Flight to quality in the multifamily market: Investors are being more selective these days

With investors being more selective about the location and quality of properties and the lack of deal flow, the price of quality assets has remained relatively strong. Conversely, prices for more management intensive properties or properties that have deferred maintenance have languished. While some investors are on the sidelines waiting for better opportunities, many are ready and willing to put capital to work in assets in good locations and good condition with strong cash flow, even if it means compromising returns. It seems as though the price change in quality assets with strong cash flow is less than the reduction in price for more management intensive assets with some deferred maintenance. From a macro perspective, Queens has seen a tremendous amount of activity this year compared to last year. Since the beginning of 2010, aggregate sales volume has totaled over $132 million at approximately $125,000 per unit whereas for 2009, total sales volume amounted to $106 million at approximately $90,000 per unit. This change represents an increase of over 65% annually for aggregate sales volume over last year and an increase in price per unit across the borough of 39%. My recent sale of the elevator apartment building at 30-60 29th St. in Astoria garnered tremendous activity from the investment community, not only from local operators but also from institutional investors. At final tally there were over 30 formal offers and final pricing exceeded ten times the annual income and $150,000 per apartment. Since that transaction closed, three other comparable properties have gone into contract, with two of them exceeding ten times the rent and all attracting much attention from the investor community. This level of pricing is comparable to prices that were paid for similar assets in 2005 through 2008 and in some cases, exceeds it. Rego Park and Forest Hills, both desirable areas in Queens, saw buildings sell at approximately $180,000 per unit whereas this year buildings have been selling in those areas at prices around $150,000 per unit, representing a 16.7% decline. The epitome of Queens multifamily purchasing in the boom was best exemplified by a few large portfolio purchases. On a price per unit basis, the market hasn't declined much at all. In fact, 30-60 29th represents a slight increase over the largest portfolio purchase in Queens and there were only a few instances where that level of pricing was exceeded significantly. On the other hand, less desirable neighborhoods and buildings with deferred maintenance have seen significantly less interest, even at discounted prices. Properties in Jamaica, once routinely trading at over $100,000 per unit, have seen prices come down significantly. One property is currently in contract at a price under $70,000 per unit, representing a discount of 30%. Buyers are balking at buildings in quality locations which have a lot of deferred maintenance, citing that banks are unwilling to finance projections as they once were. This leaves sellers with two options: (1) either sell the properties at a discount to the offers they may have seen a few years ago, or (2) provide the financing themselves for the improvements needed in order to bring the property up to a condition required to increase rents. Many of the buyers in today's marketplace have learned their lesson from previous years that the business model of burning and churning apartments in marginal neighborhoods isn't as viable as once believed. Instead, with capital already raised, it makes more sense to pursue lower risk with lower yields. This means buying properties in better neighborhoods that are less management intensive and that produce better cash flow, even if it means needing to pay more for them. These properties are also easier to finance as the banks tighten their belts. As the institutional purchasers of 2005-20008 need to refinance their properties, investors (and investment sales brokers alike) are anxiously waiting to see how much of a discount banks and equity partners are willing to accept. Gregory Bucks is an investment sales associate at Besen & Associates, New York, N.Y.