadji says.
3. Buy in the right markets—and avoid the weaker ones.
Simultaneously, Marcus & Millichap reported its 2010 National Apartment Report and National Apartment Index (NAI). Interestingly, this year’s rankings indicate that larger, high-barrier-to-entry markets are showing an uptick.
“In 2009, many of our historically tight markets fell off the index because job losses were so severe, pushing them to the bottom of our index,” Nadji explains. “Because job losses and rents have started to stabilize, those historically tight markets, such as San Francisco, New York City, and Los Angeles, have returned to the top of our list in 2010.”
In the NAI ranking of the 44 best markets in the country, Washington, D.C., San Diego and New York City round out the top three. Meanwhile, Atlanta, Las Vegas, and Jacksonville, Fla., are the three lowest-ranked markets nationwide.
At later sessions, owners and operators agreed that D.C. and San Diego metros were good markets with positive outlooks for fundamentals. San Francisco and Austin, Texas, were also named as good markets.
And while troubled markets such as Phoenix and Las Vegas continue to struggle, some markets that have had difficulties in the downturn, such as Orlando, Fla., may soon have some upsides.
“There’s a lot of doom and gloom here!” says Bob Faith, CEO of Greystar Real Estate Partners. “But I honestly think there’re opportunities in a lot of these markets. The rent fundamentals are the story to watch there. And I think there are some good long-term investment opportunities in these areas.”