Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/92705
investors, equity funds, and some institu- tional investors have tired of the competi- tion driving down multifamily capitalization rates in core markets. "It's gotten to the point where inventory Investors are increasingly turning to reposition plays for better yields in markets like Austin, Denver, and San Diego. and competition is so tight that my San Francisco buyer is willing to look at higher cap markets such as San Diego and Fresno," says Davide F. Pio, CCIM, CRS, LEED-AP, a broker associate with BCRE in Pinole, Calif. T e search for yield among class B and C multifamily properties in these markets is less common, T ypin says, but it is happen- ing. Just ask the government. "Over the last two years, I've seen taxing authorities become more aggressive in their valuations of multifamily property," says Jamie Sieff ert, CCIM, director of T omson Reuters in Carrollton, Texas. "Last year it primarily aff ected class A product, but this year has been pretty much across the board." T e government is following the money. Multifamily cap rates in secondary markets fell only three basis points YOY in 1H2012, according to RCA, suggesting that investors are increasingly turning to reposition plays for better yields in markets like Austin, Denver, and San Diego. Marcus & Millichap notes that class C multifamily occupancy was up 100 basis points in 1H2012 — the largest increase among property classes during that period. Plus, class B and C cap rates were 520 bps higher than the 10-year Treasury rate in 2Q12, compared with a 400 bps diff erence between class A and the 10-year Treasury. Yield is in the crosshairs. But how will demand for lower class multifamily proper- ties in smaller markets aff ect the future of investment and development? Adding Value Today's multifamily investor is willing to compromise in search of the right deal. "Buyers are reconsidering their investment parameters to place capital," says Aaron Mesmer, of Block Real Estate in Kansas City, Mo. "T at includes considering deals in sec- ond-tier submarkets, non-arterial locations, and other deal-specifi c complications that would have otherwise caused them to pass only 18 to 24 months ago." This investor segment mostly includes Multifamily by the Numbers Major Metros $8 0 1 2 3 4 5 6 7 8% Volume (in billions) Average cap rate 0 1 2 3 4 5 6 7 Source (all charts): Real Capital Analytics 28 private money, which comprised 65 percent and 66 percent of buyers in secondary and tertiary markets respectively as of 2Q12, according to T ypin. "Equity funds repre- sent a bigger percentage in tertiary markets, and they're more likely to search among the lower asset classes," he adds. Thomas McConnell, CCIM, associate director of Marcus & Millichap's National Multi Housing Group in Elmwood Park, N.J., recently sold an East Rutherford, N.J., apartment property built in 1979. T e fam- ily owners had not pushed rents or made basic upgrades in many years. "I sold the complex at a going-in sub 5 percent cap rate to a private syndicate that was able to see the upside," McConnell says. "Within six months, the new owners had dramatically improved occupancy with simple upgrades and a very aggressive, hands-on manage- ment campaign." The property, which is located in a thriving transit-oriented com- munity, is now stabilized at a 7.5 percent cap rate, he adds. November | December | 2012 Commercial Investment Real Estate 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2