Sticking to Their Knitting
However, Hurley sees price increases in all real estate markets. “We’re seeing the same thing across all product types,” he says. “It’s the same dynamic.” Besides, the apartment market is clearly recovering.
“Six to 12 months ago, the fundamentals side improved dramatically, even in the worst, overbuilt markets,” says Brad Muth, a partner with Concert Realty Partners, a fund manager in Chicago. “Occupancies are in the low to mid 90s, especially in the [Class] A side of the market. Job growth is taking hold, interest rates are popping up, and the condo markets slowed tremendously.”
Even if the multifamily market were a disaster, Daniel N. Kaplan, CIO with Fowler Property Acquisitions, a San Francisco-based company that partners with institutions and other investors to buy properties, says it would be difficult for them to change investments very soon.
“They can’t stop buying,” Kaplan says. “It’s their business. Through the downturn, real estate returns have been the strongest performer and the bailout asset class for these large funds. They look and see that if 8, 10, or 12 percent of their money is allocated to real estate, it’s proven that it will outperform [other sectors] in the long run.”
Instead of leaving multifamily, some pension funds have found ways of buying properties more economically, including locking up new developments early in the process. Institutions get a better price that way, but they’re taking the lease-up risk. “A lot of these people have promises up front to buy the properties when they’re built,” Muth says. “I’m seeing more of it. It was common in the ’80s but went away in the ’90s.”
In cases where they know they’re going to face negative leverage, investors may offer the apartment operator a break to make things easier during the first couple of years of ownership. Instead asking for 8 percent returns the first year, investors may ask for 6 percent. But down the road, investors will have to get the balance of what they’re owed before the operator collects, according to Libman.
Of course, institutions don’t want to make such concessions forever. If prices fall with interest rates going up, things could get back to normal. The only problem is that no one knows when that might happen. “Sellers always lag behind [the market trends], but I don’t know how long it will take in this cycle,” Hurley says. “There will be an adjustment period.”
