Economic Downturn Weakens Apartment Property Market, ‘Retrading’ Prevalent

By Keat Foong, Executive Editor Washington, D.C.–The Mortgage Bankers Association (MBA) confirmed the economic slowdown has begun to adversely affect the commercial real estate market. MBA’s just-released the Commercial Real Estate/Multifamily Finance Quarterly Data Book for the third quarter of 2008 shows that property fundamentals, property sales and commercial/multifamily mortgage performance were all negatively affected by the economic and financial downturns. “For more than a year, we have been faced with the question of whether commercial real estate would be the next shoe to drop,” said Jamie Woodwell, vice president of Commercial Real Estate Research for MBA.  “The weakening economy, in concert with the ongoing credit crunch, is demonstrating that commercial/multifamily is not entirely immune to the impacts felt by the residential market.”MBA said that supply is outpacing demand for commercial space. Vacancy rates have increased for all of the major property types, although apartment rents were up slightly in contrast to the other commercial real estate sectors.  All commercial real estate sectors show price declines, says MBA. The NCREIF TBI index is down 12 percent from its peak. However, reported cap rates showed “surprising” stability, said MBA. “A disinclination by owners to sell properties that are still generating income and meeting debt services is a likely reason why,” it said. Dave Hendrickson, managing director in the Real Estate Investment Banking Group at the Chicago-based Jones Lang LaSalle, said that multifamily transactions are off in his estimation by about 60 percent. He acknoweldged that both from the acquisitions and dispositions side, deals have been pulled off the market. And there is a lot of retrading in apartment investment sales: Many buyers would come back with a lower price after the initial bid. “At that point, the seller can accept or walk away. We see many of them walk away.” Hendrickson said cap rates for multifamily assets have risen by at least 100 basis points in the deals Jones Lang LaSalle has looked at. The cap rate increase is mainly because “where debt was 5 percent for multifamily, it now costs 6 percent,” he said. According to Hendrickson the cap rate for an institutional quality multifamily property in a “to die for” market such as downtown Chicago, for example, is now 6 percent compared to 4 percent at the market’s peak. Nevertheless, Hendrickson said the multifamily market is “holding up fairly well” compared to other commercial real estate sectors because of the availability of financing mainly provided by Fannie Mae and Freddie Mac. Although Fannie Mae and Freddie Mac spreads have increased, he said, the overall interest rates remain relatively attractive.