COVER STORY, NOVEMBER 2010

APARTMENTS ON THE UPSWING
Investors are seeking opportunities across the Southeast.
Jaime Lackey

Nationwide, multifamily is outperforming other sectors of commercial real estate. Across the Southeast, investors are competing for stable properties that show promise for rent growth as the overall economy improves.

“Interest rates and cap rates are at historically low levels,” says Patrick Dufour, vice president with the Tampa, Florida, office of Apartment Realty Advisors. “Investment sales activity is increasing significantly; however, the demand for multifamily product is exceeding the number of quality investment opportunities on the market.”

Who is competing for these limited investment opportunities? Primarily sophisticated private equity players, life companies, and pension funds.

The availability of financing plays a role in the improving multifamily market. “Fannie and Freddie still offer permanent financing, so the multifamily sector is seeing additional investment dollars because there is a lack of financing in other sectors,” says Marc Robinson, managing director with the Atlanta office of Southeast Apartment Partners.

“The liquidity in the marketplace is huge. Assets can change hands at a brisk pace because of the access to debt,” says David Feldman, regional manager of Marcus & Millichap’s D.C. office.

On the distressed side, some CMBS special servicers are electing to avoid foreclosure and sell through receivership in order to take advantage of existing debt, Robinson notes. This increases the number of potential buyers that are in a position to close a transaction and can allow a slight upward movement on the value of a distressed property.

Washington, D.C.

D.C. is probably the healthiest multifamily market in the nation, according to Feldman.

“We’ve had employment growth in both private and public sectors, which has kept D.C. insulated from factors plaguing other markets,” he says. “In fact, D.C. has added 64,000 jobs in 2010.”

Everything related to the D.C. multifamily market is improving. Since the beginning of 2010, rents have increased 2.5 percent to $1,365. Vacancy has dropped 40 basis points — to 5.9 percent — in the same timeframe. There has been an increase in the number of transactions in the market, as well as the number of offers on each apartment property brought to market. “We are smothered with offers; we are seeing eight to 12 per deal,” Feldman notes.

According to Feldman, D.C. apartment values have not reached the peaks seen in 2006 and 2007. However, the market is posting its highest numbers in the last 30 months, and those numbers continue to climb.

D.C. is seeing very few distressed properties. Feldman says, “D.C. is a safe market for investors. The apartments remain full. Rents are comfortable with the ability to grow.”

Atlanta

The 337-unit AMLI Old Fourth Ward, located in Atlanta, sold for $45.5 million this summer.

Atlanta’s multifamily market is sharply divided. There is demand for stable, well-located, quality assets that can be financed with agency debt, but there is notably less interest in C and D properties.

“There is significant demand for core assets in premier locations, like Buckhead, Midtown, and North Fulton,” says Robinson.

For these high quality properties, cap rates are in the 5.5 to 6 percent range. “This is what we saw at the peak of the market in 2006,” Robinson notes. “While cap rates are aggressive, values are not quite as high as they were at the peak because of some net operating income erosion.”

Rents in A properties average 95 cents to $1.04 per square foot, down from $1.15 to $1.20 per square foot in 2008.   “There has been a burn off of concessions, but it may be a few years before we see notable improvement in rent,” Robinson predicts.

On the other end of the spectrum, he says, “Distressed properties are seeing values at levels equal to or less than those seen in the early 1990s, during the savings & loan crisis and the [Resolution Trust Corporation] days. We have not seen any upward movement, but it does seem that we are at the lowest point.”

Tampa, Florida

Vacancies are down and effective rents are up in Tampa. According to the second quarter 2010 REIS Apartment Asset Advisor report, there are approximately 151,030 units in the market. At mid-year, effective rents averaged $781 (up from a low of $773 in 2009) while the vacancy rate dropped to 9.7 percent (down from the peak of 10.7 percent, reached at the end of 2009).

“Renter demand is increasing, new supply is still limited, and Tampa is starting to see job growth,” Dufour adds. Furthermore, he reports that the excess supply of condos has been absorbed so the condo market is not overshadowing the Tampa apartment market like it did 2 years ago.

“Property performance is picking up. With a continued lack of new development and job growth as the economy recovers, we should continue to see improvement,” Dufour says.

Although development is limited, significant projects in the pipeline include Fusion 1560, a 320-unit project in downtown St. Petersburg. Zaremba Group is currently pre-leasing the project. Garrison Developer Group of Florida is developing The Preserve at Alafia, which totals 351 units, in Riverview.

Charlotte, North Carolina

While many multifamily owners have lost equity in their properties in the last 2 years, property owners in Charlotte are seeing tremendous improvement in fundamentals in 2010. According to Smith, vacancy dropped from 13 percent in February 2010 to 11 percent in August 2010. After declining 5 percent over the past year, average rents in Charlotte have stabilized at $725 with an anticipated 2 to 3 percent increase over the next year.

“Approximately 5,700 units have been absorbed this year — out of a total of 120,000 units in the market. We only need to see another 2,000 units absorbed for vacancy to drop below 10 percent,” Smith adds.

There has been almost no investment activity in Charlotte’s multifamily sector. Smith notes that large institutional owners control 75 percent of the area’s units. “We are just now starting to see Class A properties become available. There have been very few foreclosures; B and C properties have been dealing with equity problems without foreclosure.”

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.