For Long-Term Apartment Investors, This Market Presents Opportunity

Long-term apartment investors are finding opportunity in the current market. With cheap debt and some assets trading at a discount, real estate investors that typically employ a long-term-hold strategy are well positioned to acquire properties in the current market. This segment of investors has driven investment activity through the pandemic, despite uncertainty.

“The owners that are buying deals and don’t plan to sell for a long time, they are in a great situation. There is cheap debt right now—they can borrow at 3% or 2.85% for 10-year money—it is a no-brainer,” Mike Hanassab, senior director at James Capital Advisors, tells GlobeSt.com. “That is why you are seeing so much activity. This is going to be the only opportunity for the foreseeable future to borrow at such low costs. That is really what it is.”

Investors with significant holdings are in the best position to expand current holdings. “For investors with a $40 or $50 million real estate portfolio, they can refinance and pull millions of dollars out of a refinance and they can throw it back into more deals,” says Hanassab. “Even if the asset is distressed, they will know that in the long-term—even with all of the restrictions that the State of California is placing on landlords—they understand that California and Los Angeles is always going to be a great place to live.”

On the sale side, current owners are hesitant to bring assets to the market, which has limited opportunities somewhat. These owners are afraid that they won’t be able to complete a 1031 exchange. “One of the fears is whether or not sellers are going to be able to secure an exchange property. Most sellers are not cashing out, they are exchanging into a new asset. Investors are nervous, and they are wondering it other owners are hesitant to bring a property to the market,” Elliot Hassan, a senior director at James Capital Advisors, tells GlobeSt.com. “On our end, all of our clients have been able to successfully sell and exchange into a property. So, there are still plenty of assets out there.”

So far, Hanassab and Hassan haven’t seen a significant change in asset pricing, but they agree that it is coming. The longer that the pandemic wears on, the more significant pricing adjustments will be. “You have to be realistic. It is inevitable, and the longer tenants are not paying rent, the bigger the effect for the borrowers,” says Hassan. Landlords have mortgage payments and rising operating expenses, but the income isn’t there anymore. I think it is going to happen, but the question is when. We have been saying for five or six years now that the market is at its peak and we are going to see a correction. This has been a long cycle.”

The upcoming political election will also play a role, both in the recovery and the sentiment of investors. “I think the next big tell is going to be the election,” says Hanassab. “That is going to say a lot about what happens in the commercial real estate industry.”