The apartment transaction market remains a tale of two cities—institutional players competing heavily on core assets, and smaller private local groups dominating in secondary and tertiary markets. And those two types of successful buyers share one critical trait—the ability to access capital when it’s needed, said panelists on the "Stiff Competition: Find Success in a World Dominated by New Money and Public Players" panel at the 2011 Multifamily Executive Conference.
“If you look at the strengths of the platforms of those who are successful buying multifamily assets today, first and foremost, it’s the strength of their capital,” said Steven Weilbach, senior managing director and national head of multifamily for New York-based Cushman & Wakefield. “It’s almost exclusively discretionary capital that can move very quickly.”
The cap rate compression that has occurred this year for core assets in major metros has certainly limited the playing field to the biggest of the big. After all, buying at a 4.5 percent cap rate isn’t for everybody. But many investors are finding success far away from the core—in the value-add space, on lesser quality or smaller assets, or in secondary and tertiary markets.
Many institutions focus on pre-qualified markets and clean assets, and shy away from anything that takes a lot of homework. Generally, institutional buyers don’t have the staff and resources to spend tremendous amounts of time underwriting any one property. Local knowledge combined with strong private-capital relationships can give the smaller investors a big leg up.
“A lot of things that institutional buyers will flag as negatives are negatives at the time, negatives in the general recognition of the market—but local buyers, who have been there longer, understand these trends better,” Weilbach said. “And the local buyers actually like to see some short-term negatives because it drives away the herd mentality.”
Opportunistic buyers see a lot of opportunity in taking on hairier deals that would scare away the more efficiently minded. For instance, Harbor Group International completed two portfolio deals this year, the first being a 2,500-unit, 8-property portfolio that was encumbered with 11 different loans, “none of which were anywhere near market terms—we had everything from lock out of the loans to hyper amortization structures,” said Matthew Jones, vice president at Norfolk, Va.-based Harbor. “We’ve been pursuing capital stack restructure-type deals."
Beyond having your capital lined up and targeting more research-intensive deals, panelists advised emphasizing your experience and track record when bidding—buyers often focus so much on the deal itself that they forget to effectively demonstrate their expertise.
“Many people have experience in real estate that they often don’t bring up in conversation, because they’re so focused on the asset at hand,” Weilbach said. “That may be less important than giving the seller comfort relative to your overall platform and experience.”