Q&A with Jim Scofield: Multifamily Prices Will Continue to Decline Until Market Turns Around
- Oct 23, 2008
James M. Scofield (Jim) serves as a managing director/senior investment advisor of Sperry Van Ness/Scofield Multifamily Team, specializing in multifamily properties throughout North Carolina. Prior to joining Sperry Van Ness, Scofield served as a senior broker for Anthony & Co. He also served as vice president and partner of Colliers-Seeley, a full-service commercial real estate firm in Los Angeles. Scofield’s extensive background includes representing private investors, small businesses and large corporations in the analysis, purchase, sale and leasing of multifamily and other types of properties. He talks to MHN Online News Editor Anuradha Kher about how to evaluate properties in this economy, whether people should be buying or selling in this market and what kind of multifamily projects will get financing today.MHN: How do you evaluate properties in this economy?Scofield: The only way wise investors should evaluate properties in this economy is based on their current fundamentals. This not only means the property’s existing operating performance, but also the community’s location, its condition, curb appeal, functional utility and it’s competitiveness in the marketplace.Evaluating properties based first and foremost on their fundamentals is a major departure from what the over abundance of investment capital enticed the market to do in the “go-go days” leading up to the peak of the multifamily market. There was so much equity and debt capital chasing deals that investors and lenders alike developed what Alan Greenspan described as an “irrational exuberance” that led them beyond the fundamentals into proforma evaluations that were sometimes based on faulty assumptions in income growth.MHN: How do you advise clients on whether to sell or hold given the market conditions?Scofield: Everyone has heard that real estate runs in cycles and it does. We have passed the peak and the market is clearly declining. Sales volume is off 69 percent, year-to-date new listings outnumber closed sales by 1.5, and sales prices have declined 10.3 percent from their peak, according to the Moody’s Commercial Property Price Index published by Real Capital Analytics, MIT Center for Real Estate and Real Estate Analytics LLC.MOODY’S COMMERCIAL PROPERTY PRICE INDEX – APARTMENTSHistorically, real estate cycles vary in length from as short as six years to as long as 48 years, depending on the data and who’s analyzing it. Most experts will say they average approximately 10 to 12 years. Assuming this will hold true for the present cycle, prices will fall for several years before they turn up again to reach the level they are at today and climb above it.Therefore, since prices are falling and the current market conditions are less-than-optimum to say the least, we are advising clients not to sell until the cycle turns up again unless they absolutely have to sell, or if they want to sell for whatever reason. And, if they have to sell, or just want to sell, we are advising them to take action immediately and sell now before the market falls any further.For those clients who don’t have or want to sell, we are concurrently recommending that they make sure they have satisfactory financing in place to carry them through this cycle because there is very good evidence, as espoused by Dr. Sam Chandon of REIS, that the financial markets at present do not have the capacity to meet the demand to refinance the commercial debt that will mature in the next two to three years, and especially in the 2009 to 2010 timeframe. If this remains the case, Dr. Chandon predicts that there will be localized negative price bubbles caused by a wave of properties brought to the market by sellers who are under duress because they cannot refinance their debt at the terms they require and who will thus sell at prices lower than what the property is actually worth based on its fundamentals.MHN: How hard is it to get financing for multifamily in the current market?Scofield: Multifamily financing is still plentiful despite the overwhelming negativity of the current market. Underwriting standards have tightened to be sure, but financing is definitely available with FNMA, Freddie Mac and HUD providing the majority of the loans for multifamily acquisition and development. Loan to value ratios are less than commonly achieved 80 percent of the “go-go days”, ranging from as low as 60 percent to 75 percent.We are observing now, that when someone says they can’t get financing, most likely it means they couldn’t get the leverage they wanted, a sub-6 percent interest rate, or an extended period of interest-only payments. Proven investors can get financing.MHN: How is the bailout package expected to help multifamily financing?Scofield: H.R. 3997, the Emergency Economic Stabilization Act of 2008 will help multifamily financing by enabling financial markets to orderly process problem loans, which in turn, will gradually restore market confidence and unfreeze credit. This will ripple into multifamily lending and bring many lenders back into the market, hopefully and especially the Commercial Mortgage Backed Securities Market which has been essentially shut down for more than a year.MHN: What are the regions that have a very high demand for multifamily product?Scofield: The following table from Real Capital Analytics itemizes the regions and markets with a very high demand for multifamily product. Here are the top ten markets.Scofield: MHN: Will multifamily home prices reach their bottom?Scofield: Absolutely. All real estate, be it residential or commercial, goes through cycles, and multifamily real estate is no exception. Prices will continue to decline until the market turns around and it heads up again. The above Moody’s Commercial Property Price Index is too new to show an entire cycle, but it does show approximately one-half of a cycle. How long before the drop in prices bottoms out is the $64,000 question and we won’t know it until we’re beyond it.MHN: Going forward what kind of multifamily construction will get financing easily?Scofield: HUD is a terrific source for new multifamily construction with their 221(d)(4) program and my mortgage broker contacts tell me they are very busy working on loans for new development. There is significant multifamily construction underway now in many markets, but new projects are being slowed not only because of the tightened underwriting, but also because equity investors are requiring higher returns. These higher returns are more difficult to achieve in the face of rising construction costs and the lower pace of rent growth resulting from our nation’s difficult economic situation.New projects that will get financing easy will be those in markets that have solid fundamentals in terms of economic growth, job growth and most importantly, the growth of rental households.