Nation's Multifamily Sector Inching Toward Buyers Market

"There will be a reverse of what's been going on for the last two years," Will Balthrope, senior director for Cushman & Wakefield's Texas Multi Housing Group, told investors, brokers and financiers at a recent forum in Dallas. "And, I think it's going to last a year to year and a half."

The changing scenario won't bring significant changes in cap rates, occupancies or rents, concurred a trio of experts. The first warning signs for the change showed up in recent months: offerings slightly slowed, buyers seem pickier and sale prices are starting to dip.

"There's definitely a sense of urgency out there, but don't expect cap rates to go up, said Robert M. White Jr., president of Real Capital Analytics Inc. in New York City. Though the deal-making climate is on the verge of change, sellers nationwide have been collecting 96% of their asking prices and nearly half of the major markets now have new record highs, he says. Just a couple years ago, the average trade banked about 94% of the ask.

White said sales volume, totaling $40 billion, rose 40% to 45% in a year-to-year comparison. At the current pace, the volume is on track to hit $45 billion by yearend. For those in the field, it's no surprise the majority of buyers are private local investors, both high-net worth and 1031 exchange categories. And, the Lone Star State clearly is a leading beneficiary of the flow of capital, largely from California. "The Texas markets look really cheap to national investors," White said. But, the most active buyers also are the "most vulnerable" to a rise in the interest rate, he cautioned.

With buyers becoming pickier and refi capital earmarked to get more expensive, the number of distressed properties, particularly class C, is likely to increase in the coming months. Kevin Donahue, senior vice president with Kansas City, MO-based Midland Loan Servicing, pointed to Atlanta, Austin, Dallas, Indianapolis, Phoenix and Charlotte and Raleigh, NC, as the problem markets in his arena.

Donahue said Midland's fastest growing sector for the past year has been multifamily. Sometimes, it's the property; sometimes, it's the market. "A lot of times you'll hear, 'it's alright. He's got deep pockets.' The problem is he's also got short arms," he quipped.The years to watch will be 2006-10, when the first big wave of CMBS loans come due. "It could trigger a lot of defaults," Donahue cautioned.

Preliminary third-quarter numbers show Houston remains the worst market in the nation for occupancy despite a slight uptick, nothing more than a breather in harrowing times. For that story, click here.

"Pretty much everywhere, I can see occupancy inch up," Greg Willett, editorial director of M/PF Research Inc. of Carrollton, said about its 57-metro tracking system. In Texas, this year's big winner has been San Antonio, with 92% of the 120,000-unit inventory occupied and its largest construction pipeline since the early 1980s.

The fourth-largest metro finally is shucking its stepchild image to Dallas/Fort Worth, Austin and Houston, taking a rightful place on the boom-bust track. "It's really caught the attention of the national people who previously would have ignored it," Willett said. Rent growth is predicted to rise 4% annually for the next five years. The windfall largely is due to Toyota's decision to build a truck assembly factory in Bexar County.

Dallas/Fort Worth, with a 536,000-unit inventory, ended Q3 with a 90% occupancy. "We're actually in decent shape for this calendar year," Willett said at Friday's breakfast held in Prestonwood Country Club at 15905 Preston Rd. "The problem was the past two years."

Willett predicted DFW's rent growth will be moderate over the next five years, hovering 2% annually. The cross to bear is that half of the inventory offers concessions amounting to 14% of the quoted rent.

"The really good news is Austin. If you want to buy at the bottom of the cycle, look at Austin," Willett said. "Rent growth is going to kick in very quickly. Austin will have more momentum than any other market across the country."