COVER STORY, FEBRUARY 2008

SLOW & STEADY, MARKET READY
Signs point to an even year the multifamily market.
Nick Margiasso

It was going to come to an end sooner or later.

Yes, although last year saw some of the highest highs of the last few years’ multifamily market explosion, it also saw the lowest low with the market falling off at the mercy of credit and loan restrictions. But all is certainly not lost. Many experts see 2008 as a solid year of rebuilding and moderated successes. It won’t be the best of times, but it certainly won’t be the worst, either. And that could be just what the multifamily market needs.

“Conventional wisdom in the real estate market is that this year is going to be the year of cleanup, and that 2009 is when were looking for a full recovery,” says David Tufts, president of The Marketing Directors' Atlanta office, a residential real estate company. “That’s not in all markets, but in most markets with volume like Florida that is the case. We are optimistic, though, that in some of our markets we are looking to have good things happen in 2008. It already feels like turnaround is happening in places like Sarasota. There are signs all over the board that things are looking better in a number of marketplaces of that kind. But places with large volume of properties that need to still sell, such as South Florida and Orlando, things will go a little slower.”

Multifamily lenders have a similar situation, if a more optimistic outlook.

Mark Gould, administrative vice president of New York-based M&T Bank is poised for a surprising outcome for 2008. Slow, steady and even a bit successful.

“I think volume banks like us will do a little better than last year,” Gould says. “The markets really froze up in the middle of last year, which cut into our volume. But borrowers and lenders have adjusted to the reality of that a little bit, so we think things will pick up more and more as the year goes on.”

Gould also pointed out how the difference between refinances and acquisitions could mean, well, all the difference for the multifamily market this year.

“There are fewer lenders in the market now, credit is tighter, but the rates right now are a bit better than they were in the later half of 2007,”  Gould says. “I think for borrowers, there’s still plenty of liquidity out there with places that have unrestricted capital. A lot of the refinances have already been done, so what will really drive the market is acquisition of properties, which will be a little less than recent years but still strong.”

Another key to the success of the multifamily market will rely simply, and specifically, on the developers themselves. Taking extra strides and putting the hard work in will hopefully be the edge for developers that will refuse to use the current and recent market situations as excuses.

Crosland, a top Southeastern developer, sees the light at the end of the not-so-lengthy tunnel.

New mixed-use developments like Crosland's Varela, a 345-unit development in Tampa, Fla., should see heavy interest in their multifamily components despite questions about the market.

“It’s about being concerned with the same things that we’re always focused on: bringing our very best to the very best properties we can find for the best project in Urban infill areas,” says Phil Smith, vice president, Florida apartments for Crosland. “It should always be that same bent no matter the market. You have to grow in the smartest ways possible with the highest quality product. We just signed a $200 million investment fund with Northwestern Mutual Life. It’s one of the highest endorsements a real estate development company can receive in any market, but especially with this current market. Not everyone is as fortunate as we are to have that kind of capital horsepower behind us.”

One state away, in Atlanta, Tufts echoes that sentiment.

“It’s a year of doing everything the best you can possibly do things,” Tufts says. “The tried and true of attraction become even more important. How you present your property, making sure it looks it best and present your unique sales proposition clearly in the marketplace. You have to be savvy on the Internet with placement. You have to use buyers as resources, because people sell people.”

Project holds, which have come to mean a failure or example of slowing for some, don’t necessarily stand as bad marks after all. These kinds of situations are always occurring, but certain market situations might make them read the wrong way. Such is the case in 2008.

“It has a lot to do with the economics not working,” Tufts says. “It can be a supply and demand issue, but also that the terms of the deal aren’t working anymore. Just because its not happening today doesn’t mean it won’t happen tomorrow. There are different holds. I’ve seen a potential condo site become rentals because the rental market in that particular place has become stronger, or vice versa.”

Specific successes could also come from smaller styles of investors. Tufts says first or second time home buyers could pick up the slack — not completely, of course — from the big time investors who have “left the building.” And, with multifamily markets staying on course in the wake of the much worse single-family housing situation, many properties will benefit from downtrodden single-family woes in shared markets.

“When you have a mortgage market causing major hurdles for qualification as it is now, I think that on some level it bodes well for multifamily developers,” Smith says. “In one scenario a couple of years ago you could get 95 to 100 percent financing, and in this current condition you can only get 75 to 85 percent financing. There is a significant equity investment required now that wasn’t before. That makes people more inclined to rent an apartment. You also have in the rapidly changing conditions of multifamily and insecurity about where prices are going to go, which might lead people to rent where they would have bought before. But the ill health of the single-family market shouldn’t justify investment in a multifamily development alone. But it is a factor.”

It’s just another factor in a market in which every little bit helps. Experts seem to agree that if everyone does the homework, the benefits and success in multifamily markets are there to be had still.

“Credit is generally a little tighter than it was last year, but it’s still not as tight as it was a few years before that,” Gould says. “There’s less interest-only loans, but attractive loans can still be had. Terms are still pretty good from a historic perspective, and companies like M&T are much more aggressive than we were just a few years ago.”

And, with that said, the trend of high-end or A+ multifamily properties is still full steam ahead. It’s these kinds of properties that just might bring the whole market into a new age of more triumph and less tribulation.

“We see people coming back from condo reversions looking for professionally managed, highly-amenitized places to live,” Smith says. “People have found out that those reverted rentals don’t offer the same things as A+ properties do. I think the well located, A+ mixed-use projects will be in the highest demand because of that. It’s about giving people as many options as they can get, but also goes back to the trend of environmental sensitivity. You can live in a high-end apartment, get all the amenities, get a cup of coffee and go to work and never walk to there car. That’s what the market is moving toward for the future.”

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