The Expert: Buyers, Sellers Remain Polarized

As the first quarter comes to a close, the investment strategies of multi-family buyers and sellers remain further apart than ever before. Transaction velocity continues to plummet: In January, investment sales of properties that were priced over $3 million dropped 93 percent from January 2008 figures. In other words, 93 percent of the nation’s apartment owners decided to wait on the sidelines, declined participation in the investment sales market.There are two types of investors in the market today: short-term players primarily being forced to sell because they have debt coming due and long-term buyers who believe that fundamentals and demographics will improve in the next five to seven years. Sellers that have to clear the market must be willing to accept steep discounts, ranging from 15 percent to 30 percent of the property’s inherent value.Every buyer in this market must be induced to buy right now because it is so difficult to assess true property values and actual rent growth. If one or two multi-family properties traded at a 30 percent discount in Los Angeles County, for instance, other investors expect to receive that same discount, even for a lower-quality asset in a tertiary submarket. And most sellers are not willing to accept such low prices for their investment properties. Rather than accepting a 30 percent discount, sellers are likely to accept a discount of 8 to 10 percent. As a result, buyers and sellers remain polarized.The apartment sector will face many challenges over the next 18 months, as job losses continue to mount. In 2008, The United State lost almost 3 million jobs, and another 1 million are expected to be cut by year-end, which will impact apartment operations.Despite these short-term setbacks, long-term multi-family fundamentals remain strong. U.S. demographics will support healthy demand over the long term. Echo Boomers, totaling roughly 70 million U.S. residents, are entering their prime renting years, a trend that will continue during the next five to 10 years. On the supply side, construction starts are declining rapidly for all types of residential units, which should translate into a quick recovery for apartment vacancy and rents once economic expansion and job growth return.Linwood Thompson is a senior vice president & managing director for Marcus & Millichap Real Estate Investment Services Inc.’s National Multi Housing Group.