One Sector's Woes, Another's Windfall

DALLAS-In a world of winners and losers, the multifamily market is primed for gain due to rising foreclosures in the single-family sector. The monthly postings are averaging 3,000.

"What we're seeing in the single-family market is a positive influence for certain types of multifamily," says George Roddy Sr., president of locally based Foreclosure Listing Service. The respected market watcher predicts the biggest benefactor will be class C properties, a likely refuge for foreclosed homeowners looking for low-cost housing while they regroup. "The bottom line is we're in for more foreclosures. It doesn't mean the rate will go up," he explains, "but there's no abatement in sight."

Whether or not the financially strapped masses will end up behind class C doors is open for discussion. "I believe many will be more discerning as to where they live," J. Scott Henderson, a local senior investment adviser for Sperry Van Ness, tells GlobeSt.com. Nonetheless, they must land some place. As he sees it, the majority will seek class B apartments and condos. "I'm not sure how healthy it is to gain occupancy by virtue of foreclosures," he says, "but the good news is wherever they land this isn't a group who goes home to their parents."

Occupancy is ticking up in many North Texas markets. The banners for free move-in concessions are coming off buildings. Henderson says effective rents started to edge up late last year and the trend is holding. "For the first time in four years, we have a scenario where revenue is higher and operating expenses are going down," he adds.

From a broker's perspective, Henderson sees the new wave of tenants as a lifeboat for multifamily properties that too were in danger of foreclosure. "I think they have new life," he says. "I think you'll see a lot of commercial postings weather the storm. Improved revenues and occupancy can cure a lot of ills. That's probably what's going to save a lot of apartments from foreclosure unless their debt is too deep."

From an analyst's perspective, Roddy says commercial foreclosures dipped 2% in the past year: 160 courthouse sales or three less than 2004. Of the 2005 total, 46 were foreclosed apartment properties, reflecting an increase of 11 from the year before. In the past five years, the peak year for commercial foreclosures was 2003 when 200 properties went back to lenders--and only 28 in the stack were multifamily assets. "The bottom line is we are seeing multifamily has not escaped unscathed," Roddy told the developers and brokers at DFW Apartment and Investment Brokers' monthly breakfast meeting held at Prestonwood Country Club in North Dallas.

What neither local expert will dispute is the flood of available buyers, particularly out-of-state investors, who now account for 60% of the multifamily sales. Roddy says that, prior to 2005, less than 50% of the trades were closed by out-of-state investors. Last year, there were 476 apartment sales, up 114 from 2004 and setting up the biggest gain in the year-to-year breakdown for all commercial types. When it comes to other product type, Roddy's data shows that 40% or less of the closed deals end up in out-of-state investors' hands.