In the 4th quarter, there were 60 regular apartment sales (10 or more units) – similar to each previous quarter in 2011. Of these, half sold for more than $1M and 33 of the 60 were “all cash”. The 27 sales that had financing were mostly from new loans or restructured / assumed loans from the existing lender. What was different about the 4th quarter was that we are now seeing the resale of many properties that were purchased at bargain prices over the past couple years (“flips”). Of the 60 regular sales, 17 (28%) were “flips”. Some of these “flips” had little work done, some were repositioned after some degree of upgrading, and some were sold by owners that decided that apartment ownership was not as easy as expected – or maybe they just believed that their broker’s “proforma” was reality! Not our buyers….. For 2011, all apartment sales (10 units or more) including regular, 3rd party trustee and partial condo sales (not including portfolio sales), totaled 265. The number of total sales was an increase of 19% over 2010 (223 total sales) and was much higher than in 2008 (75) and 2009 (57). The industry showed a renewed faith in the market by permitting 1,961 units for new construction in 2011, this compared to 408 units in 2010 and 637 units in 2009. Most of the new construction is planned as “in-fill”, as opposed to the previous trend of building in the path of expansion on the outskirts of the cities.
Trustee Sales Reduced – Auction Platforms Growing in Popularity for REO’s
In the past few years, we have seen a number of apartments sold to 3rd parties at Trustee Sales. However, in the 4th quarter, there were only two 3rd party trustee sales for apartments. Many lien holders are trying to complete a sale prior to the trustee sale in an effort to avoid the liability of ownership – requiring additional time and expense for management, deferred maintenance, and all health and safety issues. There is a growing trend for lenders that do take on ownership to resell the asset via an auction platform. While this covers the lenders concern about being “transparent”, the prices obtained are typically much less than a properly marketed community using the full service of an apartment broker.
Liquidity: Still Dismal for Most – Great for Some
Liquidity (money for financing) in the market is still minimal – but there are signs of life. The distressed, “B” and “C” properties are still only serviced with loans with higher interest rates (10% to 18%) at 50% to 60% loan-to-value (LTV). As these properties are refurbished and rent-stabilized, a strong owner may be able to obtain 70% LTV with reasonable interest rates. For “A” and “B” quality properties with strong historical financials, Fannie Mae, Freddie Mac and others have been offering +4.5% interest rates at 80% LTV. Minimum loan amounts are about $2.0M. These larger, quality properties are being purchased at 5% to 6% cap rates since large investment funds are receiving very low interest from banks and have minimal options for finding other investments with reasonable returns.
The Next Jump in Value
Property values have inched upwards with the steadily increasing domestic and international buying pressure, but there is plenty of upside as the economy and financing improves. Banks are still failing across the country and are being absorbed by larger, more solvent banks. Because of these failures, for many smaller banks, the FDIC and banking regulators have such a tight hold on the bank’s operations, it often prevents them from doing loans – including apartment loans in metro Phoenix. As banks, big or small, grow out from under this tight control, look for liquidity to come back in the market. For the “B” and “C” properties, we expect to see a jump in values when liquidity returns. At present, the “all cash” buyer’s return is essentially the “cap rate”. When liquidity returns and investor