COVER STORY, SEPTEMBER 2011

MULTIFAMILY MATTERS
Multifamily market fundamentals show improvement.
Savannah Duncan

The 252-unit Reserve at Regency Park in Centreville, Virginia, was part of a seven property portfolio acquired by Starwood Capital Group and The Bainbridge Cos.

Throughout the Southeast, the multifamily market is making a strong recovery. Overall occupancy rates average in the 90 to 95 percent range, and a lack of new development is driving rent up. Because of the strength of Fannie Mae and Freddie Mac, steady lending for the multifamily market has caused sale volume to continue to climb.

“Properties on the ground are seeing better rents, higher occupancies and generally better traffic,” says Shelton Granade, senior vice president of CB Richard Ellis’ multi-housing group in Orlando, Florida.

Occupancy rates in the second quarter of this year increased in several areas in the Southeast. Larry Schedler, principle of New Orleans-based Larry Schedler & Associates says New Orleans as a whole currently has an approximately 91 percent occupancy rate, which is up 3 percent from the previous year. The highest occupancy rate in the city is 95 percent is in the historic center of New Orleans, the city’s central business district.

Schedler says the reason occupancy rates are higher in some sub-markets than others is because some of the areas that were damaged by Hurricane Katrina have still not properly been rebuilt. In Eastern New Orleans, one of the most heavily hit parts of the city, the multifamily market dropped from 7,000 units pre-Katrina to 4,000 units today. Additionally, it has taken a while for other types of commercial real estate properties, such as retail and healthcare, to return to the area, which Schedler believes needs to happen before the multifamily market picks up there.

“In Atlanta, the general trend away from home ownership, whether by choice or by necessity, is sustaining the apartment market,” says Marc Robinson, managing director of Southeast Apartment Partners’ Atlanta office.

Centennial Holdings purchased the 400-unit Fountains at Waterford Lake in Orlando, Florida, for $37 million in April.

The occupancy rate has risen slightly from 89.9 percent this time last year to 90.1 percent, according to Dale Henson Associates. Robinson says while the occupancy levels have not changed notably from mid-year last year to mid-year this year, there has been notable improvement that has come through reduced concessions in the market.

Another city where the dropping level of homeowners has raised apartment demand is Orlando, which currently has an occupancy rate of approximately 93 percent, Granade says. The strongest submarket is East Orange County with 5.7 percent vacancy in the second quarter of this year. 

“The home ownership rate dropped, so demand is up and new supply has been almost nothing,” Granade says.

One of the strongest multifamily markets in the country is in Washington, D.C., says Steve Weilbach, senior managing director and national head of multifamily for Cushman & Wakefield. Occupancy rates average about 95 percent in the Washington, D.C., area.

“Compared to last year, rents are up in all major submarkets,” Weilbach says. “Government spending drives renter demand, which in turn creates a need to supply, keeps rents and vacancies where they should be and makes Washington, D.C., a good investment market.”

The sales side of the multifamily market has been fairly active this year, with most transactions between ranging between $30 million to $60 million.

“The A and B assets are starting to trade very actively, based on increasing fundamentals improving revenue and perceived strength in the market,” Robinson says. “On the top end of the market, REITs and private capital are active buyers and on the lower end, it’s private buyers that are owners and operators purchasing distressed assets.”

In Atlanta, there have been a few large sales this year, including the $60.3 million sale of the 412-unit Windsor at Mount Vernon. Sales volume this year has already doubled the sale volume of last year. In 2010 through early August, sale volume was approximately $468 million, compared to $1.06 billion so far this year, according to Real Capital Analytics.

Granade says Orlando is also on track to surpass its sales from last year. Year-to-date, there has been approximately $370 million in apartment sales, which Granade projects will reach between $700 million to $800 million by year’s end, up from $640 million in 2010 and $219 million in 2009.

Buyers in Orlando are mostly private equity investors, but Granade says he has also seen an uptick in institutional interest, REIT and foreign buyer activity.

One of Orlando’s largest transactions so far this year was a purchase by an American company from a foreign seller. In March, Boston-based TA Associates purchased the 377-unit 55 West, a high-rise condominium building in the downtown area, from Dutch lender FFWO for $75 million. The second largest sale occurred in April when Atlanta-based Centennial Holdings purchased the 400-unit Fountains At Waterford Lake in Orlando for $37 million.

“[The multifamily market] is getting comparable to what we’d say is a normal year here, closer to 2003-2004 in terms of sales volume,” Granade says.

Schedler says buyers entering New Orleans are the ones who have been sitting on the sidelines, but are now ready to do business. He says value-add buyers are attracted to New Orleans because there are still some properties that haven’t been fully renovated after Hurricane Katrina.

“We have had situations where half of the units were renovated but the other half were not, so buyers see an opportunity to come in and make improvement to increase the stream of income,” he says.

The sales in New Orleans are slightly smaller, with the largest year-to-date being the $12.22 million sale of the 264-unit Stonebridge Manor Apartments in Gretna, Louisiana, purchased by a California Investment Group and financed by Fannie Mae.

Some of the largest transactions in the Southeast this year have occurred in Washington, D.C. Weilbach says all major types of buyers have displayed interest in multifamily products, with institutional advisors, REITs and life insurance companies active in the Class “A” sales and local, regional and private investors interested in Class “B” properties.

In June, Denver-based UDR closed on the acquisition of the 185-unit View 14 in Washington, D.C., for $105 million. In May, Starwood and Bainbridge purchased Equity Residential’s 1,600-unit portfolio for $287 million. In another portfolio sale, Dune Real Estate Partners and Pantzer Properties bought a portfolio of 2,580 units for $460 million.

One of the reasons the sales activity has been so robust this year is because of the accessibility of capital for multifamily properties.

“Part of the reason sales are occurring so actively is because of Fannie Mae, Freddie Mac and life insurance companies,” Robinson says. “They are aggressively financing at very attractive rates.”

Weilbach agrees the financing is readily available for multifamily products. “Interest rates are at an all-time low with 10-year financing still in the mid-4 percent range,” he says. “That’s as low as it’s ever been.”

However, Robinson says that while capital for acquisitions is plentiful, debt and equity for new developments is thin. “Even some of the biggest players in the market by reputation and history are still having a hard time getting deals put together on the financial side for new developments,” he says.

New Orleans has definitely seen a slow down in new development as a result of a slow down in government funding and its location. Following Hurricane Katrina, there was an abundance of redevelopment and new construction, which Schedler says was fueled by federal taxes and tax credits provided to developers to rebuild their properties.

“The only reason we saw the amount of construction we did was because of federal programs,” he says. “There are not as many out there now as there were before.”

Additionally, because New Orleans is surrounded by water, there is a limited amount of land available for new developments. Because of this, all 882 units that are slated for completion this year are in the metro parts of the city in the historic center and West St. Tammany.

“A cooling off period with regards to new construction will be positive because it will give us a chance to absorb new units,” Schedler says.

During the past 24 months, new development in Atlanta has been slowing down, which Robinson says is a positive thing because the supply constraint has driven high occupancy levels and improved revenue. According to Marcus & Millichap, only 1,800 units will be delivered in Atlanta this year, compared to 4,600 units last year.

“There’s not a whole lot of development activity now, however, there has been a notable increase of interest in doing deals during the last quarter,” Robinson says. “Developers are out in the marketplace, seeking land if they don’t already have it and shopping for debt and equity.”

Granade agrees interest levels for new construction are starting to rise. “There’s become more talk of new construction, so we’re seeing dialogue start in Orlando,” he says. “It will be 2013 before we see any real, sizable deliveries of new units.”

According to CB Richard Ellis’ Summer 2011 Orlando Multi-Housing Outlook, in 2009, 4,270 units were completed, which fell significantly to only 786 units last year. A projected 733 units are expected to come on-line this year, which Granade says are all time lows for Orlando. However, the number of units being delivered is estimated to rise to 1,586 in 2012 and continue rising in coming years.

The areas of interest to developers are East Orange County and Lake Nona because of some projects taking place there, including two large medical facilities. Also, developers have shown interest in where the SunRio Commuter Rail Train, which is expected to begin service in 2013, will have its stops.

Washington, D.C., saw some oversupply between 2005 and 2007, which has slowed new developments some. Marcus & Millichap’s Third Quarter 2011 Washington, D.C., Apartment Market Update, 2,100 units will be completed this year. Weilbach says 10,000 units are in the permitting process or under construction to come on-line between 2011 and 2013.

“That’s a large amount, but relative to the total stock in D.C., given where rents, vacancy rates and supply are, that will by no means crater the market,” he says. “It will probably meet demand and keep occupancy plus or minus 5 percent.”

Looking ahead, there’s a consensus that the next year will continue to see high occupancy rates and sales if employment rates rise and new development stays down.

“I anticipate continued current active sales volume, improvement in operations, a lowering of concessions and an increase in rent,” Robinson says.

Granade says the market is beginning to stabilize. “We are encouraged. It looks like Orlando will have good job growth moving forward and occupancy is up, so the supply and demand balance looks very good for us right now.”

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