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Buyer appetite endures, but deals take longer

May 2020

What sellers in today’s market do need to understand is timing. Having a ready, willing and able buyer doesn’t mean we can get it to the finish line in a timely fashion.

We always talked internally and with our clients about what would eventually slow down our apartment market. Would it be overbuilding? Would lenders’ rates go up and stay up? Would pricing be too aggressive for buyers to bite off? We would track and stay on top of all of these things. The one thing we did discuss was an event that no one could see coming. Not the smartest owner or lender in the world would be ready for it – the elusive black swan event. A few months ago, we started hearing about this virus in China and didn’t take it seriously. Then as it began to pop up in the U.S. and shut things down, the reality of what had just happened to our industry is still sinking in.

After the initial rush of what is happening to the economy and, more specifically, the multifamily sector, we have seen a tic up in interested buyers. We haven’t seen buyers looking for deals like we did in the 2008-2010 financial crisis, and I don’t believe we will get to that point. Instead, we’re hearing from buyers who are looking in this market with a long-term outlook of the asset class. Multifamily has performed well for a very long time and was one of the first asset classes to come out of the great financial crisis. There is a strong belief with longer escrow times lenders will loosen up terms when the curve of the virus starts going in the right direction. For this reason, we see active listings and offers from small to large deals and everything in between. Some people might be asking why someone would be selling in today’s market and expect that he is going to have to discount it to move it; however, this is not necessarily true. Sellers always have different reasons for selling, and sometimes the timing doesn’t work out ideally. We are talking with sellers about people in a 1031 exchange who have less options as many owners have pulled things off the market, which gives these sellers’ assets additional exposure that might not have otherwise been able to get.

What sellers in today’s market do need to understand is timing. Having a ready, willing and able buyer doesn’t mean we can get it to the finish line in a timely fashion. There are many third parties we rely on that can’t do business the way they used to, so things are moving slower.

Lenders across the board have pulled back drastically on multifamily projects. The debt markets are very volatile right now and hard to navigate. That said, we still see a willingness to lend just not as aggressive of terms as 30 to 45 days ago. The outlook for some buyers is to make it work in today’s debt market and then potentially refinance down the road into better terms. Most lenders have higher loan-to-value requirements, higher rates and are looking closely at the last few months of rent collections to determine deals on a caseby- case basis. The most extreme restrictions are coming from Freddie Mac and Fannie Mae, which is leaving the door open for midmarket deals to the local and regional banks once again. Debt is available. Lean on those relationships now more than ever.

One sector of our industry that likely is forever changed is thirdparty property management. Besides the obvious that collections are down, how managers and tenants interact daily is going to look different moving forward. Expectations are changing as many embrace virtual showings, common area cleanings are expected to be more thorough and specific custom amenities are being halted. I can imagine these things will become more common practice moving forward for managers.

As far as all the other third-party providers we use, such as appraisers, inspectors, environmental companies and title companies, they are all still in business and working out ways to do their jobs. For that reason, we always suggest adding extra time to any due diligence as the coordination of all third parties takes time and can be intrusive to tenants, especially in a time when everyone is walking on eggshells. They are all taking proactive approaches to deal with today’s new normal the best way possible.

The light at the end of the tunnel is that this will pass. All things point to continued high demand for the multifamily sector. We anticipate the Feds keeping rates low for an extended period of time to try and continue to help stimulate the economy; eventually, lenders rates likely will lower as well. Thirdparty service providers have had to adapt to new ways of operating and, if anything, will come out of this stressful time more efficient and well-ordered than before. People need a place to live, and that’s why I am thankful for the industry in which I work. We can all work together to get through these times and come out better on the other side.

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