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Are the Bulls Still Running the Market?

By March 20, 2014No Comments

In 2010, a trio of executives from Marcus & Millichap Real Estate Investment Services Inc. delivered a special presentation, “US Economic, Capital Markets and Apartment Market Overview and Outlook,” in which they said that the multifamily industry was heading for its next bull run. Zeroing in on the investment market for multifamily was Linwood Thompson, senior vice president of Marcus & Millichap and director of its National Multi Housing Group, who said that the market was divided into two camps: those who believe in the inherent long term investment value of apartments, and those who believe in the short-term transactional value (i.e. the bulls). He noted that the ranks of the former were rising while the latter group was decreasing.

So the million-dollar question today is: Are the bulls still running the multifamily market?

According to Los Angeles-based Gary Tenzer, principal and managing director of George Smith Partners, multifamily was a significant portion of his firm’s financing business last year. And he predicts that 2014 will bring a similar deal volume in the sector. “As capital availability and rates continue to strengthen, we anticipate that the multifamily market will continue to demonstrate strength.”

Irvine, CA-based Passco Cos. LLC’s Gary Goodman says the bulls still control the market by bidding up prices to historically high levels. However, the SVP says that in many cases, they overpay for properties that in a more normal market would not command those high prices.

“This overbidding is prevalent in the value-add sector of the market, which generally accounts for 75% to 80% of today’s multifamily acquisitions,” he tells Real Estate Forum. “Many investors and sponsors are focused on acquisitions that will produce a large gain in the residual value of a property, as opposed to cash flow generated throughout the holding period.”

Specifically, he says, many buyers are paying sellers for the upside value before it is added by the new owner. “This is particularly obvious in the primary or gateway markets where investor interest is the most competitive.”

Much of the overbidding that Goodman sees in primary markets is taking place on older multifamily assets in original condition. Many investors and sponsors, he says, would prefer to acquire an original property as opposed to one that has undergone some renovations because the more original the property, the more opportunity there is to improve it to enhance its residual value.

“In short, the bulls pay more for properties in worse condition,” says Goodman. That approach, he says, is risky because the planned profit of a value-add deal is typically based on a dramatic increase in rents – which may or may not be achievable.” If all goes as planned, he says the returns can be high. However, if the projected rent growth is unattainable, the investor can be stuck with an older property that requires a great deal of capital just to maintain.

Goodman adds, “Much like the risk of development projects, if the market takes a sudden change due to an increase in interest rates or other unforseen factors, the sponsor/investor may not be able to sell the property for a profit and, in many cases, as we saw in the recent recession, will have to sell it for a loss or lose it to a lender.”

Scott Chaplan, executive chair of L.A.-based Urban Group of Cos. points out that the multifamily sector remains on fire. “A fund we manage acquired a multifamily building in Los Angeles approximately a year ago for $300,000 less than we sold it for a few years before. We are contemplating listing the property for sale at $400,000 more than our recent purchase price,” he tells Forum. “While we performed standard upgrades, strong economic indicators, asset-allocation strategies for high net worth and institutional investors, tax-advantaged structures, low vacancies and of course, historically low cost of funds continue to drive the prices up; 2014 will see continued growth in this sector.”

There remains an abundance of capital in the market, Chaplan adds. “By way of example, funds like those managed by Blackstone have invested several billion dollars in the Southern California distressed residential market,” he says. “Our opportunity funds have shifted to higher-end product to enjoy decreased competition, similar margins and higher absolute dollar returns.”

Like all industries, real estate will always house a vibrant market sector, explains Chaplan. “The predicates like location, product type, financial architecture and structure will always evolve.”

JLL capital markets international director Jubeen Vaghefi tells Forum that there is still a plentiful supply of equity capital pursuing a meager supply of investment opportunities. “On the hells of the economic recovery, there’s not enough multifamily product to satisfy demand,” says Vaghefi. “Investors are going outside of the core markets, following yield as prices hit peak levels.”

According to Vaghefi, “We are absolutely back to peak pricing, and, in some markets, surpassing peaks. While dollars continue to flow into other asset classes, multifamily is still the belle of the ball and will continue to be such for the forseeable future.”

And according to a special research report on the CRE Investment Outlook from Marcus & Millichap, apartments garner the most favorable sentiment, both in terms of value creation and whether now is the time to buy more. Apartments have already recorded significant rent growth over the past three years, and even with the pipeline of new construction growing, there appears to be a good balance between supply and demand in most markets. “Investors feel pretty comfortable that rent growth will continue in apartments, even if that growth occurs at a slower pace,” says John Sebree, national director of the national multihousing group at the firm.


Prices in “certain markets” have been pushed up to high levels, notes Paul Keller, founding principal and CEO of Mack Urban. “The capital market remains very efficient; locations with solidy progressive job growth, quality assets, along with historic low capital costs see high values.”

But not all locations are alike. According to Keller, the “running” up of prices is more like a “walk,” except in markets such as New York City, San Francisco and Seattle. “We cannot forget to look at job quality and not just formation,” points out Keller. “Good jobs must be accumulative to an economy (not a drag on an economy).”

TruAmerica Multifamily, for example, is eyeing apartment properties for acquisition in two strong Western markets: Seattle and the Silicon Valley, Bob Hart, founder, president and CEO of the firm, recently told sister publication The company is focusing on markets that have strong workforce housing potential.

The Los Angeles-based real estate investment firm recently acquired Arcadia Luxury Townhomes, a 309-unit apartment complex in Federal Way, WA (a Seattle submarket), for $54 million from a firm Hart now identifies as Cornerstone Advisors/Legacy Partners. The acquisition follows the buyer’s recent $38.3 million purchase of the Vineyards in Gilroy, CA.

“Federal Way is a very good market for workforce housing,” Hart told “There’s not a lot of new construction there, but there’s strong demand, and there’s good proximity to jobs in Seattle. It’s 30 minutes from the major metro part of Seattle, there are rapid bus lines and freeways and good-quality affordable housing [is needed there].”

In the past, Federal Way was a strong area for multifamily, particularly in the Campus Drive area, Hart added. The region brings in a nice, steady flow of renters, and when he was CEO of Kennedy Wilson, the firm owned many properties there.

Now, TruAmerica is buying two other assets in this market: a 190-unit multifamily called Westhaven and another called Holland, both in West Seattle. Holland will require moderate rehab and is more urban, located closer to the Seattle CBD than the other properties TruAmerica has purchased recently. “We like that area,” says Hart. “It’s growing and an urban-renewal area.”

Other areas of multifamily investment interest on TruAmerica’s horizon are Denver and San Diego. “It’s all about jobs and transportation-centric right now, as well as affordable rents. We focus on class-B and workforce housing, and we look for areas where we can make improvements and still grow rents.”

One emerging phenomenon about apartment location is that there has been a shift in perception: former secondary markets are now being viewed as primary, according to GSP’s Tenzer. “For example, Seattle, which was once considered a secondary market, is now seen as major gateway city. Other examples include Atlanta, San Antonion and Phoenix. Today, these ‘newly classified’ primary markets are garnering much of the same attention from big players as traditional major markets.”

Still, certain markets always seem to land on their feet. Urban Group’s Chaplan says that Northern California continues to boom, driven in part by the robust direct and indirect jobs created in the tech sector and the infill density. Similarly, the Pacific Northwest, he says, where his firm recently closed a transaction, remains a seller’s market with no end in sight. The Central Coast of California, another strong investment area, has seen a resurgence in all product types from land and single family residential to apartments and commercial, he says.

Also, according to a recent San Francisco multifamily repot from Marcus & Millichap, investors remain keen on the San Francisco apartment market, which resulted in an 8% rise in trasaction velocity during the past 12 months. The largest jump occured in the class-B segment where deal flow increased by more than 75%. According to the report, the median sales price rose 16% during the period to $250,000 per unit as intense buyer demand pushed up valuations. Mid-tier apartments transacted at a median a sale price of $229,700 per unit.

And over in New Jersey, as reported, it was an especially crisp fall for multifamily building sales in northern New Jersey according to Gebroe-Hammer Assoc., which closed a record 27 sales totaling $135.85 million in October and November. “The volume is indicative of how attractive multifamily investment properties are, with demand currently at a peak,” says Ken Uranowitz, president.

According to a recent Emerging Trends in Real Estate 2014 report from ULI and PWC, Austin, and Dallas/Fort Worth remain markets to watch in 2014. According to the report, “The Dallas/Fort Worth economy will continue to benefit from high concentrations of technology, corporate headquarters operations, excellent distribution infrastructure, and above-average population gains. Dallas/Fort Worth remains attractive to employers and employees alike due to its highly competitive cost of living and doing business.”


On the West Coast, the bulls are still running in both L.A. and Orange counties, says Bernards SVP Dave Cavecche. “There is evidence of this in that Orange County’s unemployment has drastically fallen to the lowest unemployment the county has seen since the start of the recession in 2008,” he says. “Los Angeles County is not far behind and added 67,000 jobs last year.”

As a consequence, he adds, “developers are moving full speed ahead with the multifamily mania activity with no slowdown in the foreseeable future.”

Rebounding markets provide new opportunity, according to Tenzer. He says that markets such as Las Vegas and Phoenix, which were hit particularly hard during the recession, are now steadily rebounding, especially as employment also rebounds. “While primary markets become increasingly crowded, some large multifamily investors are beginning to look to these markets for the next big opportunity.”

But Tenzer stresses that employment remains essential. “Markets that are not doing well often have one factor in common: employment. Employment has always been, and will continue to be, a fundamental driver in real estate. Without strong employment, the demand for real estate, especially housing, will be simply nonexistent.”

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