No one knows how 2010 will play out, but as we head into the new year, industry watchers are eyeing a number of big trends. Here are the top five predictions for the coming year.
1. THERE WILL BE AN IPO… OR TWO.
2010 could be the year of the IPO. Look at the trends. A number of private apartment owners bought at the wrong time and wrong price and are now carrying debt-laden portfolios. Non-existent job growth is putting even more pressure on those portfolios, especially those with near-term maturities. And in the past year, the public markets have been rewarding REITs. Add it all up, and it makes sense that we’ll see some of the much-awaited IPOs to recapitalize those properties in 2010.
"It's a way to take advantage of the fact that public values are at a premium to private values," says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O'Neill + Partners. "I think we'll start to see the IPOs of some of these privatized REITs, which offer investors existing platforms."
2. MORE DISTRESS WILL HIT THE MARKET. (AND NO, IT WON'T BE A FLOOD.)
The numbers indicate that more of the distressed assets sitting on bank books will trickle out in 2010. For instance, credit rating agency Realpoint just reported that multifamily has become the largest contributor to overall CMBS delinquency. While accounting for 1.23 percent of the CMBS universe, multifamily accounts for 26 percent of total delinquencies. And it could get worse: Realpoint expects delinquent CMBS to grow as much as 31 percent to 58 percent by mid-2010.
The question is, will the banks and special servicers continue to “extend and pretend” with these troubled borrowers or will they begin taking product back and looking for short sales? Even if the extension policies continue, some think that more of these problem assets will make it to market this year. “With a lot more assets on their balance sheet, will they continue to kick the can or will they take them over?” asks Doug Bibby, president of the Washington, D.C.-based National Multi Housing Council.
The answer to that question will, without a doubt, be one of the biggest stories in the apartment industry this year.
3. STARTS WILL STAY AT POST-WWII LEVELS.
It’s not necessarily a surprise that no one expects starts to increase in any meaningful way in 2010. It’s just that starts will remain so low (and demand could be so high), that the dearth of new construction has to be a story. The National Association of Home Builders projects that starts could drop to 74,000 units in 2010. That’s the lowest number on record since World War II.
The main issue thwarting new starts has been lack of financing. Outside of the FHA’s 221(d)(4) there’s little financing available. In some cases, developers see insurance companies showing more interest in developing; banks are at least talking about new projects; and even vulture funds are looking at the yields development could provide. Despite these trends, though, things are at a stalemate. Most people don’t expect construction to pick up until 2011 when sources of debt could finally see opportunity in some supply-constrained markets. Right now, the NAHB projects 132,000 starts in 2011, and that will be a story to watch as well. But not until next year.
4. EVERY MOVE BY THE GOVERNMENT REGARDING FANNIE AND FREDDIE WILL BE UNDER SCRUTINY.
Until the secondary markets come back (and there are signs that may be happening), there won’t be many financing opportunities for apartment owners outside of Fannie Mae and Freddie Mac. That means that if anything were to happen to limit the support given to these government entities, it wouldn’t just affect borrowers. It would have a huge impact on the valuations of existing deals.
That means that until other forms of financing start to ripen, it’s nearly impossible to overstate the power the two GSEs have on the industry. That's why every move the federal government makes to clarify, broaden, or limit its involvement with (and the operations of) Fannie and Freddie will be closely watched in 2010. “What happens to Fannie and Freddie over the next 12 to 24 months is the No. 1 issue facing our industry,” Bibby says.
5. THE INDUSTRY WILL FINALLY HIT THE BOTTOM.
After a horrid first quarter, 2009 saw some recovery in occupancies. The question for 2010 is this: Have we seen the bottom, or will we hit that point sometime in the next 12 months?
Right now, it seems most analysts feel safe projecting 2010 as “the bottom.” In a recent report, Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm, projected that rents should bottom out at where they were a decade ago and then begin improving in the third quarter before gaining “steam” in 2011 through 2015. Even with job growth remaining sluggish for the next couple of years, pent up demand could lead to more household formation, which would be great news for rental owners.
But that doesn’t guarantee that a recovery will also begin in 2010. For one thing, declining home prices could pull renters out of apartments in some cities. What's more, there’s no guarantee against further job losses, which would ultimately hurt rents.