Monday, November 29, 2010

Multifamily Sector Leads the Charge Back into the Investment Property Market; Buyer Confidence Rises By Leaps and Bounds; Market Hits Inflection Point: "Buy Now!"

We at Adner Realty Group have noted a strong uptick in multifamily investor interest in the past couple of months.

Up until this time, investor sentiment had been decidedly negative, with expectations being that the economy would worsen, cap rates would increase, inventory would improve, and seller distress would pervade the market.

The economy is doing no more than flat-lining, but with little apparent change in cap rates, inventory, or seller distress, investor activity has spiked, despite our being several years into the 'more of the same' market.

What is the cause of this change?  It could be buyer fatigue and impatience.  Loaded with cash, with no other attractive investments on the market, buyers are 'throwing in the towel' and accepting 5 and 6 caps (and on an exceptional day, for larger assets, 7 caps), rather than waiting for the mythical day when quality multifamily assets are trading at higher levels.

It could also be foresight that we are on the cusp of an economic recovery.  Unemployment and vacancy rates have leveled, and if market fundamentals are not deteriorating, then why not tiptoe into the market?

Lastly, it could be fear.  In a world of defaulting nations abroad and quantitative easing at home, bricks, mortar and fully rented assets in the always-in-demand Southern California region seems like an attractive place to sock away cash, especially when you can lever up to 75% of the purchase price.

Although our observations on the market are purely anecdotal, we've read press that supports our sentiment that investor confidence is on the rise.

Loopnet's Q3 2010 reports that investor activity has risen, with multifamily leading the charge:
In Q3, overall sales in Los Angeles increased 46% compared to the prior year. Over the last 12 months, the price per square foot for office property is down 1%, multifamily is up 10%, industrial is down 9% and retail is down 37%.
The multifamily sector in Los Angeles is the only sector to enjoy price increases, and a whopping 10%, at that.

The improving outlook in the multifamily sector has been echoed by Marcus & Millichap Real Estate Investment Services:
What a difference a year makes. Twelve months ago, real estate players with money in pocket were hesitant about making purchases, but now confidence is on the upswing and they have become increasingly acquisitive.

Approximately 55 percent of those surveyed for the report say the market is ripe for snapping up apartment properties, while only 32 percent believe now is the time to buy retail and 26 percent are keen on hotel and mixed-use assets.

The emergence of multifamily as the investor flavor of the year comes as no surprise to Marcus & Millichap. “Traditionally, you would expect apartments to see recovery first because the leases are short-term and as the economy picks up, people rent more; that has been the classic recovery pattern for many, many cycles."

While the apartment market is following typical patterns, there is one factor that is not so typical. “Not only did the market recover first, it recovered at breakneck speed.  It was the strongest upsurge pace we’ve seen in over 10 years.”
Has the market reached an inflection point?  We think it has.  Our advice to Sellers: consider which assets in your portfolio that you might want to exchange or cash out of now ... the Buyers are out and looking and you may be able to find superior multifamily investment alternatives on the market.  Our advice to Buyers: evaluate your cash reserves, and get ready to step up and make strong offers to acquire quality assets.  Now is the time, before the market heats up and any Buyer advantage is lost.