Wednesday, September 30, 2009 ~ VOL. CCLIV No.
77
DEAL OF THE WEEK
SEPTEMBER 30, 2009
Apartment Know-How in NoHo?
By MAURA WEBBER SADOVI
About two years ago, the owner of the Gallery at NoHo
Commons was close to selling the apartment complex in
the North Hollywood section of Los Angeles for more than
$140 million, a person familiar with the matter said.
Now, the 438-unit complex has sold for $96 million.
The deal is a sign of the drop in values in the multifam-
ily sector which has seen vacancy rates rise as cost-
conscious renters have doubled-up or moved in with family
members. Sales of apartment complexes nationwide have
slowed to a trickle. Some $27 billion in apartment build-
ings traded in 2008 compared with $55 billion in 2007,
according to Reis Inc., a New York real-estate research
firm, based on a survey of transactions valued at $2 million
or greater. Through the second quarter of this year, there
has been less than $5 billion in deals.
But some investors have stayed behind as others have
fled the sector and the sale of NoHo Commons gives a
glimpse into their thinking. It was purchased by a non-
traded real-estate investment trust managed by Behringer
Harvard, a Dallas real-estate company. Behringer has be-
come one of the biggest buyers of U.S. multifamily proper-
ties this year, buying five apartment complexes with 1,690
units for a total of about $274 million in cash and assumed
debt.
Behringer executives say they see opportunity in the
downdraft, which has sent U.S. apartment prices from
$113,000 in the third quarter of 2008, to $80,000 in the
second quarter, Reis says. "Properties of a very high qual-
ity are available at pricing that really wasn't available a few
years ago," says Jason Mattox, chief administrative officer
at Behringer.
Behringer Harvard was formed in 2001 by Robert
Behringer, 61 years old, who worked for a large pension-
fund adviser before he started two real-estate companies
that became predecessors to Behringer. Behringer now has
about $8 billion in assets under management through its
various nontraded REITs as well as through some private
partnerships and other affiliates, according to Robert Ais-
ner, president and co-chief operating officer of Behringer
Harvard.
The portfolio hasn't been immune to the downturn. For
example, a Dallas condominium development by a
Behringer-affiliated partnership converted the condo units
to rentals about six months ago after they failed to sell
quickly, Mr. Aisner says.
Behringer is able to go on a buying spree partly because
it has been able to raise capital. Through early September,
Behringer Harvard Multifamily REIT has raised about
$249.2 million from a public offering begun in September
2008. It also has raised money in a private offering as well
as about $200 million from Dutch pension fund PGGM. It
also is taking advantage of financing still available for
apartment acquisi-
tions from Freddie
Mac and Fannie Mae.
Mr. Aisner says
Behringer seeks to
finance as much as
60% of the cost of its
acquisitions, and will
likely look to one of
the housing-finance
giants for a mortgage
on the NoHo Com-
mons complex for
which it originally
paid cash.
Apartment build-
ings are clearly pro-
ducing higher returns
than they used to. In 2007, the so-called capitalization
rates of apartment buildings, derived by dividing a
building's net operating income by the price paid, were
5.8%. Today they have risen to 7.1%, according to Real
Capital Analytics, a New York real-estate research
firm.
The NoHo apartment complex, which offers such
amenities as a pool, fitness center and a room that it
bills as a recording studio, fetches monthly rents in the
$2,400 range for a two-bedroom unit and has an occu-
pancy rate of 91%.
The apartment property was attractive because if it
is financed it could ultimately throw off a rate of return
of more than 8%, says Herb Chase, managing director
of Multi Housing Capital Advisors who represented the
seller in the Los Angeles complex sale. Opportunities
for such higher returns in apartments have begun to
attract some investors who previously retreated to other
perceived safer investments such as Treasury bonds
after the recession hit. "Everybody was scared but peo-
ple are less scared now," Mr. Chase says.
To be sure, the outlook for apartment properties is
likely to get worse before it gets better. U.S. apartment
vacancies are expected to peak next year at 8.1%, a 30-
year high, according to Reis. It could sour further if the
economy worsens and rents and occupancy rates con-
tinue to fall.
But some people think a recovery for apartments is
likely in 2011. If the job market stabilizes in 2010,
younger workers are likely to be the first to be hired
back because they are cheaper to employ, the theory
goes. Since many of those people are renters, that is
going to drive the apartment recovery, says Victor Ca-
lanog, director of research for Reis.