Where are all the 50+ unit multi-family deals?

Question

Where are all the 50+ unit multi-family deals? Can someone transport me back to 2010? I've been actively trying to get into 1-2 deals since October of last year however inventory has been extremely tight. I've made strong offers on several buildings, 69 units, 73 units, 96 units etc etc. however haven't been able to lock down the deals. I'm looking at properties on a regular basis however most of the inventory is overpriced. My investors have been calling me asking me when they can put their money to work (not the worst problem to have). I've been networking with other big owner/operators in town and they are relaying the same thing. Multi-family is hot and the deals are scarce. Obviously I'm only giving my experience from one city (Cincinnati) however I'm curious if other multi-family investors have been experiencing the same thing. It's really interesting to see what the cycle has done since 2008.

Are there any investors out there with an abundance of deals still (50+ units)?

Joel Owens · Answer

"interested in significant value-add deals" I think this statement is key. In multifamily there are "value add" and "yield" plays. Value add is taking something generally semi-performing and turning it around. Totally vacant is a value play too but you must be getting it for pennies on the dollar to justify a project like that. From my experience most value add properties were already bought up in 2009 and 2010. They have been stabilized and have been performing a few years with high occupancy and are now being sold off as yield plays. So for example a property built in 1976 that was 50% occupied and now it's 90% for the last few years and the sellers are selling at a 9 or 10 cap stabilized. There are plenty of investors who would love to buy a performing product at that yield. If you are a syndicator or group etc. you make money off of fees and only purchasing at a certain deal structure. I think those types of funds will have a very hard time to keep sourcing deals that work. There is about 1 trillion of commercial loans now through 2018 coming due and some will be distressed. Markets are recovering so I do not believe prices will be the same when they sell below value. A medium to slight discount versus a deep discount. Foreign investors and other out of state investors are happy to land for themselves a 7 to 8 cap etc. as they can't find it locally. What is a deal is all in the eyes of the buyer. For me I do not source small deals that are in distress. It's a waste of time and skills. A 20 unit that need rehabs and sells at 5k a door is only 100k sales price. Likely if it's a short sale I would have to negotiate liens and all this other stuff to get accepted for a 3,000 payday or 6,000 if I got it all. For the investor the upside might be huge but for me it's nothing. Now if we are talking 50 units that trade at 20,000 a door and only need 3,000 a door in work versus a full gut the payoff is 30,000 to 60,000 for me for the time invested. Investors need to understand how a commercial broker values their time in the business and wants to make as much as they can just like an investor does. Investors who want a fully performing property not to turn around is easier to conduct business for a broker. It's like a buyer saying I want a Walgreens to hold for a retirement for a 6.5% cap versus a fund looking to buy one with a few years left on he lease for a 9 cap. They are out there but many people are searching for them. I am not saying value add cannot still be sourced but you cannot expect massive deal flow like in 2009,2010,2011 etc.

Giovanni Isaksen · Answer

Out in Seattle cap rates are in the high fours and investors are competing with institutional money as well as overseas investors who snap deals up with all cash. There still are small (< 50 units) '60s vintage properties scattered around that have room with value add but it's a hot market. Portland has higher caps in the suburbs but smaller institutions are there too. You can still find some decent deals there if you are a long term holder and you stay under 100 units but that will make property management more expensive. You can go north from Seattle and caps are a little better but if you go too far north you begin to compete with Canadian investors coming south and will bid up anything with a broker's six cap because it's twice what they can get in Vancouver where caps are in the threes. In Seattle prices have crossed the Line of Doom (existing properties selling above replacement cost) and we're being pitched a lot of development deals. That typically means the apartment investment cycle is getting peaky but just when you think they'll be no renters to absorb the new supply Amazon announces another million sf of office buildings they're about to break ground on. The saving grace is low interest rates. Ben/Janet say please buy assets so if you lock a property up with fixed financing (minimum 10 year fixed) and plan to hold through at least a full cycle you'll do just fine. If you're flipping with hard money you could get caught without a chair when the music stops

Brian Burke · Answer

Talking with one of my brokers recently, he remarked that inventory is lower than he's seen in his career (I'm in the Texas markets). I wouldn't disagree. I closed my last one in July and haven't seen one since that looked as good. I think we are getting late into the cycle and the hotness is a sign that it's a better time to be a seller than buyer. I'm still looking, but I'm being really picky and conservative and only interested in significant value-add deals...but who isn't these days? It's the repeat story of too much capital chasing too few deals. This too shall pass.

Duncan Taylor · Answer

Multi-family in general is in a bubble. A lot of under and non-performing properties were purchased, turned around and are now on the markets. That has started a feeding frenzy and large funds, foreign investors and other cash buyers are buying with both hands. Remember, when everyone is selling, buy, when everyone is buying, sell. But, there are deals out there. I had one fall into my lap in WA state this past fall. Commercial office could be a play if you have a longer term view. Avoid retail space unless you are getting it for pennies on the dollar and can afford to carry it for a few years. The economy is starting to sputter. Another recession is on the horizon. Industrial copper demand (not price) has been a solid predictor of the last several recessions and it is SCREAMING that a recession is looming.

Brian Burke · Answer

...or be willing to pay too much, or choose markets that don't show any promise. I think that investment sense has to trump the desire to acquire or you're just taking on too much risk.

Joel Owens · Answer

I had a recent conversation with another multifamily listing broker that was interesting. We were having a conversation about listing properties knowing they were marginal deals. My mindset and knowledge level is different than some multifamily buyers. I would say based on experience not to take the risk but others might say they do not care they want to go for it. I see properties that transact in areas I would never buy and prices I would never pay but someone is buying them. From listing broker: "I used to be very selective in my listings but gave that up because for every crazy seller there is a crazy buyer. You can't sell something if you don't have the listing. This seller is not crazy and not far off on his pricing. He is obviously far off on his pricing for you but there are others out there that have other tolerances for returns and visions for properties that are different than yours or mine. I try not to judge anymore based on what I'd buy it for because every time I do that I'm wrong." ------------------------------------------------------------------------------------------------

Brian Sabet · Answer

If I hadn't mentioned before, I do market research/analysis for a multi-family broker firm. I would definitely said that it must be your area. I am located in Maryland but handle deals all over the Baltimore, Washington D.C., and Northern Virginia markets... and it has been HOT. We are a small office (5-6 people) but have several deals going to closing while still getting a ton of listings. Make friends with a multifamily broker; we work exclusively with off market deals which sounds like something that you need right now!

Marc Ramsay · Answer

I also have to agree. I have been closely watching the Cleveland market for 2 years and where I could find lots of opportunities 2 years ago, it's much harder now. Most of the listed properties are at 9 and 10 CAPs. These are Cleveland properties people! Not Houston! I'm focusing on finding off-market properties as the listed stuff is just getting stupid.

Bryan Shaffer · Answer

I finance several Multifamily projects over 150 units and my clients are still active. The per unit price is up in almost every market and cap rates are down 100 to 200 bp. You really have to be connected or go to a less desired market to be active.

Tom Meade · Answer

Multifamily is scorching hot right now. We're seeing a ton of acquisition business as well as RE-fi / repositioning plays. There is a lot of money chasing deals, so cap rates in major markets remain at or near historic lows.