Market Dominated By Foreclosures

Market Dominated By Foreclosures
MEMPHIS, TN - Apartment complexes can be found throughout Memphis, but lately it seems the center of the multifamily world is on the courthouse steps Downtown. Foreclosure sales have dominated the industry's activity in Shelby County of late, with the most lucrative deals occurring as trustees' deeds after the original owner defaults on a property or as bank sales after the lender reclaims and resells the property.

Of the 15 multifamily sales during the past 12 months valued at $1 million or more, only seven have been conventional transactions, according to real estate information company Chandler Reports, The rest have been bank sales, trustee sales or health board sales, the result of a struggling commercial real estate market.

The list includes the highest-dollar apartment transaction in almost a year – the Hickory Pointe Apartments at 5861 Mt. Moriah Road, which sold for $5.8 million in January in a substitute trustee's sale to Hickory Pointe Apartments Utah LLC, an affiliate of Salt Lake City-based Capital Growth Corp. (The bid for the property was made in November 2008, but didn't close until two months later.)

It also includes more recent sales such as the Whitney Manor and Frayser Manor apartment complexes in Frayser, and the Cazassa Crossing apartment complex in Whitehaven, all of which were sold by trustees within the past two weeks.

Blake Pera, senior vice president for CB Richard Ellis Memphis' multifamily division, which helped broker the Hickory Pointe deal, said the situation here is happening everywhere.

"The number of foreclosures we are experiencing in Memphis is pretty much in line with what most markets are experiencing today," Pera said. "Some of the foreclosures were driven by the economy, but most were caused by aggressive leverage assumptions from the last several years."

Downtrodden places
Lea Heilig, a broker for Woodyard Realty Corp. and chairman of the Memphis Young Brokers Alliance, said the rise of foreclosures in the multifamily realm has had a two-fold effect: They have driven down values and "they have raised questions about the direction that the market overall is taking."

That has led to fewer deals, Heilig said, a trend that should continue with lenders employing stricter underwriting criteria.

"There are definitely a number of bank-owned properties and it's very likely there will be more bank-owned properties coming online," she said. "Foreclosures now have an impact on the multifamily industry and for the foreseeable future they will have an impact. But that's the case of other commercial sectors also."

One trend among the foreclosure sales, however, is the properties tend to be older or "off the radar" properties, as one broker called them. Often, they are in submarkets plagued by foreclosures in other sectors, from residential to retail.

"Foreclosures in the multifamily sector have been limited primarily to older and less stable apartment communities," said Mark Fogelman, president of Fogelman Management Group. "We are not seeing the nicer communities being foreclosed on.

"I think that this (foreclosure issue) will be limited to many of the less desirable communities which were not well kept and suffered physical issues."

Fogelman and other experts said the "shadow market" is having an equally significant impact on the multifamily industry. That occurs when foreclosed homes are bought by investors, who then rent those properties to families. Under this scenario, which takes business away from traditional properties, there is no way to track the data on the number of renters or the rental rates.

Like past periods in the multifamily industry, the first quarter of 2009 provided mixed reviews, according to the latest data from CB Richard Ellis.

Occupancy decreased 0.1 percent to 89.4 percent marketwide and rental rates increased to $714 per month. Also, construction was slow with only 182 units coming online, while absorption was a negative 548 units.

That said, in spite of the national trends that showed apartments faring much worse, Memphis proved to be resilient.

"After the dramatic drop in occupancies across pretty much all property types in all locations throughout the market in November and December of 2008, we were very pleased to see the market as a whole stand firm during the first quarter," Pera said. "There was a lot of pessimism across the nation at that time, and it was certainly encouraging to see things stabilize the first quarter."

He added that first quarter tends to be slower than others, which could bode well for the sector as 2009 transpires.

Michael Greenberg, CEO of Makowsky Ringel Greenberg LLC, agreed that there are positive signs in the local market.

"I think we're starting to see some stability there," Greenberg said, "and I think we're starting to see leasing activity pick up some in apartments. But the financing is a big question mark, and I don't know where we are. Guys like me are trying to hang on and are not quite sure what to do."

But by forecasting the remaining three quarters to be "choppy," Fogelman said things will likely get worse before getting better.

"Until we start hearing about positive jobs announcements for the area," he said, "it is going to be tough to grow our business locally."

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