I mentioned several days ago that we’ve been researching for several months an article that will appear in the February edition of The Emerging Market Report (due out on or about 1 February) dealing with state of multifamily in 2009.  At this point we’ve titled the article “Will Multifamily Hold Up in 2009?” – not very a very sexy title but indeed probably the most common question we’ve being asked as a team over the past two months. 

We’ve rounded up a dozen key trends / changes / themes that will dominate the landscape for multifamily investors during the upcoming year and very potentially into 2010 as well after visiting with, listening to, and reading the thoughts of some of the most respected and experienced hands in the business. 

Probably the second most common question we’ve heard over the past two months is where are the “very best” opportunities going to be in multifamily investing; a close variant of this question has been “are there going to be any opportunities at all in this market?”

It is our opinion, and that of most experts whose opinions we’ve reviewed, that perhaps the most critical issue upcoming for investors will be surmounting the challenge of procuring workable financing.  Everyone understands that the rules have changed quite a bit over the past two quarters (LTV ratios, DSCR, etc.); what everyone doesn’t understand is that lenders are going to look askance at markets with anything but the very best fundamentals, and secondary markets will held to a higher level of scrutiny.  Procuring funding for tertiary market projects will be akin to climbing Mt. Everest; possible but accomplished only by very, very few. 

Are there markets with good fundamentals today?  The answer is a resounding yes; the pool is shrinking a bit as the economic funk worsens, but there are indeed markets with sound multifamily fundamentals today. 

That said, where do the “experts” think the greatest values are going to be found in multifamily today?   We think, as do many that we interviewed, that the greatest values will be found in projects experiencing some form of distress.  Distressed projects are probably not as numerous at this point in time as you’d think.  Undoubtedly there are projects on the market today that are in distress or about to fall off the precipice into distress that are not being marketed as such by brokers, and the cadre of distressed properties will be growing larger this year. 

Here’s a short list of potential drivers of distress that our acquisition team is on the lookout for as well -

  1. “Speculator special” projects - highly leveraged projects, typically closed at the peak of the market with short term CMBS funding underwritten on outrageous proforma data, and often under-managed or overtly mismanaged.  Typically in pre-foreclosure or foreclosure. 
  2. Failed conversions, with failed for sale condo projects a close second in this category. 
  3. Maturing debt that is difficult to refinance due to the changes in the capital markets, driving considerations of sale.
  4. Operational changes driven by market collapse or economic stressors unique to a particular market; not always a highly leveraged project, but more often one with weak / under-performing management.   
  5. Highly leveraged new projects in competitive / oversupplied markets that have out-lived their construction or early operational funding. 

The upcoming newsletter article will offer more detail, but at least this is a glimpse of what we’ve been working on.

Now – it’s time for a bit of fishing; we’re having a heat wave here in Bozeman – temps are due to reach near fifty and a bright sun is shining.  We’re off to fish the upper Madison today….

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