With uncertain economic indicators, record-low interest rates, and a favorable supply-demand equation, apartment owners have a host of variables to consider as they manage their portfolios going forward.
Consider refinancing, for instance. In the past, an owner may have shied away from swallowing a pre-payment penalty and, instead, chose to sell. But with the threat of interest rates rising and rent growth over the next few years, holding with long-term fixed debt may make more sense.
"Do you sell because of the debt when there's opportunity for growth potential?," said Phil Lukowski, executive vice president and chief of asset management for Chicago-based Waterton Associates.
But managing your own assets was only one of the things that the panel at "The Right Mix: A Better Approach to Asset Management" session dealt with at the 2011 Multifamily Executive Conference. The owners on the panel also spent a lot of time talking about how they add properties to their portfolio.
Jim Ledbetter, president and CEO of Drucker & Falk, based in Newport News, Va., said his company has looked at moving to new markets and states, while Arlington, Va.-based REIT AvalonBay Communities is making an effort to add more B-level assets to its portfolio. "We allocate capital to the best-performing submarkets," said Sean Breslin, executive vice president of investments and asset management at AvalonBay.
Breslin says the company is seeing that deals are thinner on the West Coast where people are anticipating better growth. But overall pricing remains strong in AvalonBay's markets. "Multifamily is back at peak levels at this point," Breslin says.
Waterton recently moved into New York in search of diversification and returns, buying two properties. But generally, the company sticks in markets that it knows well. It looks to buy from sellers or developers who have loan maturity issues. "We look for distress situations," Lukowski said. "We look for things that may need management help and capital."
Distress is Not a Factor
But when it comes to distress, all three panelists said there is very little activity out there. "There's not a significant amount of distress out there," Breslin said.
Ledbetter agreed: "You're certainly not going to steal anything." In fact, Drucker & Falk is finding it harder to get deals in the B to C range that it favors. "It's getting more and more difficult to make money on the buy side," Ledbetter added.
And Ledbetter is concerned that there is only so much residents of those assets can pay, which could hold down valuation. "I have a concern that you will hit a ceiling and that will affect valuations," he said.
With the economic questions of the past couple of months, a couple of prominent research firms have lowered their expectations for rent growth in 2012. That could hurt buyers who bought on strong future rent growth projections. "If growth rates go down, values will go down," Lukowski says.
Rehab Deals to Grow
With competition stiff for new deals, redevelopment represented a stronger opportunity for all three panelists. AvalonBay is investing $100 million in redevelopment, as it also continues to develop. "We've been more active than most with existing assets," Breslin said.
Wateron has 40 properties in the redevelopment pipeline. And Lukowski sees a lot of redevelopment potential in new purchases as well. "After five or ten years, a lot of these properties are tired," Lukowski says.
For his portfolio, Ledbetter wonders if redevelopment will really yield the desired rental jump. "If we’re increasing rents to $50 or $100, it’s going to cause sticker shock," Ledbetter said.
