Multifamily Sector Draws Buyers Back to Town

At least, that's the word from the front lines at the third annual RealShare Phoenix, part of the RealShare Conference Series hosted by Real Estate Media, a division of Incisive Media. Nearly 150 participants, attending the half-day session at the Camelback Inn in Scottsdale, got first-hand validation of their perceptions about the market. They also learned some of the reasons behind the slowdown and the best way to tough it out for the duration of the slump.

Christopher E. Toci, executive director for Cushman & Wakefield of Arizona Inc., said the Phoenix real estate cycle has tracked with the national economy since the early 1970s. He also pointed out that the area has had only one year of negative job growth for the past 30 years--at least until now.

"We're projecting a 25,000 to 50,000 negative job loss this year," Toci said. "That would mark the second consecutive year in which Phoenix lost jobs. That's the first time it's happened."

[IMGCAP(2)]Adding to the bleak scene is a change in underwriting guidelines. "The few remaining players in the capital market have the pick of the litter, they can pick and choose," said Guy Johnson, CEO of Johnson Capital, headquartered in Los Angeles. He added that the abrupt departure of the CMBS market also has left a huge capital hole. "Last year, the CMBS market financed $174 billion domestic and this year it's maybe $10 billion," he pointed out.

"When you take $170 billion out of US commercial financing, it leaves a mark."Scott McPherson, principal of Capital Advisory Group LLC in Phoenix, believes that the CMBS source will be for a significant period of time. The life companies that used to step in are suspect because of AIG. Banks, financing companies and credit companies are being selective while private equity, debt and mortgage funds are active. The bottom line is "be very careful who you're dealing with," McPherson cautioned.

Most panelists agreed the region's multifamily market was faring better than other sectors in the down market because Fannie Mae and Freddie Mac were around with the financing. Mark Forrester, partner with Phoenix-based Hendricks & Partners, said the sector is starting to see some correction, with more private capital interested in chasing product.

"I've not seen a lot of these guys in 10 years," Forrester said. "They're coming out and looking now. The question remains are they ready to buy or do they think it's too early. But a few months ago, they weren't even looking."

On the money side, Jay Ganske, senior vice president from Midfirst Bank in Oklahoma City, said his institution is lending selectively, mainly to high-quality deals and repeat borrowers, especially when it comes to construction lending.

Meanwhile, Ericka Deneke, assistant vice president with Diversified Funding Group LLC in Tempe, said the company likes to see 65% loan-to-value on land. "On developments we partnered into about two years ago, we're extending loans and working through it," she admitted.

Infill communities also are good bets, Deneke added. "We're no longer going out to eastern portions of Pinal or southern portions of Buckeye," she said. "We like the major transportation corridors and are sticking to the infills, which will recover a lot faster."

[IMGCAP(3)]The way deals are done has changed as well. With Phoenix as a definite buyer's market, Steve Brabant, senior vice president in Phoenix for CB Richard Ellis, said changes are being felt during negotiations. For one thing, the best and final phase is going away.

"If you have a sense that a buyer is good for whatever reason, you may be better off changing the market process and trying to strike a deal then and there," Brabant advised, adding going through several rounds could mean a loss of both buyers and price. "That's been one of the hardest transitions the market has had to make."

Michael Lynch, chief investment officer of Los Angeles-based Ardent Realty Inc., agreed with Brabant. He suggested buyers be aggressive with bids. "Come in at a low price. If you can't transact today, you could probably get the same property cheaper tomorrow," he said.

From the seller's perspective, Lynch advised that nothing is held back, providing buyers with all reports, operations statements and other paperwork so no surprises slow or halt the deal. Also find out who the real buyers are. "Do your research and see who's buying. If you understand who's transacting, that's a big help," Lynch stressed.

Above all, in this market, buyers and sellers need to be collaborators, rather than adversaries. "Buyers won't be interested in going hard unless they know they have their loans locked up," said Gary Goodman, senior vice president with Passco Cos. LLC of Irvine, CA. "If sellers are willing to work with buyers that are doing due diligence and spending the money to underwrite, they can rest easy the buyers are acting in good faith."