O’Connor Apartment Forecast Luncheon

Comments from speakers Greg Austin of Jones Lang LaSalle and Teresa Lowery of Colliers International at recent O’Connor Apartment Forecast Luncheon:

October 20, 2010

By Ray Hankamer Jr.

We have just about come full circle from 2007, when multi-family sales were at all-time high. Then cap rates and interest rates were in the 5.0 to 5.5% range and they are back there now, with too much money chasing too few good (Class A) deals. In 2007 the “value depression” started with single family collapse on the West Coast and moved East. Job losses and rising cap rates went hand in hand as buyers were few. By 2008 sales of multi-family were down 40% and by 2009 down another 60%. Special servicers for CMBS portfolios hinted of a “tsunami” of distressed projects about to hit the market. But they never did. Buyers are still waiting for them, and in the meantime, some of the distressed notes have been sold (avoiding foreclosure of the assets), with lenders accepting some discounts to 80-90% of original loan, but now, thanks to their extending and keeping a level head, some lenders are only having to take discounts of 5%, and even now they are selling off some loans at par.

Houston’s multi-family occupancy is now 89.4%, lower than some other of the metro markets in Texas, but climbing nonetheless. There is positive rental rate growth, although ten per cent concessions are still the norm in Houston.

The market has returned to equilibrium and builders are starting to plan for construction of new supply, and construction lenders are ready, with loans of value in the 65-75% range. Demand is now starting to lead supply, and some additional multi-family demand is expected as single family foreclosures proceed in the area. Occupancies of 91.2 in Houston are predicted by next year, although Austin is in the 94-95% range.

As for distressed multi-family, Houston has the 4th highest level of 20 nationwide markets, with $1.4 billion (52 troubled assets). Many of these distressed situations are being handled by servicers selling the loans, and this should pick up speed. Buyers should keep some powder dry.