“Some enormous profits have been made by buyers who were active in 2009, so there will be some long-term holds that sell into the market to maximize returns with a shorter holding period,” Alfieri explains. “Given the rent and NOI expectations of the next few years, I would say that holding periods have the potential to be shorter, but if the NOI growth does not materialize, then a typical seven- to 10-year hold will be the average.”
Just how short could holds get? Ross speculates that there are more than a handful of buyers who have already bought on a pro forma of five to seven years who could possibly sell in 2011 and take profit. “I think you will see a lot of people end up with a 24-month hold,” Ross predicts.
Players familiar with broken deals nevertheless caution buying into those types of accelerated dispositions and argue that the current economy is not a conducive environment to asset flipping. “Anyone who is planning from the outset to flip something, whether it is a single property or a loan portfolio, is taking a heck of a risk,” says Hoffman of Trigild.
#6 LevereD PlayerS MAY TAKE an Encore.
Still, the opening of the B markets and the availability of financing from the GSEs and other lenders, coupled with interest rates, makes a return of the leveraged arbitrage player to the apartment sector inevitable. “The levered player has been stymied, and I think he is coming back,” Toomey forecasts. “As you look to the future, I think you’ll see more bulk purchasers borrowing on spread, scooping up all of the Bs that they can. That part of the market will come back.”
Alfieri agrees: The domination of the all-cash, institutional buyer is likely to wane in 2011 as capital moves into the secondary markets. “As the value-add and Class B product becomes a larger share of the market, financing will become more of a requirement,” Alfieri says. “This will be a different type of investor, more highly leveraged and return-driven.”
Jones Lang LaSalle’s Morris explains that interest in financing Class B asset buys and value-add plays is about market psychology. “There’s simply less fear in the markets today than there was 18 months ago. As investors become less fearful, they are ready to take on risk,” he says.
#7 Banks and Life Companies respond to the GSEs.
While recent increases to the yield on the 10-year Treasury rate have been pushing up rates on five- and seven-year loan interest rates from the GSEs, borrowing for multifamily acquisition still remains at historically low costs. The dramatic return of life insurance companies—and to a lesser extent, banks—to the apartment debt arena at the close of 2010 is also juicing up deal flow, with market watchers saying there is still plenty of room in the spread between interest rates and cap rates to satiate the yield expectations of investment committees.
