CB Richard Ellis Investors has emerged as one of the most active multifamily buyers this year, spending about $500 million, putting it behind only Behringer Harvard and Equity Residential.

Last month, the company closed on its largest acquisition to date with the purchase of The Resort at Pembroke Pines, an 85-acre, 1,520-unit community about 20 miles from Fort Lauderdale and Miami. The $193.5 million deal, executed through the company’s Strategic Partners U.S. Value Fund 5, was the largest apartment deal in South Florida in three years.

The multifamily arm of Los Angeles-based CB Richard Ellis Investors only opened its doors two years ago, when managing director Steve Zaleski was brought in to ramp up the company’s investment business. The firm has since invested about $1.5 billion between acquisitions and equity investments in new development through developer Wood Partners, in which it owns a majority interest.

Apartment Finance Today senior editor Jerry Ascierto recently sat down with Zaleski to talk about Pembroke Pines, his company's rise to the top of the buyers list, and his take on today’s acquisition market.

AFT: When did CB Richard Ellis Investors start focusing on multifamily?
ZALESKI: We started the multi-housing group in March 2008. I was hired to create a separate team to acquires and handle the management and disposition of multifamily assets for all of our clients. Prior to that, we had done a number of condo projects, but in terms of acquiring rental properties, we had done very little. It’s a small but growing part of our portfolio. Including our development commitments, we’ve invested around $1.5 billion.

AFT: And how much of that has been on multifamily acquisitions?
ZALESKI: Since April of 2009, we’re at around $850 million in terms of acquisitions. And the rest is equity that we’re putting through our Wood Partners development platform.

AFT: Tell me about The Resort at Pembroke Pines: What attracted you to that deal?
ZALESKI: Over the years, I’ve done a series of investments in Broward County, and South Florida has performed well going back to the early '90s, so it was a market we were tracking. I went down to take a look at Pembroke and found that the concessions in that market had gone from three months to a month in less than one year. So we recognized that the fundamentals of the market improved significantly, well in advance of what the general research is saying.

One of the advantages in having our investment in Wood Partners is that we a real-time replacement costs, in terms of ballparking expenses. And one thing that was attractive is that Pembroke Pines is 85 acres, and the buildings are in eight-unit blocks.

AFT: What did you determine replacement cost to be?
ZALESKI: We were close to $200,000 per unit, including land. But I don’t know how you price 85 acres there; I don’t know how you would ever control 85 acres in Broward County.

AFT: Do you plan to do much rehab work on Pembroke?
ZALESKI: All of the amenities and exteriors were redone after there was a small hurricane in 2006. And so, from a value-added perspective, it limits your risk because you don’t have to put a whole bunch of capital in the exteriors. We can focus our value-add on the interiors. We had a spread in rents between Resorts, and the next level of property, of up to $300, and we can go in and add significant value by rehabbing, renovating the interiors, and bringing those rents up maybe half of that. I think its B-plus, and we can get it to an A-minus.

AFT: You assumed a $120 million floating rate mortgage as part of the deal. Did that factor into the price?
ZALESKI: It was attractive financing, definitely. But I want to emphasize that we never let financing drive the decision-making. I always look at my unlevered return because being in the business as long as I have, interest rates go up and down, particularly floating rate, and we underwrote it very conservatively on the debt side.

But we’re in the business of buying quality assets in high barrier-to-entry infill locations. So we’re not in the business of financial engineering. If we can get extra yield above our target with financing, we’re certainly going to take advantage of that. But if I have a target yield of X, I’m not going to get to that target yield using financing; I’m going to get there based on the fundamentals of the property. And the financing is going to be X-plus. I learned that a long time ago, and that’s served me well over the years.

AFT: In general, do you expect cap rates to keep trending down?
ZALESKI: I think they’re leveling off right now. Cap rates are only one component of the valuation. So you hear about a 4.5 percent cap rate, but then let’s dig into that: Are you capping rents that are 60 percent of peak or 80 percent of peak? And what are you paying on a price-per-pound basis, and how does that compare to replacement cost? Can you build this property, particularly if you’re looking at core product? And I think that’s where it starts to balance out. You’ll see development come back into the market slowly over the next three to four years.

Eighteen months ago, you couldn’t sell land, and now you’re starting to see some land transactions, starting to see the pricing creep up a little bit. So we’re constantly triangulating around not just cap rates but replacement costs and peak pricing and vacancies and competition. What's my window before I’m going to see another 1,000 units in that particular market? In the high barrier-to-entry submarkets, you can get a pretty good handle on that.

AFT: Do you expect to see more distressed deals coming to market next year? Is the window of opportunity opening or closing next year?
ZALESKI: I think that you’re going to see a steady amount of opportunities as fundamentals improve. A lot of the properties we bought were from distressed sellers—they needed the cash, they were taking a small writedown. You’re seeing some of that, but I think that there’s enough capital in the market, and the fundamentals are improving, and there’s no real supply. \

I lived through the '90s recession, and we overbuilt the multi-housing market then. And we didn’t think it was going to come back. I can remember in 1992 sitting around an investment community table, with people talking about California not coming back until 2000. Because California had 8 percent unemployment, and they were the last to come out of the recession, and we were debating whether or not to invest in California. But California then had a 10-year run. It’s still a very difficult market to buy in. But that was a result of supply. And now we really haven’t had a job recovery but the fundamentals have improved dramatically and that’s a supply-side issue.

AFT: How did you know it was the right time to strike?
ZALESKI: Even in April '09, we wondered, is this the right time? There were not a lot of people active in the market at that time. At the beginning, we were able to buy core product at value-added pricing. Obviously, in retrospect you wished you bought two or three or four more buildings.