COVER STORY, FEBRUARY 2009

MULTIFAMILY RENTAL MARKET IS IN BUSINESS
Northeast multifamily rental market holds its own despite job loss, shadow markets and a lack of financing.
Stephanie Mayhew

Job loss, shadow markets and lack of financing are all affecting the Northeast multifamily rental market; however, strong fundamentals continue to keep the sector steady. This month, Northeast Real Estate Business sat down with experts from three of the Northeast’s major markets to get their take on the multifamily rental sector in their respective markets.

Solid Fundamentals Keep Philadelphia Steady

“We are in business in Philadelphia,” says Ridge MacLaren, vice president of investments and senior director of Marcus & Millichap’s National Multi-Housing Group in the firm’s Philadelphia office. It is a sentiment that is being heard throughout the Northeast, particularly within the multifamily sector. Despite a downturn in many other commercial real estate sectors, multifamily rental and investment sales activity has remained fairly steady throughout the Northeast as we head into 2009.

In Philadelphia, MacLaren says that the city’s solid fundamentals and high barriers to entry keep its commercial real estate market balanced.

“Philadelphia is a market that doesn’t go way up or way down,” he explains. “We are seeing a little weakness and vacancy is starting to tick up, but overall, we are still well under a 10 percent vacancy rate, averaging a 5 or 6 percent range in the Philadelphia Metropolitan area.”

The slight uptick in vacancy in Philadelphia has resulted in an increase in concessions, but MacLaren notes that is mostly being seen only in new products that are not burning off as quickly. However, he does note that in reaction to the current market, landlords will most likely not raise rents as aggressively as they have in the past. Some  experts are forecasting no rent growth at all for the next year or two.

Despite a possible flatness in rental rates, the fact that many people are choosing to rent rather than buy at the moment continues to make multifamily rental properties a sound investment.

“People are still looking to buy and there is also money out there to be lent from Fannie and Freddie, and Marcus & Millichap also has an internal source with our Capital Markets program,” remarks MacLaren. “However, with that being said, volume sales are off 20 to 30 percent. People are scared, sitting on the sidelines and not everybody that was in the market a year or two ago is in the market now. Deals are getting done, it is just at a lesser pace. When you have times of distress there is a flight to quality, so the better apartments are the ones that are getting the most attention.”

Although the Philadelphia multifamily market is holding steady, MacLaren notes that it will most likely drop some in the coming year because of the economic pressures the country is facing.

“The Philadelphia market is pretty steady overall, so it won’t be a great drop, but I think things are going to get a little bit worse before they get better, but not drastically so,” he says.

Diversity Buoys Boston Multifamily Market

While some of Boston’s suburban multifamily markets are struggling, the diverse market within the urban portion of the city has kept the multifamily sector active during the downturn. Robert Tito, executive vice president and principal at NAI Hunneman in Boston, notes that city’s wide range of colleges and universities has been a key driver.

“We have approximately 250,000 students coming and going all year long and they occupy a lot of the housing in certain sectors of the city,” he explains. “And most of the major universities and colleges in the area are also expanding, meaning more students and the need for more housing.”

As the local colleges and universities expand, Tito says that most of the surrounding neighborhoods, as well as the city, frown upon the schools eating up buildings for use as dormitories. So, often, the universities are short on dormitories and students rent from the private sector instead, helping to sustain the rental market dramatically.

In addition, the fact that more people in the city overall are choosing to rent right now is also bolstering the multifamily rental sector. However, while this has proved beneficial for apartment owners and investors, Tito notes that it could create a shadow market and more competition down the road.

“Some of the new condos, luxury condos or re-hab condos that don’t sell will come to the market as rentals and when they become rentals they compete with some of the older stock in the city,” he says. “This could bring some stiff competition going forward because we have many older brownstone homes that don’t have elevators and don’t always have parking like many of the new developments do. We have seen that happening a little bit and I think it will happen more going forward.”

As rental vacancies manage to hold their ground in the city of Boston, rental rates are holding as well.       

“Rents in general are not going down or up; rather, they are kind of going sideways because of the perception of the market,” Tito says. “Rents are going down in office and rents are going down in retail, but the apartment market is definitely holding its own.”

However, there have been signs of some minor rental concessions creeping into the marketplace.

“In a very hot market, the lessee pays a full month’s rent, but in a sideways market, like we are in now, the landlord participates and will pay half of the fee and the lessee will pay the other half,” Tito explains.

As the multifamily market remains steady in Boston, investors are still keen on picking up rental properties as investments.

“This is my 31st year in this industry and multifamily is always the product of choice in this city. When the market is hot, condos sell like hotcakes and rentals are always full,” Tito remarks. “Well located apartment buildings are still in demand, and the fundamentals of this market, its vacancy rates, rents, interest rates and available debt all remain favorable.”

However, Tito does admit that the current financial market is hindering the progress of some sales.

“When sales peeked back in 2005 and 2006, investors who purchased those particular properties, if they wanted to sell them today, would have to take less. Not because of the income of the asset, but the overall NOI is less because current interest rates are higher. In some instances, lenders are requiring more equity in the deal; thus, their leverage is not as great as it was in the past and their cash on cash yields won’t be as great,” says Tito. “Although the value has not decreased on a per unit basis, some people simply overpaid back then and the price that they paid cannot be achieved again today.”

Tito notes that assumed debt and a disconnect between buyers and sellers on pricing are also affecting sales.

“Along with some deals there is debt that needs to be assumed or defeased, which does not make a lot of sense for most deals now.  And the lenders also would employ LTV (loan-to-value) requirements on the investor assuming the debt, so a buyer has to come up with 25 percent cash,” he explains. “Even if the seller wants to sell a property for less, they can’t do it because of the mandate on the LTV ratios.”

Development is also being handicapped by the current financial market. Lack of financing and the general malaise in the market has definitely slowed multifamily development in Boston. However, this slowdown has produced an interesting side effect in the city.

“Usually it is very difficult to obtain building permits in Boston because we are such a mature market and have very little land available; however,  because of the lack of tax revenues right now for the city, officials are being a bit more lenient on allowing permits,” notes Tito. “Many developers are seeking permits and pushing forward on certain projects that won’t come out of the ground for 2 or 3 years, a time when everyone expects the market will have turned around.”

State of Manhattan Multifamily Market Varies

According to Marcia RoseYawitz, senior director and principal of Eastern Consolidated, the Manhattan multifamily market remains as varied as the borough itself. When asked how she would characterize the state of the multifamily market in Manhattan right now, she responded, “Well it depends on what end of it.”

RoseYawitz notes that the high end of the market is suffering. In the past several years as Manhattan’s hunger for luxury housing seemed unquenchable, developers were betting that desire could stretch into once affordable middle class neighborhoods such as Peter Cooper Village, Stuyvesant Town, Washington Heights and on into Harlem. However, many developments and acquisitions were financed based on future rent increases that have yet to materialize. And many Manhattan residents have chosen to stay put rather than upgrade to luxury apartments as developers had hoped. On the contrary, RoseYawitz says that many have even taken in roommates to help with costs.

In addition, many luxury condominiums coming to the market are converting to rentals and concessions that have not been seen in a very long time in this once red hot market are now being offered to entice new renters into luxury digs.

“Owners and developers are paying the rental commissions as opposed to the renter paying a commission,” RoseYawitz says. “They are desperate to rent the high-end units because with the recent job loss you don’t have nearly as many people earning huge salaries. We have lost a tremendous amount of jobs in the finance industry here. However, that has not affected the secondary market.”

The secondary market is still holding its own because despite some financial stresses, people do want to stay in Manhattan rather than move to the suburbs, so neighborhoods and buildings that offer more moderate rental prices are staying full. In turn, the multifamily investment sales market in Manhattan is still enticing and funding is available for good income producing properties, but similar to other markets in the Northeast the fall-out from the current economy is affecting the ability to actually close deals.

“Banks will fund balance sheet items with an actual income pool, and if it is a rent-regulated apartment, the bank can anticipate what will be coming in and know that there will be some sort of rent,” RoseYawitz explains. “However, the appraisal of properties has changed tremendously. Years ago, two years ago, or even last year you could fund 75 to 80 percent and it was based on future values. Now, banks will give 60 percent but they will reappraise at 50 percent. Appraisal values are much less than they formerly were, but there is still money available.”

A prime example of the changing state of appraisal prices and property valuation is a $225 million sale that RoseYawitz brokered in March 2007. The deal consisted of 47 primarily walk-up buildings in East Harlem. Financing was comprised of a $195 million first mortgage, $20 million in mezzanine debt, and the buyer came up with the balance of $10 million in cash. Since then, the U.K.-based buyer has declared bankruptcy and is currently being foreclosed on. In a conversation with the bank, RoseYawitz was asked what she thought the portfolio was valued at now; her reply — “about $115 million.”

“It is a perfect example of how properties that were so overly leveraged are now being valued,” she says. “Now, no one is buying portfolio sales of 50 buildings or even 20 buildings because they can’t fund them. They can fund individual buildings, but in the case of a portfolio, the whole is greater than the sum of its parts and people want that.”

Another deal that RoseYawitz was working on is an example of the shakiness and uncertainty in the marketplace that was rising to the surface even a year ago.

“I had a deal on some buildings in Washington Heights, all elevatored buildings, and at the last moment the group that was funding it backed out. That was a year ago in October, so there was a shakiness that was starting to show up even then, and we are seeing it now,” she says. “Properties are trading but not at the same multiples. Certainly land is not trading in the same multiples that it was, and properties are trading differently. When we had luxury or semi-luxury apartment houses, we could sell them at 3 caps. Now, people don’t want to look at anything unless it is a minimum of 7 caps because there is going to be no bottom line after they leverage and they are not going to get that much leverage. So now it is back to rent multiples. And the rent multiples have lowered. It is all related.”

RoseYawitz does remain optimistic however, noting that the multifamily buildings in Manhattan have still maintained their value and things in the market will turn around.  

“Sellers have to get more realistic and buyers have to get funding. A solid rent-producing building whose price is based on what it is today and not on projected values will sell as long as the seller is somewhat realistic,” she remarks. “The buildings have not lost their value because the rents are still being collected, but the future value, which is what things were being sold on, doesn’t exist anymore and you can’t get the same kind of funding. That is where the problem is.”

New Multifamily Developments Set to Come Online in Stamford As part of the viable metropolitan New York tri-state area, Stamford, Connecticut, offers businesses and residents numerous opportunities. Opportunities that Seth G. Weinstein, principal of Hannah Real Estate Investors, a Stamford-based real estate development and investment company, knows very well. “Stamford is really the economic engine of Fairfield County, which is the economic engine, in turn, for the whole state of Connecticut,” says Weinstein. Having already developed several multifamily projects in Stamford with great success, Weinstein is banking on continued success and bringing two more projects to the city — Glen View House, a rental building, and Eastside Commons, a for-sale condo building. Glen View House in Stamford, Connecticut. Glen View House will offer 142 luxury residences ranging from one- to three-bedroom units with penthouses on the top floor. Located on the corner of Glenbrook Road and East Main Street, the development will also feature a convenient Walgreens store.  Each unit will have 9-foot ceilings in all simplex apartments and 16-foot ceilings in the living rooms of the duplex units. Amenities for each unit include full-sized washer and dryer units, deluxe island kitchens with granite countertops, hardwood floors, gas ovens and raised panel cabinets, and large walk-in closets. Some units will also feature balconies. Other amenities within the complex include a tiered, outdoor garden and recreation area with swimming pool, a private fitness center, a luxurious club room, business center and concierge service. In addition, residents and Walgreens shoppers will have access to a 252-space parking garage. Formerly a Suburban Cadillac-Pontiac dealership, the site is being developed by Weinstein, along with Paxton and Ray Kinol of Stillwater Investment Partners and Steven Wise of Glen View Partners, LLC of Pound Ridge, New York. Incorporated into the project will be fourteen below-market-rate (BMR) units at 50 percent median income. These BMR residences will be made available through Stamford’s affordable housing program. Construction is scheduled to begin early summer with resident and retail occupancy planned for early 2008.  Eastside Commons Weinstein’s second project, Eastside Commons, features 108 luxury for-sale residential units along with 15,000 square feet of ground level retail/commercial space. A significant portion of the commercial space has been leased by Fairfield County, which is expected to move in soon. The development contains one-, two- and three-bedroom residences with deluxe island kitchens with granite countertops, gas ovens and raised panel cabinets, full-sized washers and dryers, large walk-in closets, and 9-foot ceilings on the first, second and third floors.  Most units on the fourth floor have lofts with 16-foot ceilings overlooking the main living space. Many units have private balconies and spectacular views of Stamford Harbor and the Long Island Sound.  All owners enjoy reserved underground parking. Community amenities include concierge service, a private fitness center, a clubroom, and a private landscaped courtyard with barbecue grills and seating areas. Much like Glen View House, Eastside Commons was a blighted site. The 1.9-acre site was the former home of Chrysler automobile dealership and service facility. Situated just two blocks of Interstate 95 and a mile of the Metro-North Train Station that provides express commuter train service to New York City, the location contributes to the city’s goal of creating more housing within walking distance of mass transit and downtown amenities. The development is approximately halfway sold. Prices for the spacious residences range from $395,000 to $615,000.    Although the downturn in the market has put a damper on activity, Weinstein remains bullish on Stamford and the success of his projects. “We have been enormously successful, both in our rental programs and our for-sale programs. Of course, there has been a little interruption in sales momentum because of the recent financial strain on the economy, but interestingly enough, during that period of the last few months we have seen a dramatic uptick in rental activity,” he remarks. “Since we are a balanced company with commercial as well as for-sale and rental housing, we feel that we are poised to take advantages of increases in rental demand as for-sale housing has gone soft. But, personally, I think the for-sale market, particularly in the price ranges that we are dealing with at Eastside Commons, will pick up in the spring and we will have sold out Eastside Commons by the third quarter of 2009. We designed the projects to be high in value, but reasonably priced, so we are still maintaining sales in the marketplace.”                                                                  — Stephanie Mayhew

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