Multifamily
sales creeping back as bargains aboundBy
Jan Buchholz Phoenix Business Journal 09.18.09
While
much of the commercial real estate market, both locally and
nationally, has been in lockdown since the global banking
collapse, the apartment segment is gaining momentum this
summer.
Things
were dead in 2008, said Brad Cooke, vice president of
multifamily investments at Colliers International in
Phoenix
. But so far this year, 18 transactions of apartment
communities with 100 or more units each have closed, and 10
more are under contract, he said.
“Our
market is moving,” said Cooke.
Bobby
Bull, managing director of investment sales for Transwestern,
expects the momentum to continue.
“Now
that we’ve had about 20 deals in the market and there’s
agency financing out there, we’ll see more sales in fourth
quarter and even more in 2010,” Bull said. “Multifamily is
going to be the preferred commercial real estate investment
vehicle going forward.”
Even
though apartments are selling at prices far below the high
marks of early 2007, buyers and sellers are lined up to do
business for several reasons.
Unlike
other commercial properties, multifamily investors have access
to financing through the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Mortgage Association
(Freddie Mac). Multifamily investment traffic also is moving
in part because of the nature of publicly traded real estate
investment trusts, or REITs, many of which own large apartment
portfolios.
Because
REITs by law are required to meet certain financial criteria
and pay dividends to shareholders, many of them have been
selling properties to increase equity and to position
themselves for a new round of buying. Another factor driving
apartment transactions is the growing cache of lender-owned
properties that banks want off their balance sheets after
taking them back at foreclosure auction.
One
such deal is the Wachovia portfolio, which included three
apartment complexes — one in Gilbert, one in
Mesa
and one in
Phoenix
. The properties were purchased by SJ Management of Seattle
using short-term loans from Wachovia Bank, now Wells Fargo.
Wachovia foreclosed on those notes and hired Eastdil Securites,
based in
New York
, to market the properties. Eastdil hired Transwestern to
handle the transaction locally.
“We
had 230 signed confidentiality agreements and 60 bidders,”
Bull said.
Cooke
represented one of the potential buyers. “We had a buyer
with deep family money from the East,” Cooke said.
Though
Cooke thought he had a strong offer, Transwestern and Eastdil
settled on a bid by HSL Properties of Tucson, which paid $40.5
million for the three apartment properties. Total time of the
deal: 180 days. Wachovia’s loan to SJ Management was for $81
million.
“HSL
did their appraisal before the call-for-offer date, which made
them even stronger,” said Bull, adding it was a sweet deal
for the buyer.
Banks
willing to sell distressed properties at much lower prices
will drive more activity, said Nick Ingle, director of capital
markets for Hendricks
& Partners in
Phoenix
.
“Asset
values have declined dramatically, allowing investors to
acquire properties at a low basis. Obviously that is extremely
attractive but not overly unique in a market governed by
foreclosure forces. What is unique is that apartment
properties are performing rather well relative to office and
retail properties,” he said.
Ingle
also cites the availability of Fannie Mae and Freddie Mac
money for greasing the transaction wheel.
MC
Cos. recently took advantage of Freddie Mac
financing and depressed market dynamics.
“We
believe when the market is down is the best time to buy,”
said Ken McElroy, principal of MC Cos. in
Scottsdale
.
A
year ago, when most commercial real estate investors were in a
panic, McElroy and partner Ross McCallister shifted into a
counter-market, aggressive mode, a strategy it has employed
for years. Though the company as it exists today was
formalized in 2001, the partners have been involved in real
estate development and investment since 1985.
In
2001, MC put most of its eggs in the condo-conversion basket.
“We
got out of that before the crash. Then we got into work force
housing. What we call work force housing really is something
that was very nice in the 1980s and is very well located but
needs some updating,” McElroy said.
That’s
why MC was interested in Wickertree, the 226-unit complex in
Phoenix
near
Loop
101 and Interstate 17 and north Valley employment centers.
Built in 1983, the complex had been owned since late 1997 by
Aimco, a Denver-based REIT.
Aimco
has been selling assets across the country in response to
lackluster stock performance this year. The company cited
declining occupancy rates and rents for a 48 percent drop in
funds for operations in second-quarter 2009 compared with the
same time period last year.
McElroy
said many other larger apartment REITs are selling assets in
inland markets in order to invest more heavily on the East and
West
Coasts
.
“There’s
some nice properties being marketed (here) now. Wickertree had
exactly what we were looking for,” he said.
MC
paid $9.5 million for Wickertree with a down payment of nearly
$2.4 million. The deal closed Aug. 24. With a 91 percent
occupancy rate at closing, “this was a cash-flow play for
us,” McElroy said.
The
company is looking for more good deals, and so are plenty of
others, Cooke said. “We have no problem finding buyers if
you have a good property that is priced right,” he said.
Largest Sale
2007 (the largest apartment deal ever in Arizona): Bascom
Portfolio
Sale Price: $428 million
Sale Date: June 2007
Properties: 12
Units: 5,178
Avg. Price Per Unit: $82,561
Avg. Grade of Property: Class B
Seller: Bascom Arizona
Seller Broker: Colliers International
Buyer: The Bethany Group, California
Buyer Broker: None
Largest Sale 2009: Wachovia REO Portfolio
Sale Price: $40.5 million
Sale Date: August 2009
Properties: 3
Units: 592
Avg. Price Per Unit: $68,412
Avg. Grade of Property: Class A
Seller: Wachovia (Wells Fargo)
Seller Broker: Transwestern, Eastdil
Buyer: HSL Properties, Tucson
Buyer Broker: None
Source: Colliers International
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