Spectrum Latest Firm Eying Investment Bargains

With an eye toward capitalizing on the widely anticipated discounting of commercial real estate assets, Charlotte, N.C.-based Spectrum Properties has just established Spectrum Properties Multifamily Acquisitions Inc. The new subsidiary will acquire $200 million to $500 million in apartment communities and student housing properties at a considerable discount to replacement cost–but not just yet. “Timing is the $64,000 question,” John Gray (pictured), president of Spectrum Properties Multifamily Acquisitions, told CPN. “We’re confident there’s going to be multi-family assets that will be available at attractive prices, but there’s been a gap between what buyers want to pay and what sellers want to sell for. Over the last six to eight months, pricing has come down but the gap still hasn’t closed enough to make buyers enthusiastic.” The Urban Land Institute and PricewaterhouseCoopers assert in their Emerging Trends in Real Estate 2009 report that opportunities will certainly arise at substantial discounts to peak pricing. Most industry experts agree such a dynamic will occur, but they differ on when it will happen. “Some feel six months from now the gap will have closed, and some feel it will be a year,” Gray said. “I lean toward the six-month interval. You know the saying, ‘it’s later than you think.’ Well for sellers, it’s later than they think; they are having a hard time facing up to the reality of the market.” For the apartment market, in particular, cap rates have indeed been on the rise, so prices have been declining, according to a study by real estate services firm CB Richard Ellis Inc. “If this trend continues, and I think it will, this should create some very attractive acquisition opportunities over the next few years.” When Spectrum Properties Multifamily Acquisitions does kick off its shopping spree, it will target properties in the Southeast, Mid-Atlantic and Midwest. “These are markets I really know well and I think it pays to know your market,” Gray explained. “Also, I think these locations are where most rental growth will occur in the next few years, and in many of the markets I’ve selected, there has not been a lot of construction so there will be stronger demand.” According to figures by Property & Portfolio Research Inc., over the next five years the number of apartment-renting households is expected to increase 7 to 10 percent in various parts of Florida and 5.5 to 7 percent in Mid-Atlantic areas like Northern Virginia. At the top of Gray’s list are cities in Alabama, the District of Columbia, Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina, Ohio, South Carolina, Tennessee and Virginia. “The largest generation in history of people under 20 are coming of age and will be renting apartments.” As for financing the acquisitions, the new Spectrum subsidiary will establish joint ventures with institutional equity providers. “We’re talking with groups we already have relationships with and there are new groups we’re looking at, too,” Gray said. “There’s lots of money on the sideline and they’re waiting to invest in this, but nobody thinks today is the day. We just have to agree on what the best time is. The trick is to get in early enough to get good buys, but not wait long enough where you miss good opportunities. If you want to buy at the absolute rock bottom price, you could miss good opportunities.” The plan is to hold the assets for three to seven years. “We’ll drive net operating income up as much as we can by aggressively managing the properties, and we’ll keep an eye on the disposition market to determine when to sell,” he said. “The idea is to buy low and sell high–but there are different opinions on when the time is to buy low.”