Real Estate Forum - December 2010

big retailer moves out and you need to spend the money for ten-
ant improvements and leasing commissions. You just don’t have that
exposure with apartments.” Lustig-Bower also sees more demand for
development land. “A lot of developers are looking for multifamily
building sites,” she says, adding that condo developers will follow suit,
“but we’re still not quite there.”
It’s also likely that we’ll see more movement in distress. Multifam-
ily was in the fourth or fifth inning of the distress cycle, according
to the group of panelists that participated in the session, “Distress
Chess Match: Whose Move?”
Of the $870 billion of outstanding multifamily debt, GSEs held
43.6%, noted Jess Bressi, a partner with Luce Forward and modera-
tor of the panel. Coming in second were banks, which held 24%
of all multifamily debt, and CMBS rounded out the top three, with
12.4% of the total. But numbers don’t tell the whole story; there are
many moving parts to getting deals done—both then and now.

One of the most frequently voiced problems during the day was the difficulty in finding financing. And according to Stephan Kachani, vice president of Loan Oak Fund, not much has changed. “Even into 2011, banks will be reluctant to lend,” he says. “I’ve seen no indications that lenders are loosening up their guidelines.” Instead, he says, banks are hiding their problems. “The term extend-and-pretend didn’t come from the CMBS world; it came from the banks.

“It means the banks are extending loans at LIBOR plus 100,” he continues. “At that rate, which is very low for the banks, everything looks like it’s cash flowing. But regulators are breathing down the banks’ necks so they need to pretend that everything is kosher.” Kachani believes that banks will continue to focus on reserving capital over lending at least for the next year.

The silver lining is that people who can qualify for a bank loan can get a very low rate. “The LTVs are anywhere from 65% to 75%,”

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says Kachani. “It’s very difficult to get a loan, but if you do, you’ll get
a fantastic rate in the sixes or maybe even lower. But that’s a small
percentage of people in our industry.”
The other complication, says Kachani, is that a lot of small banks
and construction lenders are going out of business. “Many smaller
banks lend based on relationships, but now that they are going out
of business, developers who were building apartments are not get-
ting any money from their construction loans,” he relates. “They
can’t go to another bank because there are not many banks left that
are willing to do a construction loan in the first place, especially in
the middle of a project.

Also on the panel was Larry Scott, president of Allegiance Realty Advisors, who pointed out in October that there was a cap rate spread of anywhere between 150 and 200 basis points between distressed deals in coastal cities and non-coastal markets. “If you have an asset on the coast, it may be a good time to consider selling, unless you’re waiting for values to rise again,” he said.

But what about today? According to Scott, that statement still
rings true. “The only real change since the panel is that that the
amount of distress in coastal cities has lessened even further,” he
observes. “Most of the existing distressed assets are in the Southeast
and some of the Midwest markets.”
And while there are distressed land sites in California, most of
them are being marketed by the banks at levels still too high given the
current economics, Scott says. “Many banks appear willing to price
and wait rather than move those land assets out quickly.” He also
notes that the bid-ask gap is starting to narrow and the appetite for
land is strengthening. “We’ll see that grow even stronger in 2011.

Both Kachani and Scott believe that multifamily will continue to be the property of choice among investors in 2011. “The foreclosure rate is at an all-time high,” says Kachani. “Also, the requirements are

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