SHERMAN OAKS, CA-It is evident that many private equity funds are itching to pull the trigger and are buying distressed real estate, according to locally-based Robert Leveen, a senior vice president of Lee & Associates investment services group. Leveen was recently appointed to the company’s investment group to specialize in the acquisition and disposition of multifamily properties throughout Southern California.

GlobeSt.com What is the current state of the investment market as we wait for a real recovery—or a double dip?

Leveen: The investment market is seeing signs of life. There are many private equity funds formed solely for the purpose of acquiring distressed commercial real estate. It is evident that they are itching to pull the trigger and are buying. Their underwriting points to a recovering economy and the opportunity to add value to distressed property and dispose of it at a lower CAP rate. The national market is so vast, I cannot comment on what is occurring. In large coastal urban centers, where CRE is always at a premium, many seasoned investors look to other states for the right deal. Many California investors were buying in Arizona and Las Vegas for several years. Those markets overheated and with the onset of the recession, those areas took a huge hit. Then, several of my clients turned to Texas. That economy has better withstood the recession.  But, there are plenty of investors who went there and have lost their properties.

Recently, in Cincinnati, a 260-unit distressed property was not attracting the interest of local investors in the tri-state area. I brought in a Los Angeles-based investor in a 1033 exchange, who acquired it all cash at less than 50% of the outstanding debt. Although distressed as a result of defaulting on LIHTC bonds, the property had been stabilized by the receiver and was generating significant income. My client saw the benefit of long-term ownership of a lower income property, especially because it had been rehabbed by the prior owner. Assets like these are great to acquire as the rehabilitation costs were borne by the prior owner and the foreclosing lender. A buyer can acquire these types of assets at significant discounts, which were not available over the last few years. 

GlobeSt.com: You’ve helped dispose of some REO assets, but the apartment sector is coming back faster than other sectors. How do you think this will affect the MF assets coming out of REO now? 

Leveen: There is significant activity around any REO property. And, locally the apartment market velocity declined, but did not come to a screeching halt. In fact, I recently did a velocity study for Los Angeles County and looked at first quarter multifamily transactions for the last three years. The velocity declined 10.6% in 2008 from 2007; then 18.8% in 2009 from 2008; but increased 19.2% for the first quarter this year over 2009. We are far below where we were, but it appears we have turned the corner. Also, some lenders never left the financing market and that supported transactions. Moreover, what I have experienced in the Los Angeles area is that Buyers assume that the Lender is motivated to sell at any price. There is sufficient demand in the marketplace and although there are discounts, certain product will trade with multiple offers, and the discount is not as steep as many buyers would want.

Conversely, the two-unit to four-unit properties in low income areas of Los Angeles have declined dramatically in value. I have seen some of these properties trade in the last year at 35% of what the foreclosed owner had paid. At the height of the market, buyers were acquiring these assets with little or no money down with no documentation loans and that drove the prices up. Today, an investor needs at least 20% to 25% down payment and there is an oversupply of product and more is on the way. Many apartment investors switched to acquiring foreclosed SFRs that were dirt cheap, instead of apartment properties, whose values have not adjusted significantly. These investors have benefitted from end users who buy with FHA financing with 3.5% down payment and the recent federal and state tax credits that are bolstering the market. 

It’s also worth noting that the perception in the marketplace that we are at or near the bottom of the real estate cycle, especially in Southern California, is not well supported by the data we are seeing. Indications are that there will be more distressed property coming to market. There has been an increase in requests by lenders for price opinions on multifamily and there are still lenders and owners who are sitting on the fence.

I recently sold a small apartment property that was headed to the trustee sale, and we were able to market it and close within days of the sale, saving the seller from foreclosure. I think we will see more of these situations as attempts to work out loans fall apart. The economic fundamentals are still showing high unemployment and lack of hiring in the private sector. This curbs spending by consumers, and continues to erode the economy. Even with slow growth, we will need a few more years, before the private sector begins to significantly grow the economy. 

GlobeSt.com: Of the transactions that are happening, are you seeing a trend toward distressed purchases or are more well-positioned properties jumping out as more attractive investments? What trends are you seeing?

Leveen: It is clear that investors are back in the market. There will always be a desire to acquire quality assets. What motivates that buyer is different from the opportunistic investor chasing tertiary assets. Certain funds will only acquire class-A assets; that is their business plan. And even if it is distressed, they will pay a high price for the product and its location. They are buying it today at a discount from where it last traded and also based on how much debt recently encumbered the property. Only time will tell if these acquisitions prove profitable. 

Since the majority of business comes from lower income markets, it is more challenging today to sell a non-distressed asset, but we are getting these deals done. Most buyers want the best deal they can get. However, there are some that are more realistic and underwrite accordingly.  Currently, I have two properties in escrow that will trade at prices higher than they would have back in 2003-2004.