Local apartment sales at a standstill
(Crain's) — Sales of large apartment buildings in the Chicago area have come to a virtual halt because of tighter financing and concerns that the recession will lead to higher vacancies and lower rents.
In the third quarter, there were no sales in the city of big apartment buildings — defined as those worth $10 million or more — and just two in the suburbs, totaling $75.3 million. Through September, $582.5 million of apartment buildings were sold in the Chicago area, a 74% drop from $2.25 billion during the same period last year, according to a report by CB Richard Ellis Inc.
Fourteen apartment properties valued at close to $1 billion were listed for sale and ultimately taken off the market this year, says John Jaeger, a first vice-president with CB Richard Ellis' multi-family investment group in Chicago.
"There's an impasse," Mr. Jaeger says. "If owners didn't need to sell, they didn't sell."
The credit crunch, which has made loans hard to come by and more costly, created a gap in price expectations between buyers and sellers. That gap has widened in recent months as the crisis in the financial sector has spread to the broader economy, triggering wider layoffs.
Apartment building occupancy rates are down 1% to 2% from a year ago, according to the CB Richard Ellis report, while rents have flattened and in some cases declined.
Mr. Jaeger says some buyers and lenders considering deals today are factoring in little — if any — rent growth in 2009 and 2010. Buyers also are focusing on distressed opportunities, seeking to acquire properties at big discounts.
"Our customers are telling us they're in the market and have money set aside," he says. "But they're saying the deal has to be so compelling and opportunistic."
Most sellers, at least for now, aren't willing to drop their prices enough to entice buyers. Without such cuts, even all-cash buyers are having a hard time making deals, says Michael Haney, president and CEO of Chicago-based Newcastle Ltd., an investment and advisory firm.
"We're having a lot of conversations, but it seems that many sellers still have in mind prices that might have been appropriate a year or two ago," Mr. Haney says. "It's difficult to find properties that have been priced to reflect the operating results you're going to see for several years to come."
The investment market for apartments is bolstered by the involvement of government-chartered lenders Fannie Mae and Freddie Mac, which have been extremely active in the sector. Still, according to CB Richard Ellis, lending terms today are markedly different than just a year ago. Loans a year ago were commonly made at 75% to 80% of value, vs. today's levels of 60% to 70% And lenders are no longer factoring in higher rents and are instead using current rents.
Mr. Jaeger says few deals will close in the fourth quarter, so total volume for the year will be around $600 million, which would be the lowest since 2003. Expectations that credit markets won't loosen until the second half of next year has him forecasting that sales volume in '09 also will be around $600 million, markedly lower than the $1-billion average over the last 12 years.
There have been so few transactions this year in the Chicago area — the two latest suburban deals occurred in July — that it's difficult to gauge how much prices have fallen. Nationally, some estimates have put the figure at 20%.
Deerfield-based Benjamin E. Sherman & Sons Inc. has closed on five apartment properties nationwide this year, including its second Chicago purchase in the past two years: the 260-unit Woodlake Apartments in Gurnee.
"We're being a little bit contrarian," says Scott Gould, the firm's senior vice-president and director of acquisitions. "We're waiting for the right opportunity and the right price ... and we've seen some regression in pricing."
Benjamin E. Sherman bought the Woodlake property in May for $34.3 million from New York-based pension fund adviser ING Clarion Partners, financing the deal with a $23.6-million loan from Freddie Mac.
"Our timing might not be perfect from a rental-growth perspective," Mr. Gould says. "But we take a long view, and believe once we work through the economic woes that eventually the rental growth will be there."
The two deals that closed in the third quarter were both in west suburban Carol Stream, and both properties were sold by Denver-based real estate investment trust Apartment Investment & Management Co.:
· AIMCO sold the 492-unit Lakehaven Apartments to Skokie-based F & F Realty Ltd. for $52.3 million, or $106,200 per unit. The deal was financed with a $43.5-million, seven-year loan from Freddie Mac.
· AIMCO sold the nearby 293-unit Yorktree Apartments to San Francisco-based Friedkin Realty Group for about $23 million, or $78,500 per unit.
