As the news headlines see an influx of Q1 2010 performance reports, we are greeted with a sense of improving numbers for the multifamily sector of commercial real estate. The OK CRE View article entitled “Q1 CRE Sales: Change in Attitude” shines light on a positive outlook for the rest of 2010 based on first quarter findings. Q1 2010 showed an increase in sales volume in all sectors of CRE, with multifamily seeing “the greatest spike in transaction volume.” The article interestingly points out, however, that these sales primarily consisted of core and not distressed properties. As potential buyers are incentivized to pursue quality assets and competition for these investment properties builds, cap rates are forced down, leading to higher prices and benefits to sellers. The drop in cap rate in apartment buildings was less dramatic, but this can be attributed to the fact that prices did not fluctuate as much despite the soft economy. This sector experienced the least drop in NOI, as occupancy level remained high thanks to an increased demand for cheaper rental housing.

Locally in Los Angeles County, there have been few distress sales. Even in the case of REO investment opportunities, Chase Bank, which holds most of the faulty multifamily debt, engages in several broker price opinions (BPOs) prior to selecting a broker to list the property at or even above market value in some cases. Recently, a 14 unit property in Van Nuys established a new price standard for properties in the submarket. The “REO” title stimulated activity, creating a bidding war of 22 offers as buyers scrambled to pursue the “distressed” asset. Furthermore, these REO properties are often sold as all-cash purchases, and still, the final price placed above the expected market value.

What does this all mean for investors? These Q1 results indicate a transition from the down-turning market and may begin to set the pace for an up-trending market. Now is the time to consider selling smaller 10-unit buildings and 1031-exchanging into a 20-unit building to take advantage of historically low metrics on cost per unit (CPU) and cost per square foot as well as the potential for pro-forma figures to grow as the economy improves. As the economy recovers and rents increase, pro-forma numbers will also rise. Investors can use these trends of historical rent growth in order to make calculated assumptions in pursuing investment opportunities. According to the article, Los Angeles stands as one of the top performing markets in Q1 2010. Use the market trend to your advantage.

Source: Q1 CRE Sales: Change in Attitude

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Alice is a member of the AptBldgTrader.com team. We specialize in going above and beyond to assist clients in meeting their investment criteria and positioning their properties to achieve optimal value.

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