Asset quality among those refinancing portfolios, however, might be another roadblock to bulk deal activity. “Some of the CMBS pools have cross-collateralized portfolios,” says Dave Woodward, CEO of Greenwood Village, Colo.-based Laramar Group, which assumed management of a distressed portfolio of San Francisco assets in early 2009. “Some of those portfolios might be coming out of special servicing, but it is not core product. Most of these deals are tough stuff—[they were] marginal deals five years ago and even more challenging now.”
If distressed portfolios do come out of the cycle of CMBS maturities via special servicers, many in the sector expect that the assets are still out of reach for a couple of years. “We don’t have any large portfolios on our watch list,” says Bill Hoffman, president of San Diego-based receiver Trigild, which successfully sold the Irvine, Calif.-based Bethany Group portfolio out of receivership to foreign investors in 2010. “If similar portfolios of that size were coming out in 2011, I expect we would have heard rumblings about them before now.”
#2 the B Market WIll Get a Boost.
With plenty of money nevertheless chasing apartments—and the first round of core-plus trophy asset buying coming to a close—demand for both Class B and value-add assets will advance in 2011, particularly in cities that saw less deterioration in market fundamentals or are experiencing better job growth relative to the rest of the country. “The players in the 2010 market were large, well-capitalized pension funds and REITs, who were throwing darts and picking up trophies. The difference this year is in the cycle,” UDR’s Toomey explains. “If you look at 2010, all markets were somewhat improving with one or two shooting stars. In 2011, substantially all the markets will be [better], creating the opportunity for more buyers going down the curb to buy Bs and Cs.”
That doesn’t mean dealmakers won’t discriminate. When it comes to value-add opportunities, development veterans such as Atlanta-based Wood Partners are looking for more than a quick bump on lipstick improvements. “I am more interested in significant rehabs of properties in excellent locations: Strategic redevelopment is what we are calling it,” says Jay Jacobson, Wood Partners national acquisitions director. “We will focus on location-driven deals rather than traditional value-add ‘let’s fix a kitchen and charge $20 more a month’ deals. We’ve never been big believers in that model.”
Keep in mind that Class B assets don’t usually have a purchasing process that is any easier—or more cost effective—than Class A deals. Alfieri of Behringer Harvard expects cap rate spreads to tighten between asset classes as more purchasers seek out choice deals in the B sector, and firms leading the way in the buying blitz aren’t exactly turning deals on a dime. “As A properties get absorbed, people are continuing to start looking at the Bs,” adds Randy Fifield, vice chairman of Chicago-based developer Fifield Cos. “We closed out 2010 with the purchase of 1,300 [Class B] units in Texas, and they were still difficult deals to close from both a lending and due diligence perspective.”
#3 Buyers WILL spread out geographically.
A run on B assets, coupled with perceived overbidding on what deals are still available in coastal markets, will have apartment buyers moving beyond core metros and into secondary markets, notably in the Midwest and South, with the diaspora of dealmakers again likely to follow rent fundamental improvements and market-to-market job growth.
