Yet toward the end of the year and into 2010, transactionactivity began to pick up. Driven by the availability of GSEfinancing, low interest rates and relatively good fundamentals inmost major markets, coupled with the need to place capital, buyersbegan to come into the market to snap up select properties. Theonly problem, at least in the final three months of last year, wasthat sellers were reluctant to give up their assets. Yet thisactually turned out to be a positive for the sector as fiercecompetition for the few quality properties that were put on theblock worked to drive prices up. CBRE notes that it seemed likevalues bottomed out in November 2009, when Moody's reported thefirst positive returns; Moody's originally estimated thatmultifamily prices would decline between 25% and 40% from the 2007peak. By the end of last year, cap rates for class A assets intop-tier markets even saw a bit of a decrease.

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While that did entice some sellers to put their assets up forsale, most are still holding tight to their properties, resultingin a significant imbalance between the demand for, and supply of,class A assets. "Private, public, domestic and foreign capitalalike have all identified US apartment properties as the best andsafest bet for the foreseeable future. Property operations in mostmarkets are stabilizing with a general belief that there will bereal rent increases in 2011 and significant rent increases insubsequent years," says Peter Donovan, senior managing director ofCBRE's multi-housing group here. "Cap rates for core multifamilyproperties have declined 75 to 150 basis points at a speed thatwould have been unthinkable a year ago."

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The wealth of capital versus a dearth of supply will most likelyexist for the balance of the year, he adds, and cap rates shouldcontinue to decrease modestly through the first half of this year.Once more product enters the market, cap rates should start torise, probably in the latter half.

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The lack of available properties is causing some would-be buyersto consider lesser-quality properties. "Investors will be able toseek better returns and less competition for class B productthrough the first part of 2010," says Donovan, leading to downwardpressure on cap rates for those properties, too.

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Yet class C product isn't garnering the same attention, mainlybecause tighter underwriting conditions make them difficult tofinance and investors don't see the upside potential in them. "Thevolume of class C transactions will likely remain small asinvestors looking for such opportunities are penciling in IRRs ofmore than 20%," he states.

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No matter the quality of property, the leading criterion forinvestors seeking apartment product will be a predictable incomestream. Both buyers and lenders "will use annualized 30-, 60- or90-day trailing revenue with 12 months of trailing expenses tocreate a stable, predictable NOI," in their underwriting, says theexecutive. This trend has even led investors to shy away fromvalue-add plays, since lenders are less willing to finance productthat is not currently cash flowing. While NOI for the first year isunderwritten close to existing figures, many players are expectingsomewhat significant rent growth from 2012 to 2014 in most majormarkets.

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Aside from core product, a good amount of investors are lookingat "unstable" product such as fractured condos or new deliveriesthat aren't fully leased. Even traditionally core buyers areconsidering some of the assets, as long as the location and priceare right. The good news for folks looking for deals is that 2010should increase the flow of distressed assets to the market,although it will be nowhere near the flood that was expected. "Thefive-year, ultra-aggressive CMBS loans that were placed during thebubble period in 2005 through 2007 will begin to come due thisyear," Donovan explains. That works out to some $29 billion offixed-rate CMBS maturities this year, a five-fold increase over2009. While borrowers holding class A and B product will be able toget workouts, class C properties will most likely end up on themarket as distressed offerings.

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Along that vein, many owners will have to make a decision toeither refinance their asset until values increase more, or sell itinto today's market. There are several factors to consider,including the direction of the economy, whether interest rates willremain low or rise, property fundamentals and competition fromother assets that are put up for sale. If interest rates rise, sowill cap rates, resulting in value declines. "Unfortunately, theproperty's NOI cannot increase enough to offset a significantincrease in cap rates or a sharp decline in the marketfundamentals," says Donovan.

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It certainly is a sellers' market, but some property owners willstill choose to hold onto their assets in the hopes thatfundamentals will improve and the investment market will be morefavorable in a few years. In these cases, it would be wise torefinance through Fannie Mae or Freddie Mac, especially if theowner intends to sell within five years. According to Donovan,"Having assumable and resizable financing on the property willhedge the possibility of rising cap rates and declining propertyvalues."

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