Multifamily Executives Bullish on Industry Forecast Mon, 2011-09-26
A year ago, the phrase “cautious optimism” was a popular forecast for 2011, a middle ground between the hangover of a nasty recession and the hope inspired by improving fundamentals. As values and access to capital continue to improve, however, multifamily professionals are starting to drop the caveat from that phrase. New developments seem to break ground every day; value-add deals are returning to vogue; and acquisition activity is heating up well in advance of the typical fourth-quarter busy season.
“We’re obviously bullish that we’re at the beginning of a development cycle, so we’re putting a lot of time, energy, and resources there,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential. “And the cap rate compression, coupled with better fundamentals, has made deep renovations feasible again.”
It’s no wonder, then, that Alliance has a development pipeline of around 5,000 units and expects to acquire about 2,500 units this year. And the company’s value-add business is growing as well: It’s currently working on a $45,000-per-unit rehab of a 40-year-old community in Rancho Palos Verdes, Calif., looking to move rents by $750 a door.
Alliance isn’t alone in its optimism. About 42 percent of multifamily firms are increasing their acquisition appetite, while another 36.5 percent plan to start more development projects over this coming year, according to a survey of 138 senior-level multifamily finance professionals conducted in August by Multifamily Executive’s sister magazine, Apartment Finance Today.
What the data—and interviews with active players in the industry—indicate is that multifamily firms are feeding their growing appetites for new construction and acquisitions more aggressively than at any point since the Great Recession. And the first order of business is to determine what their particular plans for the future entail.
A Rebound in Values
Like many firms, Alliance has been selectively selling off assets to help fuel its own ever-growing acquisition and development appetite. And it’s a great time to sell—the rebound in values has prompted many firms to reconsider their hold periods.
At the beginning of 2011, UDR wasn’t planning any dispositions for the year. Yet the REIT recently revised that forecast significantly. “Cap rates compressed much quicker than anybody expected, and it’s become the new norm,” says David Messenger, CFO of the Denver-based firm. “It hasn’t changed our acquisition strategy, but it’s one of the reasons we’re marketing between $400 million and $600 million [in asset sales].”
Indeed, the outlook for cap rates has many firms rethinking their strategy. This year, nearly 83 percent of respondents said they expect cap rates to stay flat or even start rising in 2012. Then again, 78 percent said the same thing in last year’s survey, and yet cap rates continued to compress. While forecasting is always difficult, seeing is believing, and many firms have been inspired to restart their development pipelines based on the ever-declining yields in the acquisition market. “The low cap rate environment is really driving people to development,” says Derek Ramsey, CFO of Charleston, S.C.–based Greystar. “And if cap rates stay relatively low, there’s a very wide spread between stabilized yields on cost and acquisition cap rates for core product. The formula for development is very favorable right now.”
Like UDR, Camden Property Trust has been one of the industry’s most active buyers over the past 12 months, closing on more than $700 million for 18 communities from July 2010 to July 2011. Though cap rates remain compressed, the rock-bottom yield on the benchmark 10-year Treasury has allowed many low cap rate deals to pencil out. “With interest rates as low as they’ve been, you can still acquire an asset in the mid–5 percent cap rate range, finance it with good agency debt, and get to a decent levered IRR,” says Dennis Steen, CFO of Houston-based Camden. “So the interest rate environment really helped us accelerate some acquisition activity.”
While the agencies remain the quote to beat, many private-sector lenders are growing more competitive. Last year, only 16 percent of survey respondents borrowed from either life insurance companies or conduit lenders. But more than twice that, 39 percent, expect to tap CMBS or life company debt over the next year.
The availability of equity capital has also improved. Nearly 60 percent of respondents believe equity capital is more available now than it was a year ago, and 65 percent expect the market to stay just as healthy, or even improve, in 2012.
Excerpt from the article written by Jerry Ascierto for the Semptember 2011 issue of Multifamily Executive Magazine. To view the original article in its entirety, click here. Back to article index