In its most recent report on apartment market trends, New York-based research firm Real Capital Analytics (RCA) said that the apartment sector has $20.3 billion in assets known to be in distress. Unfortunately, only $3.3 billion, or around 13 percent, have been resolved and turned into real estate owned (REO).

That doesn’t surprise Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O'Neill + Partners. “A lot of people talk about distress, and we’re all very excited for distress to trade,” he says. “This downturn is complex as far as financial structures, the securitization of the assets, and the different people involved in the capital stack. Unlike the early '90s, where you just had whole loans, the workout process today is much more difficult. There’s seemingly no incentive for people to sell assets.”

RCA said another $1.1 billion of distress was added in July, which is down from the $2 billion added monthly from December through March. “With the final resolution of so many situations being delayed, the expected wave of distressed property sales may not break at once but could fan out over an extended period of time,” the company said in the report.

Or it may not break at all in the form that many analysts expect, Goldfarb says. “The distress that everyone is hoping for will probably take some time to happen but will probably not happen in the size and scale that people hope,” he says. “Everyone is hoping for the same thing and the system isn’t up for a purging of the excess.”

And the assets that do come on the market seem to have a wide variety of private money and established operators chasing them. Just look at a deal bid on recently by Philadelphia-based Campus Apartment. COO Miles Orth says that deal was billed as “distressed.” “As a result of all of the interest and some money chasing the opportunity, the company able to secure the deal ended up buying it above the debt,” he says. “It goes from being a distressed deal to not distressed at all. The correct valuation is below the debt. There were so many funds chasing it that they ended up buying the deal at the inappropriate valuation.”

Some Hope

Because of extension and forbearance agreements keeping distressed assets on life support and blunting sales, only $795 million of apartment properties sold in July. That was a 44 percent decline compared to June. RCA says a 15 percent to 30 percent drop in activity between June and July is typical.

Even without distress sales, there are positive signs in the market. July did see what Real Capital called a “flood” of new product offerings. RCA says more than $1.3 billion in assets are currently under contract. And September holds promise because it is traditionally one of the biggest months for closings. 

Brokers see that as well. “The requests for packages, tours, and offers are all going,” says Scott Melnick, managing principal for the Transwestern Institutional Multifamily Group in Bethesda, Md.

The deals are larger, too. They average $24 million, compared to an average of $14 million on transactions that have already closed this year. Melnick thinks that since the market was flooded with smaller private buyers earlier in the year, sellers were only putting assets out that those kinds of buyers could afford. That’s changing. “Gradually, over the course of the year, the deals have gotten larger,” Melnick says. “Before, smaller was better.”

Those smaller deals have had an effect on the market, pulling per-unit prices down $80,000 this year, roughly a third off the prices at their peak. Cap rates have closed at 7 percent. “Stubbornly, cap rates for newly offered properties have failed to move significantly to the upside, hampering new deal activity,” Real Capital says. Rumors abound that heavy bidding activity have returned in certain markets when assets are appropriately priced.”