The housing crisis has finally caught up with the multifamily sector, which faces a decline in new development and the value of rental income properties that will last until 2010, according to industry leaders speaking at the Multifamily Executive Conference in Las Vegas this week.
Through August, multifamily starts on buildings of 5 units or more were off by nearly 25 percent, as developers increasingly found it difficult to secure financing for new deals. Linwood Thompson, managing director of Marcus and Millichap, a major brokerage firm in the multifamily sector, predicted that even steeper declines would be in store for 2009. “This will be a good thing for the industry—in three years,” he said, referring to a likely increase in the value of existing apartment investments as demand for rental apartments grows, exceeding the supply.
At the moment, though, multifamily firms are cutting back on construction and development. “We have plenty of apartments in most major markets in America right now,” said Tom Bozzuto, chairman and CEO of The Bozzuto Group, a Greenbelt, Md.-based company that builds and operates apartment buildings in addition to building single-family homes. Bozzuto said that he had reduced his apartment development staff and was focused on the fee management business to drive growth for the next year.
“We’re going to cut starts dramatically,” said Ric Campo, chairman and CEO of Camden Property Trust, adding that he’ll probably stretch out the $1.5 billion worth of multifamily projects in the public company’s development pipeline. As developers restrict supply, this will create firmer pricing in the future, Campo predicted. “In 2010-2011, we’ll have an incredibly robust multifamily market.”
JPI East, a division of JPI, also recently slashed its development division in response to the credit crunch, according to an article in the Washington Business Journal.
“We probably wouldn’t have an over-built apartment market if it weren’t for condo conversions,” added Tom Toomey, the CEO of UDR, an apartment REIT based in Colorado. “By 2011, we’ll probably be talking about a shortage of apartments.”
Meanwhile, the credit crunch is negatively affecting deal flow and valuations in the multifamily market as buyers and sellers disagree over the value of apartment projects.
“Normally buyers and sellers disagree on price by 5 to 10 percent,” said Thompson, adding that the gap can typically be bridged. With the cost of debt financing going up 125 basis points to 200 basis points, and equity financing harder to come by, “all of a sudden you have a difference of 25 percent,” he said, adding that this has resulted in a 50 percent drop in transactions.
Sellers would rather hold on to their properties than sell them today for a discount. “The only reason that someone would sell today is that they are highly leveraged and have a gun at their head,” said Campo.
Toomey, whose company closed a $1.7 billion sale of 25,000 apartments this spring, said that the company will do little development in the year to come. Instead, the company will be concentrating on improved operations and improving the company’s green footprint. “We’re going to horde our cash, improve our position, and sit in 2009,” he said.
Toomey noted that the industry will undoubtedly face new players and rules in the banking sector next year, making it difficult to compare deal terms to those of years past. He suggested that developers not lament about the deals they used to get, but instead “take the deal you can get and move on.”
Boyce Thompson is editorial director of BUILDER magazine and Hanley Wood’s Multifamily Group.