by Paul Braungart, President, Regional Capital Group
In the current commercial real estate market multifamily properties appear to be outperforming other income producing property types. Investors have targeted apartment projects for acquisition partly due the availability of funds for this sector of the marketplace. In the past 18 months there has been some downward pressure on property values as a result of a decrease in average rental rates and an increase in the vacancy rate across some markets. Many in the industry feel that from an economic standpoint, the worst is over for multifamily properties and that a small recovery has begun in this sector, but it may not be fully realized until 4th quarter of this year or until early 2011. Buyers and sellers appear to be motivated to work together to complete transactions.
Over the past year many markets have experienced a decrease in capitalization rates as the demand for higher quality projects among the larger players has heated up. Existing apartment properties have a distinct advantage over new projects due to the barriers to entry including a difficult and lengthy process of project approvals along with the challenge of finding construction financing.
With supply being somewhat constrained, it is expected that the children of baby boomers will have a major impact on the multifamily industry. As a result household demographics expect a substantial increase in new renters over the next 10 years which will contribute to the growth of the industry. Employment rates appear to be declining while new job creation has helped tremendously to improve this sector of the commercial real estate market. Those new to rental housing have exhibited more confidence in the economy and have helped the decline of vacancy rates. The housing market is still struggling and the lack of homebuyers contributes to the growth in multi-family occupancy rates. Declining housing starts, weak existing home sales, and difficulty in obtaining residential mortgages have also helped the rental housing market.
Although most of the commercial real estate markets are in flux, the multifamily arena continues to be a positive indicator that real estate capital is available in the market. The most active players are the agencies including FNMA, FHLMC, and HUD which are typically financing acquisitions or refinances. The life companies have also stepped back into the game with lower leverage loans, but have shown a steady stream of loan closings. The CMBS market has reappeared on a smaller scale as well as a number of bridge lenders, all capable of closing in a shorter period of time. Leverage, sponsorship, and performance are all critical factors when trying to secure financing in today’s market. Equity is also available for multifamily and student housing project types in proven markets. The interest rates are still very attractive and most of the commercial real estate closings in the market are for this sector.
Several of our clients and partners are looking to acquire new projects either performing or non-performing. RCG continues to be very active in all sectors of the multifamily marketplace as historically the firm has been a real estate opportunity fund manager participating in all pieces of the capital stack. RCG has expanded its services to coordinate the funding for both short and long term loans for borrowers and to really meet every financing need a borrower may have.