SoCal Multifamily May Disappoint, Says StarPoint CEO
BEVERLY HILL, CA—The multifamily market
in Southern California will have some
pockets of growth in 2012, but it is not
going to be as robust or as broad as some
people are projecting, according to Paul
Daneshrad of StarPoint Properties. Real
Estate Forum caught up with the locally
based CEO to discuss what’s in store for
multifamily market this year.
FORUM: I have heard stories of dramatic
recoveries. What key drivers are you seeing?
Daneshrad: Are we going to see dramatic
rental growth? No. People purchased in
early 2011 expecting 3% to 6% rental
growth, which drove the cap rates down into
the 4% and 5% range. The drag of high
unemployment and a stagnant economy will
create headwinds that will keep a lid on
rental growth. Still, it is a solid, stable market
compared to the other property types.
FORUM: Are there any pockets in Southern
California that are faring better than others?
Daneshrad: Any of the beach-specific
locations are showing signs of strength.
Job formation and the employment base
FORUM: What does the future hold?
Daneshrad: 2012 is an election year, the
European debt crisis isn’t resolved and our
own debt crisis is an ongoing concern.
There are too many negative forces that
could impact investment strategies and
clearly a conservative approach is war-
ranted. That said, we did purchase a 558-
unit complex in the Inland Empire in 2011
for $79 million. We are only purchasing
assets that have strong current cash flow.
We’re not relying on asset appreciation to
enhance our returns or warrant the pur-
chase. That said, there is plenty of capital in
the system for multifamily and it will still be
the product of choice.—Natalie Dolce ◆
Success Means Timing, Boots on the Ground
The drag of high
a stagnant economy
will create headwinds
that will keep a lid on
are the strongest drivers in multifamily
and will continue to remain so. As a
result, areas where there have been no
constraints to supply—such as the Inland
Empire and San Bernardino, which have
also been hit hard by higher than average unemployment—are much softer.
FORUM: Are the fundamentals changing on
the investment side?
Daneshrad: Yes. The underwriting requirements are much tighter in today’s market;
people are much more conservative. A
number of deals are not getting done
because buyers are pushing back on the low
cap rates. People will no longer make the
aggressive assumptions they made in 2011.
But the stable income streams and demand
demographics that multifamily offers will
keep the investment side healthy.
Having been in the real estate industry for over 40 years, I have learned two things
that apply to today’s troubled times: real estate investment success is primarily
determined by timing, and the importance of experienced “boots on the ground”
cannot be overemphasized.
A recent Trepp forecast notes that more than half of the $363 billion of commercial real estate loans maturing this year will be underwater and, we believe, the
Western US will account for a significant part of the problem.
As a court-appointed receiver who has handled over $750 million of similar
troubled assets, I have seen a myriad of the “bad” deals across
almost all asset classes. Two primary characteristics are evident:
the property was acquired or developed at the wrong time, and
the borrower did not have experience in
the basic fundamentals of the property
type and or location.
Moreover, in the wake of recently moderating a number of industry panels involving sophisticated
buyers and financiers discussing their recent deals, we also see
the possibilities of what good deals may look like.
First, a number of deals have been traded to public companies whose buying decision is driven by low cost of capital, the need to be in the
market and a long term view. In other instances the purchase was made to satisfy
capital partner expectations and allowed the company to stay in business for
another year. In both cases, the timing criteria was predetermined. They were
going to buy and they were going to win their fair share of deals. The timing of
their purchases will be the primary factor in determining their success.
Second, the deals that appear to have the best possibility of success have been consummated by local talent, with a long track record of success in both the geographic
market and product type. This local buyer profile is able to navigate through the maze
of hurdles of most troubled real estate. Other investments that appear to have the
most chance of success involve owners of troubled properties who have been able to
attract new capital. Using experience with the asset and application of the basic, local
fundamentals, the owner can negotiate new loan terms and/or a short sale can be
negotiated with the lender. Those who have provided the new capital under these circumstances may have maximized the timing and boots-on-the-ground formula.
There are possibly two larger strategies at work. If you have large quantities of
capital and must deploy it now, and the timing is right given the price you have to
pay, you are making deals. If you have local expertise and can access capital, you
have the opportunity to maximize the value of the property.
Real estate investment is not just a financial bet. It requires true knowledge of a
market and product type, boots on the ground and timing, timing, timing to maximize your chance of success.
By Taylor Grant
Taylor Grant is the founding principal of Real Estate Receiverships based in Newport Beach, CA.
He may be contacted at tgrant@CalRER.com. The views expressed here are the author’s own.
Vital Signs...Job growth will pick up somewhat and payrolls will surpass their pre-recession peak by late 2016.—Beacon Economics
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