SHERMAN OAKS, CA-It is evident that many private equity fundsare itching to pull the trigger and are buying distressed realestate, according to locally-based Robert Leveen, a senior vicepresident of Lee & Associates investment services group. Leveenwas recently appointed to the company’s investment group tospecialize in the acquisition and disposition of multifamilyproperties throughout Southern California.

|

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

|

Leveen: The investment market isseeing signs of life. There are many private equity funds formedsolely for the purpose of acquiring distressed commercial realestate. It is evident that they are itching to pull the trigger andare buying. Their underwriting points to a recovering economy andthe opportunity to add value to distressed property and dispose ofit at a lower CAP rate. The national market is so vast, I cannotcomment on what is occurring. In large coastal urban centers, whereCRE is always at a premium, many seasoned investors look to otherstates for the right deal. Many California investors were buying inArizona and Las Vegas for several years. Those markets overheatedand with the onset of the recession, those areas took a hugehit. Then, several of my clients turned to Texas. Thateconomy has better withstood the recession. But, there areplenty of investors who went there and have lost their properties.Recently, in Cincinnati, a 260-unit distressed property was notattracting the interest of local investors in the tri-state area. Ibrought in a Los Angeles-based investor in a 1033 exchange, whoacquired it all cash at less than 50% of the outstanding debt.Although distressed as a result of defaulting on LIHTC bonds, theproperty had been stabilized by the receiver and was generatingsignificant income. My client saw the benefit of long-termownership of a lower income property, especially because it hadbeen rehabbed by the prior owner. Assets like these are great toacquire as the rehabilitation costs were borne by the prior ownerand the foreclosing lender. A buyer can acquire these types ofassets at significant discounts, which were not available over thelast few years.

|

GlobeSt.com: You’ve helpeddispose of some REO assets, but the apartment sector is coming backfaster than other sectors. How do you think this will affect the MFassets coming out of REO now?

|

Leveen: There is significant activityaround any REO property. And, locally the apartment market velocitydeclined, but did not come to a screeching halt. In fact, Irecently did a velocity study for Los Angeles County and looked atfirst quarter multifamily transactions for the last three years.The velocity declined 10.6% in 2008 from 2007; then 18.8% in 2009from 2008; but increased 19.2% for the first quarter this year over2009. We are far below where we were, but it appears we have turnedthe corner. Also, some lenders never left the financing market andthat supported transactions. Moreover, what I have experienced inthe Los Angeles area is that Buyers assume that the Lender ismotivated to sell at any price. There is sufficient demand in themarketplace and although there are discounts, certain product willtrade with multiple offers, and the discount is not as steep asmany buyers would want.

|

Conversely, the two-unit to four-unit properties in low incomeareas of Los Angeles have declined dramatically in value. I haveseen some of these properties trade in the last year at 35% of whatthe foreclosed owner had paid. At the height of the market, buyerswere acquiring these assets with little or no money down with nodocumentation loans and that drove the prices up. Today, aninvestor needs at least 20% to 25% down payment and there is anoversupply of product and more is on the way. Many apartmentinvestors switched to acquiring foreclosed SFRs that were dirtcheap, instead of apartment properties, whose values have notadjusted significantly. These investors have benefitted from endusers who buy with FHA financing with 3.5% down payment and therecent federal and state tax credits that are bolstering themarket.

|

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

|

I recently sold a small apartment property that was headed tothe trustee sale, and we were able to market it and close withindays of the sale, saving the seller from foreclosure. I think wewill see more of these situations as attempts to work out loansfall apart. The economic fundamentals are still showing highunemployment and lack of hiring in the private sector. This curbsspending by consumers, and continues to erode the economy. Evenwith slow growth, we will need a few more years, before the privatesector begins to significantly grow the economy.

|

GlobeSt.com: Of thetransactions that are happening, are you seeing a trend towarddistressed purchases or are more well-positioned properties jumpingout as more attractive investments? What trends are youseeing?

|

Leveen: It is clear that investors areback in the market. There will always be a desire to acquirequality assets. What motivates that buyer is different from theopportunistic investor chasing tertiary assets. Certain funds willonly acquire class-A assets; that is their business plan. And evenif it is distressed, they will pay a high price for the product andits location. They are buying it today at a discount from where itlast traded and also based on how much debt recently encumbered theproperty. Only time will tell if these acquisitions proveprofitable.

|

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

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.