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Glimmers of Hope Emerge in the Multifamily Market - 12/01/09
By Jerry Ascierto

The third quarter was the strongest to date for the apartment transaction market this year, with the highest volume and largest deals.

Apartment transactions in September totaled more than $1.5 billion, nearly double the $830 million closed in August. Overall, sales were up 12 percent in the third quarter compared to the second quarter, with more than $3.5 billion in assets changing hands.

“I see all the ingredients brewing that activity is going to pick up significantly in the near future,” says Dan Fasulo, a managing director at New York-based Real Capital Analytics. “Sellers are becoming much more realistic, buyers are starting to feel a little more comfortable that a recovery is taking hold, and lenders are becoming a little more active.”

Fasulo noted that the number of sales valued at more than $40 million in the third quarter is nearly the same as had been achieved through the first six months of 2009. And that trend looks to continue in the fourth quarter. In one of the largest deals of the year, Equity Residential paid $100 million for the 326-unit Metropolitan at Pentagon Row in Arlington, Va., at the end of October. The property, built in 2004, is 95 percent occupied.

And the volume of distressed multifamily assets actually decreased in September. New outstanding apartment distress fell by 2 percent month-to-month due to increasing resolutions and REO, according to the research firm. In all, about $3.5 billion in apartment properties entered default, foreclosure, or bankruptcy.

While a new opportunity fund seems to close every day, the volume of distress hitting the streets certainly hasn’t met those expectations so far. “We’re still in the earlier innings of the distress cycle unfortunately,” Fasulo says. “But I think a lot of opportunity-focused investors or vulture investors are going to be disappointed.”

Another recent report, the National Multi Housing Council’s (NMHC) quarterly survey of apartment market conditions, also offers hope. The survey found that the availability of debt and equity capital has markedly improved in the last three months. And 45 percent of respondents said that the bid-ask gap has narrowed since the second quarter.

“There’s still a gap between the buy-sell spread, and that gap has kind of closed,” says David Cardwell, vice president of capital markets at the Washington, D.C.-based NMHC. “It hasn’t completely closed, but what I’m hearing is that institutional investors have come down from 15 to 18 percent return expectations to 10 to 12 percent today.”

Further good news is that transaction velocity in global markets has picked up, with China and Western Europe seeing a firming of prices. That bodes well for the United States, according to Real Capital Analytics

“When you’re talking about the $50 million-plus deals, it’s very much the same cast of characters around the world, whether it’s on the lending or investment side,” Fasulo says. “A Blackstone or Carlisle are all competing over the same prime assets around the world.”

And it’s not just the sales market that’s picking up. REIT AvalonBay recently announced that it would soon start construction on two new multifamily developments in the Northeast.

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