Apartment broker Mike Buhl sees a trio of trends that keep cleaving multifamily sales into two investment markets, one high and one low: Fire-sale pricing prevails at the bottom, where there is a lack of long-term financing for poor properties. Investment capital is flowing mainly to the top and the high performers. Investors who already have a stake here are buying from one extreme to the other. “There is still a big disconnect between the most desired and most troubled assets in the market,” said Buhl, whose Commercial Realty Resources Co. recently released its midyear apartment report.Comments
At the bottomSales of distressed assets made up 88 percent of transactions for pre-1980 properties the first six months of 2011, he said, “really weighing down the average for the earlier-vintage apartments.” Buhl pointed to two sales he handled, the 338-unit Overlake Apartments, 7920 NW 21 in Bethany, and 184-unit Whitby Court Apartments, 7525 Knight Lake Drive. The two sales accounted for 522 units at an average price per unit of $5,460. The average price for all eight pre-1980 sales was $6,592, he reported, which was just more than one-third of the average this time last year. He said he expects “a big rebound” in the average price for the older apartments in the second half of 2011 because so many distressed properties are selling.
At the topNewer properties and others that are performing well and nearly full are appreciating in value because sellers, seeing willing investors, are under no pressure to discount prices, he said. “The capital that is available today is flowing predominantly to top-quality properties with high occupancy rates,” Buhl said. The average price for 1980s apartments at midyear was $44,547 per unit, compared to $35,583 this time last year, on a total volume of $21.6 million, compared with $2.1 million the first half of 2010, he reported.
Repeat investors“The buyers who are actually closing the transactions are those with an already established presence in the market. This is especially true for those properties that are selling at a massive discount to replacement cost,” Buhl said. Two post-1990 properties sold in the first half of the year, the 216-unit Quail Landing Apartments, built in 2000 at 14200 N May Ave., for $73,100 per unit; and the 228-unit Renaissance in Norman Apartments, built in 1998 at 1600 Ann Branden in Norman, for $57,432.
Better returnsCapitalization rates for top-quality apartments are approaching 6 percent for the first time since 2008, said Andy Burnett of Sperry Van Ness/William T. Strange & Associates, who with his brother David Burnett handled the Quail Landing sale in April. That’s good for buyers. The cap rate is the initial return to the investor — annual net operating income as a percentage of the purchase price. “With favorable rent and occupancy trends projected, many buyers see a brighter income future ahead,” Andy Burnett said. Buhl said cap rates for the highest-quality properties “are about as good as they’re going to get” because of the interplay of pricing and mortgage interest rates.
Complementary rates“Top-quality properties are doing very well right now because interest rates on long-term debt remain at levels that are 150 to 200 basis points (1.5 to 2 percent) lower than the going-in capitalization rate,” he said. “When interest rates are at these historical lows, it really creates a win-win for this asset class: Sellers are achieving low capitalization rates on their valuations and buyers are getting low interest rates to justify those valuations. “This type of long-term financing is not available for transitional properties with lower occupancy and deferred maintenance, which creates the value separation in the asset classes.”