MHN Interview: Why Now Is a Good Time for Multifamily Acquisitions

By Jessica Fiur, News Editor

Chicago—KBS Legacy Partners Apartment REIT, a joint venture sponsored by KBS Capital Advisors LLC and Legacy Partners Residential Realty LLC, has recently made its fourth multifamily acquisition of the year. MHN speaks with W. Dean Henry, president of Legacy Partners Residential, about why now is the best time for multifamily acquisitions.

MHN: Your company has made a lot of recent acquisitions. Why is now the right time for that?

Henry: There are several important reasons why now is a great time to acquire existing multifamily assets. Let’s start with demand and supply:

• The U.S. population is increasing by approximately 3 million people per year, plus the legal immigrants who enter the country, and 75 to 85 percent of whom rent rather than buy.
• Secondly, the 18- to 35-year-old population totals approximately 65 million and will be relatively constant for several years. It is this age group that generally rents multifamily apartments.
• As we know from our daily news, beginning in the middle of the 1990s, we began losing renters to homeownership. That trend reversed in early 2005, but by then we had lost between 5 and 7 million renters to homeownership, many of whom were not qualified to own a home. Since then, approximately 3.5 million renters who became homeowners have returned to the rental pool creating a significant demand.
• At the same time that the demand has been huge, the supply has dwindled. For the past 15 years or so, new multifamily starts in the United States have averaged approximately 300,000 units per year. In 2009, 2010 and 2011, the aggregate total was just over 300,000, meaning we are building new apartments at the rate of approximately one third of the last 15 years. Clearly, when you have this imbalance of supply and demand, an increase in occupancy and rent levels is predictable and is occurring at this time in almost every major market in the United States.

While the production of new rental communities is increasing, the opportunity to buy existing is increasing as well. Approximately $380 billion of multifamily debt is maturing between now and 2015. Much of this debt cannot be refinanced based on current terms without an infusion of additional capital, which is not likely to happen in many cases. As a result, we are seeing many assets with maturing loans being brought to the market to be sold.

MHN: Do you think this will continue?

Henry: All observers recognize that apartment sales volume has increased substantially from 2009 and 2010 to 2011. In 2010, all U.S. apartment sales over $15 million totaled approximately $19.4 billion. In 2011, transaction volume totaled approximately $32.7 billion, and year-to-date 2012 is significantly greater than 2011.

A significant factor driving apartment transactions, as well as supporting relatively high pricing, are the extremely affordable interest rates provided by primarily the GSEs. Loans of 50 to 65 percent of value with maturities of five to seven years are available in the range of 2.5 to 3.5 percent. This is an exceptionally good time to lock in relatively long-term financing.

MHN: What is your ideal property type to invest in?

Henry: Seventy to 80 percent of our capital will be invested in core assets and the balance will be in value-add and opportunistic assets. We define core assets as those in major metropolitan markets, in extremely good locations and requiring very little rehab or repair. We will also invest in assets that need additional capital on which we expect to get marginally better returns. We are positioned to invest in both value-add and core opportunities.

MHN: What are some challenges facing multifamily today?

Henry: I think the challenges facing the multifamily industry today are, frankly, those occurrences over which we have very little control. The European crisis is certainly affecting the U.S. capital markets in both a positive and negative way; positive to the extent that 10 year Treasuries are extremely low resulting in borrowing rates being very low as well; in a negative way the capital markets continue to be substantially locked up with regard to new construction. Certainly, new job creation would be a huge benefit to our industry.

MHN: Is there anything you’d like to add?

Henry: We believe this is an extremely good time to be investing in existing multifamily assets and the opportunities to do so are numerous.